According to the World Press Trends published by WAN-IFRA earlier this year, paid digital circulation has grown to more than $3 billion globally (30 percent growth over 2015 and accounting for about 3 percent share of $90 billion paid circulation). True, this is still a small proportion of subscription revenue, but the growth is stunning in an industry that is going through major disruption to its traditional print subscription business.

To put the volumes of print and digital in perspective, the print subscription product has reached maturity, while the digital product (not the print replica) is fairly young. The print product has been active for more than 100 years in many cities. Digital subscriptions, at most, are as old as the internet, which became accessible to many Americans during the 1990s. Paywalls for digital content were given the formal blessing when The New York Times launched its pay meter in 2011 (though many local newspapers already had paywalls). Revenue strategies are also contrasted by the different maturity levels of each product. In print, the focus is retention, re-acquisition, price increases and slowing the circulation decline. For digital, the focus is growth, new acquisition, price discounting and building customer loyalty.

What About Advertising?

Digital advertising revenue is certainly important and growing, but the news is not quite as positive. The same WAN-IFRA report notes that the growth rate in digital ad revenue declined in 2015, showing a growth rate of only 7.3 percent. With the rise of ad blockers, the oversupply of inventory, the downward pressure in CPM’s, and the dominant position Facebook and Google have in targeting a mass audience, publishers are put in a difficult position when competing for advertisers’ budgets.

This chart shows that the programmatic channel accounts for more than 60 percent of inventory across a survey of publisher websites, though with an effective CPM being less than a dollar, the revenue share is less than 20 percent. Only 11 percent of inventory is sold locally on a CPM basis with an additional 6 percent coming from local sponsorship campaigns.

Part of the challenge is that advertising sales is not controlled by the publishers. The myriad ad networks, data management platforms, agencies and advertisers wield most of the power in digital advertising. When buying and selling commodities such as digital advertising inventory, the producers are typically price-takers. As a long-term and sustainable revenue stream, digital advertising is not instilling confidence at the moment.

To be clear, I am not suggesting publishers should forego investments in digital advertising or ignore it, but I am arguing that digital subscriptions should get the recognition they deserve.

Will Millennials Pay for News?

I do not accept the commonly repeated premise at face-value that millennials will never pay for journalism (or anything for that matter). By most accounts, this generation is the most savvy and aware consumer group, meaning that their dollars are just much more carefully spent.

Let’s step outside of newspaper subscriptions for a moment and into the world of paid over-the-top streaming, led by familiar names such as Netflix, Hulu, HBO, Amazon, and now even YouTube Red.

Hulu launched its “ad-free” product for an incremental $4 per month around this time last year (introducing a new premium subscription product for a total of $11.99 per month). Hulu has not released reporting on how many of its nearly 10 million subscribers upgraded (and how many are millennials), but it is a clear competitive play against ad-free competitors such as Netflix, which boasts nearly 90 million subscribers. Hulu has heard the cry from its customers and the trend led by millennials to stop annoying advertising. As a side note, Hulu proudly self-reports that its demographics skew heavily toward millennials.

OTT attracts a big millennial audience. And it is true, a significant proportion of streaming is ad-supported. However, the leaders in the industry realized they have two big audiences: those who want free content that will be supported by advertising and those who will pay extra to access premium content or even ad-free content. They are certainly investing in advertising, but paid subscriptions are a major focus for the leaders in OTT.

Millennials will pay for content when it is relevant, when it is delivered through a clean user experience and when the product is compelling. Now back to newspapers.

Action from Strength

Newspapers have a strong advantage with their unique content, relevant reporting and user data. These are the basic building blocks of a sustainable digital product. The most commonsense approach to building the digital product is converting strengths into tactics and value.

The two example newspapers in the chart here show the type of online content that led to a paywall event and subsequently to a paid conversion in each market. The small local market clearly attracts conversions from news content, which upon further drill down, reveals that crime and local content drive most of the volume. In contrast, the large metro market has a clear advantage in sports content, which, in September, is driven by the NFL and college football. Nearly all publishers can collect this type of data through tracking tools and use it in marketing/communication, creatives, targeting and discounting.

The conversion funnel is the centerpiece of any ecommerce site, and it should be one of the primary KPI’s monitored on newspaper websites. The next example is from a large metro market.

The three funnels above show the steps to conversion, split into three primary channels of digital starts.

1. The paywall entry shows the flow from users who encountered a “hard block” by a paywall lightbox.
2. The subscription entry shows “voluntary” starts for users who clicked on a SUBSCRIBE button directly.
3. The email entry is from users who clicked an offer from an email campaign.

Note that to compare these three funnels, the equivalent conversion rate from the paywall entry relative to the “offers” phase is 0.12 percent (1,333 conversions divided by 1,114,682 offers) since users in the subscription and email flow never encounter a modal.

Setting aside the voluntary starts and focusing on the paywall vs. email channels reveals a conversion rate of 0.12 percent vs. 0.41 percent, respectively. More than three times as many users convert from an email offer, though more than four times as many users see an offer through the paywall. Overall, new start volumes (1,333 for paywall vs. 1,139 for email) are nearly identical and, in this case, the prices are fairly similar in both channels.

To demonstrate the long-term ROI with some simple math, a $2 per week offer (assuming 100 percent retention) will yield $520 per year for a new subscriber. The lifetime value of an anonymous user therefore is $31, but the lifetime value of an email address is $107 ($520 X 0.12 percent and $520 X 0.41 percent, respectively). This information may lead to a rethinking of marketing spend towards higher-yielding tactics. If the marketing dollars spent on paid social media referrals or amplification are not sending enough new visitors into the funnel, it may be time to redistribute the budget to where the lifetime value is greatest.

Granted, the growth in page views, impressions and advertising dollars needs to be accounted to truly measure the net revenue impact. But typically, a new visitor does not generate significant ad revenue as evidenced by this table.

Each user’s KPI’s is averaged here over the course of a 30-day period by user type. Note also that the registered user generates four times as much ad revenue as an anonymous user.

If an average anonymous visitor yields $0.02 in ad revenue per month ($5.20 for a five-year LTV assuming 100 percent of the users return to the site), then there have to be at least 21 new visitors brought to the site who will generate ad revenue to match the value of a single email address ($5.20 / $107). The cost of acquiring 21 visitors vs. one email address must also be taken into account.

This leads to a tactic that is too often overlooked. Offer a free registration instead of a hard paywall for certain users. Registering your audience helps to build loyalty and builds a prospect list for potential subscribers. The ROI of an email address (at least in the market illustrated) is worth more than three times as much as attracting a new visitor when considering subscription revenue and 21 times as valuable when considering only ad revenue. Not only does capturing an email address improve the conversion probability, it also lets newspapers target users directly in targeted advertising campaigns. The key to good registration is to provide a fair-value exchange with the user. Offer unlimited articles for another 30 days, enrollment into a rewards program or a gift card from an advertiser.

The sample row here has been anonymized for a single registered user over the last 30 days.

Since registered users are logged in, publishers can attribute precisely what pages they read to the specific user. Overlaying content preference, browsing behavior and any other data at the user level for use in targeted acquisition, retention, marketing and communication will make the email campaigns even more effective.

Yield Management to Guide Digital Subscription Growth

The previous examples focus heavily on the first step in the subscriber lifecycle. Understanding how to maximize new start yield through content and channel are just two examples of how to grow digital subscribers.

Predictive modeling can also be deployed on the anonymous audience and email list to determine what types of campaigns and offers work best. Further segmenting the audience by acquisition probability and expected lifetime value are the final keys to turning 3 percent of subscription revenue into double digits. Starting with basic data-driven optimization and shifting to more advanced predictive modeling over time will keep growth rates high as the digital subscription product matures.

Print subscriptions have been the bedrock of newspapers. But as technology and consumers continue to evolve, newspapers must embrace data-driven yield management for future growth. Part of the challenge is mindset. If publishers think of the digital world as fitting into their advantages rather than as a threat, the strategy and tactics naturally fall into place. Newspapers have full control of their content and paid products and are in a position to make digital subscriptions the key to a long-term sustainable future.

All data is sourced from Listener™, a digital data platform built by Mather Economics. 

Arvid Tchivzhel, a director with Mather Economics (www.mathereconomics.com), oversees the delivery and operations for all Mather Economics consulting engagements, along with internal processes, analytics, staffing and new product and services development. He has led numerous consulting engagements across various industries, working with econometric modeling, forecasting, economic analysis, statistics, financial analysis and other rigorous quantitative methods.