Marketing Practice

Harnessing
the Power of E-mail
How to Get Real Impact
From Online Communications

Overview
E-mails speed, cost, and effectiveness (response rates in excess of 15
percent for the most targeted campaigns) are securing its central role in
the new marketing environment. But marketers must act quickly on this
opportunity because e-mails power will erode as the medium matures.
We see four key strategies you can use to harness e-mails potential:
1. Aggressively build out your e-mail list.

Be sure that your Web site can capture visitors e-mail addresses.

Look to capture e-mail addresses via other channels.

Carefully test rented lists before making a major commitment.

2. Add more customer relevance and value to e-mail campaigns.

Ask customers what they want.

Analyze past behavior to help customize content and contact

frequency.

Enhance your overall value proposition with e-mail.

3. Integrate e-mail into a multi-channel communications strategy.

Create a common marketing data structure.

Use insights from other channels to tailor e-mail content.

Run tests to evaluate the optimal mix and spending across channels.

Link e-mail to your broader marketing program.

4. Develop a repeatable, scalable test and learn process.

Run basic tests to analyze performance, and then roll out the
best practices.

Use a sound understanding of each customers value to tailor

your approach.

Track performance with a continually refined set of metrics.

Set up a closed loop IT infrastructure to measure performance,

ideally across channels.

Align the organization and processes to support closed loop testing.

The last 2 years have brought considerable focus on the power

of e-mail as a marketing communications vehicle. Two key
factors have been driving this interest.
The first is the dramatic response rates that have been achieved
by a large number of companies. For example, many have
achieved e-mail response rates in excess of 15 percent for the
most targeted campaigns, versus 1 to 3 percent for traditional
direct mail. A large number of companies also report benefiting
from a branding effect, where consumers do not respond
directly to the e-mail, but still end up purchasing more than
they would have if they had never received the e-mail. Studies
show that the branding effect can amount to approximately 20
percent of the overall value of an e-mail campaign (see Table 1).
The second, and perhaps more important, factor is e-mails power
to help companies improve their process and relationship benefits
which, together with functional benefits, form the three key dimensions for differentiation.1 At the process level, companies are able
to use e-mail to simplify and improve the way they interact with
customers. For example, Amazon was an innovator in simplifying the
time-consuming online buying process with its one-click shopping
system, and a number of airlines such as United and Northwest have
used e-mail to simplify, improve, and reduce the cost of flying and
upgrade notification processes.
Companies are also using e-mail to build stronger relationships with
customers over time. Hewlett Packard, for example, has successfully
built relationships with its customers after purchase, and has driven
additional sales by sending personalized follow-up e-mails to
product owners with recommendations ranging from preventative

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Table 1

E-Mail Has a Second-Order Branding Impact on Sales

Dollars
Aggregated Examples
0.04

0.60

Branding effect
from e-mail

Average sales
if e-mailed

0.17

0.39

Average sales if
no e-mails sent

Direct response
to e-mail

Source: Digital Impact; McKinsey & Company

maintenance suggestions to targeted offers for extended warranties.

P&G has developed its reflect.com range of cosmetics in part by
sending targeted e-mails to consumers with beauty and health tips.
One campaign, for example, sent women, who said that they spent lots
of time in the sun, tips on how they could prevent damage to their skin.
In addition to these consumer-oriented benefits, e-mail is faster,
cheaper and more information-rich than traditional direct-marketing
approaches. It enables companies to construct and launch multiple
tests, measure the results, and make adjustments in near real time.
Studies show that more than 80 percent of e-mail responses are
received in the first 48 hours, and some companies measure, track,
and optimize campaigns on an hourly basis. These benefits can be
achieved through a medium that costs about 3 to 10 per e-mail,
significantly less than regular mail (75 to $2) or telemarketing ($1 to
$3). Furthermore, e-mail campaigns provide not only response rates
but also information such as bounce, open, and unsubscribe rates.

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It seems clear that many companies are starting to think that e-mail
will become the killer marketing application of the Internet, and
many especially those with strong direct marketing units are
actively looking at how they can make e-mail the cornerstone of their
marketing communications programs. But for all e-mails strengths and
advantages, clouds loom on the horizon that could dramatically diminish
the effectiveness of the medium. So its important that companies act
now to develop and strengthen their e-mail marketing approach.

The Challenges Ahead

The power of e-mail will inevitably erode as the medium begins to
mature. Already, response rates have begun to decline across many
industries (see Table 2). A number of factors are likely to continue to
drive this trend:

New media fatigue. Interest in new media often wears out quickly. A classic example is banner ads response to regular banners
was initially maintained by rich media, but response rates soon
dropped off as consumers became tired of this new media. We are
seeing a similar trend today with e-mail as the gap in response rate
between html and text e-mails narrows.

Crowded e-mail boxes. Consumers received on average three

marketing e-mails a month in 1999. This volume is expected to
soar to 130 a month by 2005, according to Jupiter, as companies
recognize the economic power of e-mail marketing. With this
clutter, however, it will be hard to sustain the current rate of
opened e-mails (40 to 60 percent). Financial services companies
have already seen their open rates drop 10 percentage points
from the third to fourth quarters of 2000.

Consumers will simplify their interactions. The majority of

online consumers are attracted by the ease and simplicity of the
Internet, rather than by the need to comparison shop. As a result,
the growing e-mail clutter is likely to prompt them to narrow their
incoming e-mail field to only a few trusted companies.

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Table 2

Dropping Click-Through Rates by Industry

Average percent

8.7

3Q 2000

8.3

8.0

4Q 2000

7.5

6.9
6.2

5.7

3.8

Brick and
mortar apparel

Financial
services

Technology

Travel

Source: Digital Impact; McKinsey & Company

Emergence of filtering software. Consumers will respond to the

commercial onslaught through the use of filtering software, such

as the one Yahoo! has in place, to automatically screen unwanted
messages from predefined senders.
Constraining legislation. Tough new privacy laws and continued

development of legislation will make it increasingly difficult to

build customer databases.

Maximizing the Value of E-Mail

Given these challenges, marketers must move quickly. Our experience
has shown that leading companies are using four key strategies to
fully develop the marketing potential of e-mail:
1. Aggressively build out your e-mail list. Now is the time to rapidly,
but efficiently, build a robust database of e-mail addresses of both
customers and prospects.
Ensure that the Web site is able to capture e-mail addresses of

both visitors and customers. Enabling techniques include one-step

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registration on the home page and using the e-mail address as the
log-in name for any registration process. Northwest offers frequentflyer miles in exchange for consumers entering their e-mail address
on the Web site and agreeing to receive messages.
Look to capture e-mail addresses via other channels, such as call

centers, catalogue operations, and retail stores. Capturing e-mail

addresses through multiple channels allows both a richer e-mail

directory and the ability to link customers across multiple channels.
For example, AT&T Wireless captures e-mail addresses by
informing customers during service calls that they can check their
account status using their e-mail address and a log-in ID.
Carefully test rented e-mail lists before making any major commit-

ment, since they are often unproductive. Response rates to names

acquired from lists are generally much lower than those collected
from a companys own site (see Table 3). Once the costs of buying
these lists is taken into account, the analysis suggests that in many
cases it is not economical to rent names from a list for marketing
purposes. Therefore careful testing of rental lists is required before
any significant investments are made.
2. Add more customer relevance and value to your e-mail campaigns
to maximize the response. Developing relevant e-mail content and
offers are the best ways to ensure that consumers will continue to interact
with you. Personalizing content and managing contact frequency can
improve e-mail response rates by 40 to 80 percent.
Ask customers what they want. Many management teams struggle

to define the will of the customer in terms of desired content,

frequency of contact, and more. Leading players take a different
approach: they ask the customer to create their own profile including
desired content and contact frequency. While great care must be
taken since customer self-reported data is often not a reliable
indicator of true preference, especially in a new field, it nevertheless
can help to drive future customer communications.
Customize content and contact frequency by analyzing past behavior.

Past behavior on the Web site, or purchase history, is often a good

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Table 3

E-Mail Response Rates Vary Widely by Name Acquisition Source

Click-through rate, percent
Aggregated Example
14.5
8.7

8.1
6.2

Co-operative
and viral

Online
registration

Incentive

4.3

Rental list

Other

Decreasing name quality

Source: Digital Impact; McKinsey & Company

indicator of customer interests. Analytic techniques such as collaborative filtering can generate targeted content recommendations.
As for contact frequency, e-mail lists inevitably contain a small
proportion of active names, and a larger number of dormant
names, each of which requires a different approach. Understanding
how consumers respond to e-mail campaigns via a Recency/
Frequency analysis allows companies to effectively segment
customers by value and target them with different approaches.
Enhance your overall value proposition with e-mail. Often, the highest

impact e-mail programs not only increase short-term sales, but also
significantly enhance the value proposition and even redefine the
company-customer relationship. For example, use e-mail to deliver
tailored information to customers; to publicize sales, overstocks,
and special events in physical stores or on the Web; and to notify
customers of time-sensitive events. Leading apparel retailers like
Lands End notify targeted customers via e-mail about the arrival of
new items and overstocks that match their self-developed profile.
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3. Plan now to integrate e-mail into a broader multi-channel

communications strategy. As e-mail is adopted as a key tool for
communicating with customers, taking proactive steps to integrate it
with other channels is vital.
Create a common marketing data structure. Make sure that all

e-mail campaign data, whether internal or from a third-party

e-mail vendor, can be integrated with other customer and marketing
campaign data. This is the foundation for managing integrated
communications.
Use insights from other channels to tailor e-mail content. Insights

from customer interactions with channels such as your Web site or

call center can be used to tailor e-mail messages. For example, Web
site browsing behavior could indicate preference for certain types
of products/information that should help in tailoring e-mail content.
Evidence of a serious complaint going into the call center might
warrant a change in tone of a subsequent e-mail.
Run multi-channel tests, where feasible, to evaluate the optimal mix

and spending across channels. For example, test and measure e-mail

in a market with TV advertising versus one without, or in a market

with catalogs versus one without, or experiment with combinations
of direct mail and e-mail to determine optimal drop frequencies and
interactions. These techniques will allow you to re-evaluate and
enhance your marketing spending both online and offline.
Link e-mail to your broader marketing program in a way that

maximizes overall customer value. There are many opportunities

to increase customer value by redefining overall business processes.

For example, use e-mail as a lead-generation tool to initiate
appointments for the in-person sales force, thus reducing customer
acquisition costs.
4. Develop a repeatable, scalable test-and-learn process to
maximize the value and share of wallet of your customer base.
The ability to systematically test and learn is a hallmark of companies
that steadily increase the value of their e-mail marketing efforts.

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 Run several basic tests, measure and analyze performance, and

roll out the identified best practices to maximize value from e-mail
lists. Typical tests vary subject line content, message content,

cadence, number of offers, and overall layout. While there are few
generalized best practices in e-mail campaign management, quickly
determining what does and does not work for your business can
dramatically improve results.
Over time, tailor your approach based on a sound understanding of

the value of each customer. By segmenting and understanding the

true lifetime value of customers, companies can better determine
what they can afford and need to do such as focusing expensive
offers on high potential targets to keep customers coming back.
More broadly, this detailed understanding of customer value will
allow you to align and focus around high-value customer groups,
thus significantly improving the value of your customer base.
Develop and continually refine a set of metrics to track performance.

While the click-through rate (CTR) is a directional indicator of

campaign performance, metrics based on sales and profitability
are the real indicators of success or failure. Several companies have
found that test campaigns, while doubling CTR, increase sales
ten to fifteen times, dramatically improving ROI of the campaign.
Thus, as marketing analysis and knowledge become more sophisticated, metrics must be enhanced to more closely reflect actual
customer value. As metrics develop to approximate true lifetime
customer value, reducing unsubscribe rates becomes one of the key
performance levers which is not necessarily the case when each
e-mail campaign is analyzed separately.
Set up a closed loop IT infrastructure to measure performance,

ideally across channels. Ensure that your in-house or third party

e-mail system can not only track responses, but also link e-mail
campaigns to sales data and other critical customer information,
especially in other channels. The IT infrastructure should also be
able to efficiently track bounce backs and process unsubscribes.

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 Align the organization and supporting processes to support closed

loop testing. The greatest challenge in developing an effective testing

program is related to organization and processes, not technology.

Organizing such an effort with program managers focused on each
step of the customer lifecycle, and developing rapid-response
processes, are critical to building a high-performance e-mail
marketing group.
The speed, cost, and effectiveness of e-mail are helping to ensure its
central role in the new marketing environment. However, the difference
between companies who use e-mail well and those who dont is
growing, driven by the wide range of strategies and approaches being
deployed. For example, the gap between top- and bottom-quartile
performance on click-through rates has grown from 1.5 times as
successful to 3.4 times as successful in 6 months. We believe this
difference will continue to grow, as only the top performing companies
create e-mail marketing campaigns that are sufficiently targeted,
relevant, and interesting to warrant consumers attention. In order to
become and remain one of these top performers, companies must
develop and implement a powerful and engaging e-mail strategy that
fits tightly with their multi-channel marketing program.
1

For a more in-depth discussion of functional, process, and relationship benefits, see Marketing in 3-D:
Functional, process, and relationship benefits are the hat trick of contemporary marketing.
(The McKinsey Quarterly, 1999, 4th Quarter).

David Harding is a Principal and Doug Bewsher is an Associate

Principal in McKinseys Marketing Practice
This article is partly based on joint research carried out by
McKinsey & Company and Digital Impact, a leading provider
of online direct marketing solutions for enterprises.

For additional information or copies,

please call (203) 977-6800 or e-mail
mckinsey_marketing_practice@mckinsey.com

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Marketing Practice
02.2001
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