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THE GOLDEN AGE OF E-MAIL DATABASE MARKETING is finally here. At least that's what the leading e-mail service providers (ESPs) would have us believe.

With the sector's future clearly in customer retention, upselling and cross-selling, database companies have been snatching up ESPs at a feverish clip.

Earlier this year, Acxiom bought ESP Digital Impact and InfoUSA acquired e-mail technology firm @Once. Experian picked up CheetahMail in March 2004.

Last month, loyalty marketing company Alliance Data Systems' Epsilon unit purchased Bigfoot Interactive — now Epsilon Interactive — for $120 million.

So it's not surprising that, with the channel accounting for more sales, DMers are taking online campaigns seriously and using sophisticated strategies.

Those firms offering database marketing services see great promise in applying CRM techniques to their clients' e-mail house files. And ESPs can now lift themselves out of the land of bargain-basement CPM rates by adding value to their services. However, it remains to be seen whether the two cultures will mesh.

In any case, e-mail service providers are aiming to show they're much more than delivery agencies.

Direct recently invited five e-mail marketing pros to its New York offices to help make sense of this shifting landscape.

THINGS HAVE CHANGED dramatically in the e-mail service provider market over the last 18 months. One by one, stand-alone agencies have been disappearing as database marketing companies gobble them up.

Are the days of the independent provider numbered? Forrester Research's CRM analyst Eric Schmitt thinks so. But ESPs, even those recently acquired, beg to differ.

Either way, ESPs contend that the days of so-called batch-and-blast e-mail campaigns are coming to an end. Pretty soon, they say, the gap between the haves and have-nots in this sector will become a chasm as the haves eat into the have-nots' market share. Then again, ESPs have new database capabilities to sell. Who would expect them to say anything else?

Representing the ESPs at this year's e-mail roundtable were Matt Seeley, president of CheetahMail; Al DiGuido, president of Epsilon Interactive; and sole stand-alone provider John Rizzi, president/CEO of eDialog. Also on hand were Eric Kirby, senior vice president/general manager for e-mail solutions at marketing technology firm DoubleClick, and Stephanie Miller, vice president for strategic solutions at e-mail deliverability company Return Path.

DIRECT: What's happening in the e-mail service provider market? Will we see the death of the standalone? And — not to pick on you, John, but you're here — can companies like eDialog survive?

RIZZI: The reports of our death are greatly overstated. I think it's an absurd proposition [from] Forrester, made by Eric Schmitt, [an analyst] who covers marketing technology [like] CRM and campaign management, and not e-mail companies. He covers the guys who have been doing the acquiring. When you look at the opportunities that still exist in the e-mail market, there's loads of room for everybody. The penetration of e-mail done right is very low, and [most large companies have only a small number of their customers'] e-mail addresses, so there's huge growth yet to happen.

DIGUIDO: I think, as someone who has just gone through a transaction with a data management company, this premise that e-mail companies are all sitting around waiting for someone to pick them up is a fallacy. We had a lot of folks who were interested in our company and as much as we said Epsilon and [Alliance Data Systems Corp.] selected us, we selected them as well. I don't think stand-alone e-mail service providers are dead by any stretch of the imagination.

KIRBY: There are advantages to [database marketing firms acquiring e-mail platforms] and clearly that's part of the reason you've seen so much activity in the last 18 months. Having said that, an independent player in many ways has more flexibility than somebody aligned with a database services provider, and that flexibility can give them certain parts of the market better than a combined company could. If we're referencing Forrester data, its survey of large companies said approximately 70% of companies actually manage their marketing databases in house. If that number is even close to being accurate, not every company is going to see the advantages of having database services provided along with e-mail. Some will, but there's a lot of the market where that's not the critical issue.

SEELEY: We add value to Experian's product suite, but the idea that stand-alone e-mail companies are going to be nonexistent is absurd. It's best product, best service. You provide a good product and the best service and people will come.

DIRECT: Is there a pattern to the types of companies that gravitate toward each of your offerings?

SEELEY: No. There are big companies that choose to outsource. It's a business methodology. If you're outsourcing your database, is there good reason to have an e-mail product that speaks to it? Absolutely.

RIZZI: You can't generalize between ‘Are you a stand-alone?’ and ‘Are you part of a bigger company?’ because the stand-alones are all different, too. There are those that focus on full service, those that focus on tools. Some focus on certain verticals. There's one e-mail company that only does nonprofits.

DIGUIDO: I do think, though, that the e-mail channel has become one of haves and have-nots. The days of batch-and-blast e-mail marketing are dead. Not to say there aren't marketers that are doing it. There are, but they're not leveraging the power of the medium. More and more marketers are saying, ‘How can I use this channel more efficiently? How can I drive e-commerce more effectively? How do I build relationships with customers? How do I utilize the power of the channel?’ And that's going to push everybody in the industry to do a better job with their technology platforms and range of services. If you treat e-mail like direct mail — ‘It's cheap, so let's send a lot of it out’ — you're not going to leverage the channel's true power.

DIRECT: Are people opening less of their e-mail now?

KIRBY: We've been tracking and publishing quarterly e-mail benchmark trend data for more than three years now. For the first couple of years, open rates were pretty consistent. They were somewhere around the low- to mid-30% range.

DIRECT: Was that e-mail to customers?

KIRBY: It was e-mail to customers, opt-in e-mail to house lists. For the last five quarters, what we've seen is a quarter-on-quarter decline in open rates. What's interesting is that at the same time we're not seeing click rates fall off. We studied this and found there are three main drivers. One is that there's been some change in how the metric is recorded due to image blocking by some Internet service providers. That has the effect of suppressing an open rate's value. If the image is blocked, it limits the ability of the e-mail application to record that as an ‘open.’ The second factor is that customer e-mail files are aging. A file of new e-mail addresses diminishes over time as the total file grows. That's important because new names have better response characteristics. This also has a tendency to add suppression to open rates. The third thing is an ongoing change in consumer behavior. People are not opening every e-mail they receive. They're not in the market for every product every week. You're seeing open rates declining but click rates [holding steady], revenue per e-mail staying the same, orders per e-mail staying the same. Basically, all the metrics that really matter are maintaining their performance, and open rates are declining for the reasons mentioned.

DIGUIDO: Relevance is the number-one issue today. Are there customers we have that have seen falling open rates? Yes. Are there customers we've seen that have had incredible growth in terms of open rates, click-through rates and conversion rates? Yes. Are more of those customers spending more money on the e-mail channel? Yep. What's the secret ingredient? It's relevance. It's them understanding their customers. It's them taking all that data and taking open rates and click-through rates and using that information to deliver more contextually relevant messages. The marketer that uses the data and information more effectively is getting better open and click-through rates.

KIRBY: All that is true. Companies can buck macro-trends, but macro-conditions still exist. No doubt, there's more spam out there [today]. Basically, every smart marketer needs to evolve its program to keep ahead of those macro-challenges, and get smarter faster. How? By understanding customers better, by having the relevant data and by targeting messages.

RIZZI: I'm with Al in questioning whether you can draw averages across an entire industry, because there are so many factors that move that. It's not comparing apples to apples. One day you may be mailing a 50%-off offer, which always pulls well. The next day you might be mailing a newsletter. JupiterResearch just released a study that said highly relevant e-mail generates nine times the revenue [of broadcast mailings]. Nine times! This is not rocket science. We have a very simple rule: If you want high deliverability and conversion rates, send mail that people want to open.

DIGUIDO: These are your customers and some of them do want to have a relationship with you. How about asking them what type of information would be most relevant to them at what frequency? The best customers are willing to give you that level of data.

RIZZI: That's the future of e-mail marketing — a separation between the batch-and-blasters and the people who can really bring sophistication and handle that complexity so it matches customers' wants and desires.

DIGUIDO: We've all been around other media. Every other one is a broadcast medium where you make an assumption about your audience, you make an assumption about some proposition [involving] your product and you send it out into the market and hope you're getting response. This is the first medium other than one-to-one selling where you literally can watch people either look or not look at the message and [see] what kind of action they're taking. If you discount all the information you're getting back and you don't leverage it to build better relationships, you're not using the power of this channel [to your advantage].

RIZZI: And you're going to be disappointed. You're going to say, ‘This thing stinks, so I'm not doing e-mail.’

MILLER: I think what happens is that batch and blast does generate sales. Click rates are there, conversions are there, so it's lulled marketers into a sense of security that they're sending something that's working — but it's not. It's working for a small subset of your audience that's loyal to the program, but there's no segmentation or differentiation of product. There's no opportunity for them to tell you what it is that would be most interesting to them, so most permission e-mail goes completely unopened and unread. A huge portion of those databases are just inactive.

SEELEY: If you think about the evolution of e-mail, and where we were four or five years ago, anybody who runs a company's e-mail marketing division has been a golden child. The results were fantastic. Everything worked. Their list was growing organically at 50% a year. But you're starting to see [performance dropping]. It's starting to happen.

MILLER: Most of the clients I work with have no idea of the types of reports they can get from their e-mail vendor.

DIRECT: Let's try and empathize with the e-mail marketing manager for a minute. We've got a person with 50 things to do that afternoon. He's sending these blasts out and making money from them. Given his limited time, why should he bother to segment?

KIRBY: Often there hasn't been the same level of resources directed toward e-mail as across other channels. Our estimate is probably less than 1% of the average marketing budget is spent on e-mail marketing, yet we're all sitting here saying how fantastic the channel is in terms of return on investment. [Because there are big returns on those dollars, more senior attention has to be placed on it.] I think that's where we have to go next. Most companies today do a reasonable job of analyzing campaign results. But very few companies look at the behavior of customers over time. A lot of firms are too focused on short-term campaign reporting.

DIRECT: In direct mail, there's a financial incentive to get at the actives because it costs money to reach them. But there isn't that incentive in e-mail.

DIGUIDO: There is a fundamental shift occurring. The Internet is a significant communications channel and it's being driven by a demographic that's younger than we are here at this table. In five to 10 years, they're going to be in a sweet spot in terms of consumer spending. I think the data is really important. And when we talk to marketers, they've done poorly looking at anything more than campaign results.

DIRECT: But what if marketers don't look at anything more than campaign results?

RIZZI: They're going to lose customers. They're going to feel like you don't care about them. You're sending e-mail that's irrelevant, and wasting time in their inbox. But measuring that loss is almost impossible.

KIRBY: Too many companies have used the levers of increasing frequency to try to make their numbers. You have to take a longer-term view of your program and you have to get people at the executive level in your business to understand these issues. Otherwise, all these short-term pressures are going to win the day in each case.

DIGUIDO: And that's going to have diminishing returns over time. 'Tis the season right now for going overboard in terms of direct mail. My mailbox is getting jammed every day with catalogs. You can't do that with this channel. There are customers who are going to look at that and say, ‘Wait a second, just because it's inexpensive for you to access my mailbox doesn't give you the right to send me an e-mail every day that's irrelevant.’

SEELEY: And let's remember, once you lose them in e-mail, they're gone forever. We can't say, ‘Well, let's try them again in six months.’ If they opt out, it's over. It's a beautiful channel if you create relevance and they're interested.

MILLER: Even worse is if they're on your list and ignoring you because then they're even more distant from you than a prospect would be. For the holiday season, we did some research last year with consumers about how they responded to the overflow. What they told us is that 60% of the time they just deleted it unread. It was too much mail. But the ones they did open, the driver was that they had a previous relationship with the e-mail. So it wasn't just the brand. It wasn't just that they're customers. It's that the e-mail was relevant to them in the past. That's what got them to open it. And they spent more time with the e-mails that they did open, and they purchased from them. Seventy-five percent of the people told us they used the e-mail to make a purchase decision. It's OK to send more mail as long as it's welcome and relevant. How can we make that relationship work? Sending triggered e-mail, segmenting the list, asking people if they want to get e-mail — if they're interested in getting a Friday e-mail about what's happening in the stores that weekend.

DIGUIDO: You don't have to be a pornographer or a Viagra salesman to be a spammer. There was a comment made earlier that there's more spam than ever before. That's not accurate. There's less spam now as a result of Can Spam legislation and marketer education. It's actually on the decline.

KIRBY: There is less spam in inboxes, but there's more spam in general in terms of it being attempted.

DIGUIDO: Getting into the inboxes is where the issue affects customers. But the perception is that if you have a relationship with a big-box retailer and its e-mail is irrelevant to you, that's spam.

RIZZI: Even if they signed up for it.

MILLER: Marketers that do direct mail are very comfortable in the offline space making decisions about how to segment, how to analyze and how to measure the return. I'd love some of those things to get applied to e-mail. [A recent report from the Direct Marketing Association] said 35% of marketers are comfortable that they're applying the right kind of analytics to their e-mail programs.

KIRBY: A lot of the analytics done offline are focused on the cost of dropping a catalog. We need to figure out what [kind of] economic model to apply to e-mail. I think it's not so much trying to figure out if it's profitable to mail to somebody, because if you do the calculation you'll find out that it is and you're going to mail to everybody. What you need to do is smartly try and figure out what and when to mail. [You have to] ask questions, so that the economic incentive isn't in terms of saving dollars in wasted mail, but rather in gaining incremental performance from the campaign.

RIZZI: One thing that will help shape and change all this is some really good companies doing really good e-mail. Their competitors are going to say, ‘What's different about the performance in that e-mail compared to my batch and blast?’ And they'll see it's about relevance, about sophistication, about really understanding your customer. It's about investing in it and spending a little bit more.

DIGUIDO: Come Jan. 31, there's going to be a report about fourth quarter e-commerce and it's going to say, again, that growth is up. Everybody is going to go, ‘Wow, that's pretty incredible, but the offline brick-and-mortar is still [much higher].’ When the tipping point occurs, and it happens on a company-by-company basis, is when 20% to 30% to 40% of your revenue starts to come from Internet channels. That's when everybody sits up and takes notice.

DIGUIDO: And when the financial shift occurs, if you are sitting in the back of the bus and you haven't figured out how to get the job done, you're totally out of luck. The reality is that there are going to be marketers saying, ‘The demographic profile of my customers is changing. The channels that they're using to purchase are changing.’ There's not a lot of flag-waving going on out there where people are saying, ‘When I do a catalog and I do e-mail, it actually improves the performance of my catalog.’

MILLER: There are some.

DIGUIDO: Yeah, but there are not a lot of people saying, ‘You know what? This is the killer combination!’ We've got the direct mail side saying, ‘Let's just kill off the e-mail side,’ and the e-mail side saying, ‘Well, we're not going to put that much weight into the print side,’ when these two things can coexist.

SEELEY: And you're starting to see this. They're no longer enemies within their own organizations. It's coming together. If we had our customers in this room, they'd say, ‘Yes, we agree. We need to be relevant.’ But a lot of it is content. They're saying ‘I need access to content that's relevant, and I'm struggling with that internally.’ Most of why you segment a catalog is cost, so you might stick to [basic] categories like men's, women's or home. With e-mail you have this amazing ability to get almost one-to-one, as in ‘I'm a men's home shopper.’ Imagine that. But you've got to get content that's aimed at a men's home shopper. How do you do that?

DIRECT: Offline, marketers will send reactivation catalogs to try to get their inactives to convert. How does this translate into e-mail?

MILLER: The smart thing to do is to think about it as sort of an ongoing process. Waiting a year is too long. It's really difficult to re-engage with somebody on e-mail when they're turning off your e-mail. At three months, start looking at who is inactive, or 180 days, whatever is best for your business, and start then to think about that.

DIRECT: So what should marketers do with their files? Correct me if I'm wrong, but I think there's a chasm between what we're talking about and what is happening in the marketplace.

DIGUIDO: What you do is you go into your file and you say to yourself, ‘How many people on that file haven't opened in six months, in 12 months, in three months?’ And you craft different messages that try to get them to come back.

DIRECT: What if they say you just haven't given them anything they want to open?

DIGUIDO: If they're saying something to you, that's a good sign. A credit card company that shall remain nameless went through a whole process where people signed up for a card online. The next step is to send the plastic. We asked [this marketer] what percentage of the people who [receive] the card activate it. He said about 45%. Then we asked what do you do with the people who don't activate? He said, ‘Well, we wait a couple of months, and then we send them a piece of direct mail.’ We asked, ‘Didn't they sign up online? And you wait 60 days? What's your hit rate in terms of getting those people to activate?’ ‘Pretty small,’ he said. [Then we asked,] ‘Did it ever occur to you that when someone who goes through the entire process and gets approved, gets the card, that you should [check] your activation database and say, ‘You just signed on, but probably lost the envelope. Did you get the card?’ It was like bells went off and he said, ‘Oh, yeah. We can do this. We can trigger a message.’

RIZZI: Why that happens is that the person doing the acquisition is different from the person doing the activation, and different from the person doing the renewal.

MILLER: Marketers are always saying to me, ‘Well, Stephanie, that sounds like a really smart idea: segmenting our audience, giving people choices. I just don't know how I'm going to do that with the resources we have.’ But a little bit of content can make a huge difference in the same template. When we work with marketers to do that, they see a huge improvement in response. And the customers e-mail them, saying ‘This was really helpful.’ It's not just ‘Tell me about this product,’ it's ‘Tell me how this product is going to make me smarter, more beautiful, get richer, or please my boss.’

DIRECT: What are some steps marketers can take immediately to start realizing some of these improvements we've been talking about?

SEELEY: First, welcome people in and say ‘Thank you.’ That's a pretty basic concept.

DIGUIDO: First-name personalization would be nice. And take a look your file and try to classify the inactives on your list by the amount of time they've been on the file, the amount of opens and the recency of the last open. Try to get them to come back. If you can't, stop sending them. You're wasting time.

KIRBY: Here's an easy first step: If you're not doing any kind of basic testing, start doing it tomorrow. If you think about the simple concept of testing and rolling out, you wouldn't send out 2 million direct mail pieces without a documented test first. But with an e-mail campaign you wouldn't think twice about it.

SEELEY: Let's think of a simple one. You sell men's and women's products and you have links to them but you don't have gender on your file. Look at what they're clicking on and make an assumption. If they're clicking on links to women's products, then maybe that's what you should be using to target.

RIZZI: I have a favorite example of a bad e-mail from a great brand: It's a big airline, one of the biggest in the world. I've flown on them for years. They know who I am. I'm in every program. I have every status you could have with them. They don't know where I live. When I get their weekly e-mails about special fares, eight out of 10 times it will not have an originating fare from Boston. Why is that? That's not treating me respectfully at all, even though I've got a million-mile card in my pocket.

DIRECT: What can we expect over the next 12 or 18 months?

DIGUIDO: The gap between those who get it and those who don't is widening. We're doing some work with some people in the travel industry and the return on investment is just incredible. I have never been in an industry where marketers will stand up in a room and share ROI numbers with you that would make your head spin. What's happening is incredible. The returns are in the thousands of percentage points.

KIRBY: One of the things we're going to see over the next 12 to 18 months is gaining better access to data. You can't do any of the things we've been talking about unless you have access to that data — and not just in a periodic way, but in a consistent way — to integrate it into your program. That's one of the driving factors causing database marketing service providers to look at e-mail.

DIRECT: How much room is there in the average e-mail box these days for merchants?

MILLER: People's tolerance for that kind of stuff is somewhere in the 12 to 25 range. So I can have significant, meaningful relationships with about 45 brands. If you're a B-to-B company, what I'll allow into my inbox is a completely different metric, so that relevancy question becomes even more significant. When clients say, ‘List growth is my thing, I'm really measuring list growth,’ I say, ‘How about measuring return and lifetime value on customers you already have on your list?’

DIGUIDO: I think the 800-pound gorilla sitting in the middle of this discussion is search. People are off the charts with keyword search. I was at a DMA event and wanted to be a bit of a troublemaker. Somebody got up and said, ‘I'm from XYZ brand and search is just an incredibly powerful thing that we're doing. It just generates huge amounts of transactions.’ I raised my hand and asked, ‘Of all those transactions, what percentage of those people were already on your database?’ He kind of stumbled and then said, ‘Oh, about 50%.’

DIRECT: But search is considered cool. E-mail is not cool.

MILLER: I beg to differ!

RIZZI: They're for different purposes. Search is for acquisition. E-mail is for retention.

DIRECT: Many marketing decisions are made by what sounds cool at a cocktail party. These marketers who are doing search marketing, that's cool. They can tell all their friends they're acquiring people on Google. But if they go into a cocktail party and say they're doing e-mail marketing, they'll spend the next 10 minutes defending themselves against people who think they're spamming.

DIGUIDO: Bring the finance guys in from that company and tell them we've got a more efficient way to drive top line and bottom line. They'll think it's cool.

RIZZI: I'll take our place any day.

• Al DiGuido, president, Epsilon Interactive
• Eric Kirby, senior vice president and general manager, e-mail solutions, DoubleClick
• Stephanie Miller, vice president, strategic services, Return Path
• John Rizzi, president/CEO, e-Dialog
• Matt Seeley, president, CheetahMail