FINE-TUNING OF RATE BASES CHANGES ADVERTISERS' TAKE: ONCE A SIGN OF DECLINE, LOWER RATES NOW BRING NEW PERSPECTIVE

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Publishers used to consider a rate-base cut a sign of defeat.

In the past, a cut in rate base signaled poorly managed or inflated circulation in the eyes of the advertiser, while a rate-base increase was viewed as sure sign of circulation vitality.

But with rate base adjustments becoming so commonplace, the advertising community would do well to remember a title's rate base is an adjustable factor in publishing economics, and does not necessarily mirror a true picture of circulation health.

EXPANSION AIMS LESSEN

These days, publications realize it is less profitable to chase new subscribers to beef up circulation numbers -- especially with fewer prospects coming out of the sweepstakes. This change has forced magazines, especially the multimillion circulation titles, to take a hard look at how they manage rate base.

At the top of the magazine food chain, Reader's Digest recently announced it will lower its rate base 17% in two stages. The rate base is now at 15 million, but it will move to 13.3 million in January and then to 12.5 million in June. TV Guide cut its rate base 9.2% from 13 million to 11.8 million.

Susan Caughman, president-CEO of AFP parent American Family Enterprises, says a rate base cut is no longer a dirty word with advertisers.

"Generally speaking, if you look at some of the bigger magazines' rate base cuts, you will not find that the advertising community responded negatively," she says. "The fear is that it's going to be seen as being a decrease in terms of consumer demand, and maybe occasionally it is. But generally, it's understood by the advertisers to be an economic decision."

15 TITLES LOWER RATES

According to Dan Capell, publisher of industry newsletter Capell's Circulation Report, 15 magazines lowered their rate bases in the first half of this year -- compared with 28 titles during the same period last year. A more common scenario this year were mid-size titles raising rate base, a phenomenon tied directly to the strong ad page performance of 1997.

"The issue [of rate-base management] always comes down to advertising pages," says Mr. Capell. "The reason to grow [rate base] is to raise the ad price. So if the assumption is the ad pages aren't there to justify the growth, then there's no reason to grow."

100-PLUS BOOST RATES

More than 100 audited titles -- with circulations at or below one million -- raised their rate bases in the first half of this year, according Capell's Circulation Report.

"It's surprising that many magazines would raise their rate base, given the current environment, the toughness of the circulation business right now," says Mr. Capell. "It's not your old established titles that are doing this. I think [the rate base increases] were influenced by the positive ad page environment. Many of these decisions were made in the second half of 1997."

People, a multimillion circulation title that had been delivering a bonus, raised its rate base to 3.25 million in January.

"We were 3.15 million for years, at least before 1993," says Steven Shure, consumer marketing director for People. "We had shown a history of beating our rate base so much, we thought we just ought to guarantee it to advertisers. It would make a strong statement."

The rate base boost was timed to coincide with a strong ad market willing to swallow an ad rate increase that comes with guaranteeing more circulation.

"When any magazine raises its rate base, they raise the risk that they'll miss their rate base because they get disproportionate credit. If you beat your rate base by a lot everyone says `well that's great, you got a bonus,' but if you miss your rate base they say `Oh my God, your business is failing.' And neither is actually true. They are both just perceptions because a rate base is arbitrarily set," he says.

Mr. Shure is quick to note People has made sure readers were helping to cover the costs of producing so many copies over rate base all those years. People has a total audience of more than 38 million and has been raising its cover price 10 cents every year for the past five-to-six years to its current $2.79 -- and it will increase that to $2.99 in November. At the same time, it has been raising its subscription price 10 cents every year to 18 months, the average one-year subscription price is $90.

COMPETITIVENESS OCCURS

Competition between two magazines can sometimes create a rate base race. In such a situation the perception of circulation health is sometimes more important than real vitality, says Mr. Shure, causing a title to maintain a rate base that leaves it too dependent on ad revenue to stay afloat.

Still, publishers often may find that the money spent to produce and deliver more copies to subscribers lured into short term subscriptions with introductory prices can quickly dissipate any gains made from new ad revenue.

"What happens often is people look at all of the different sources of circulation available regardless of their long-term profitability, says Phil Whitney, VP-consumer marketing for Money.

"They use those sources willy-nilly to grow circulation. What that means is that circulation [revenue] will never become profitable, circulation always will be a cost. And, when advertising hits the skids, the magazine is left exposed with a rate base that's too large relative to its advertising base."

Reader's Digest, finding itself in just such a situation, decided to lower rate base.

"We're going to make millions of dollars additionally by taking our rate base down," says Greg Coleman, president of U.S. magazine publishing at Reader's Digest Association. "It may sound counter-intuitive to say smaller is better, but against the marginal subscribers, the cost of bringing in a subscription has gotten higher and higher. To maintain a rate base, we've spent more and more money chasing less profitable sources of circulation -- they don't renew as much or they're not as valuable to our company in the back end."

PRUNING THE TREE

The money saved by not producing and distributing copies of the magazine advertisers aren't helping to support is often better used elsewhere.

"This year, for the first time ever, I'm going to be allowed to take the savings and reinvest it back into the magazine," says Mr. Coleman. "That is why I went as deeply as I did. If we were not allowed to do that, I would have kept the rate base at 14 million. In our case, the analogy is we were allowed to prune our fruit tree. It will cause the short-term down-size; revenues go down, but the impact of the reinvestment will take a year or two."

Mr. Coleman says Reader's Digest can now spend millions of dollars on direct response advertising, radio and TV and develop an approach that is not sweepstakes-related.

One reason why Reader's Digest decided to cut its rate base was because not enough subscriptions were coming in from sweepstakes.

Mr. Whitney says lagging sweepstakes are forcing other large magazines to seek out sources of circulation that the smaller titles have discovered. For example, New Sub Services offers its Customer Activation Program, a service that exchanges frequent-flier miles for magazine subscriptions.

CIRC SOURCES VARY

Circulation directors often have to pick their sources of new circulation carefully. According to Lindsay Valk, senior VP-director of circulation marketing at Hearst Corp., "There's a lot of rogue operators out there who are not playing by the rules when they sell [subscriptions. For example,] they make it tough for people to cancel [their subscriptions]."

"Let's say you are pretty much maxed out in terms of your subscription sources. Well, you've got to find some replacement subs somewhere. So, you may have to turn to an unprofitable subscription source," he says.

Hearst Corp. dramatically decided to turn its back on unprofitable circulation sources in November of 1995 when it cut the rate bases of its titles by about 10% across the board to remove unprofitable circulation, improve the incremental value of its ad revenue and loosen up the circulations of some titles that were stretched to maintain their rate bases.

The move allowed the company to price more aggressively on the newsstand (between 15% to 30% higher) and in subscriptions (10% to 15% higher) while lowering manufacturing costs.

HEARST SEES IMPROVEMENT

Mr. Valk says Hearst's circulation revenue has improved dramatically, and its ad revenue, which took more of a pounding than expected in 1996, is recovering nicely.

"We might have been put in the penalty box for a year or so by some major advertisers because perhaps the implementation of our rate base cuts wasn't done as well as it could have been in terms of our communication," he says. "It wasn't ever a question of whether the strategy was the right one, but I think the implementation tactics might not have been as good as they could have."

According to CCR, 43% of magazines audited by Audit Bureau of Circulations have made a rate-base cut in the last 10 years, and 47% of these have done it more than once. More still, 70% of all rate-base reductions in the industry have occurred in the last three years, and 48 consumer magazines alone made such a cut in 1997.

Mr. Whitney says there is still an understandable degree of advertiser skepticism out there, making rate-base cuts risky to pull off.

"For all but the stretched magazines -- like TV Guide and Reader's Digest -- that were clearly missing rate base or were in danger of missing rate base, it doesn't make sense to do it," he says. "I would even say that in the short term, Hearst's decision in hindsight was really quite questionable. Long term, they may prove to be right, because there will be a softening in the advertising market in the next 24 months."

IMPROVEMENT IN HEALTH

Mr. Capell notes that such cutting has improved the circulation health of many titles, enhancing their ability to deliver their rate bases to advertisers. His newsletter cites 1997 audits, which reported more than 75% of magazines making their rate base, compared with 60% that did in the same time period in the mid-80s.

Like Hearst, many magazines -- including TV Guide -- have compensated for the missing ad revenue after a rate-base cut by raising circulation prices, says Mr. Valk.

While Reader's Digest has not announced such a plan for its newsstand sales, it will selectively raise its subscription rates.

Mr. Coleman says most of the magazine's advertisers have responded well to the cut.

"For the most part, [our advertisers] are inundated with rate-base decreases, so most of them really want to know, `O.K., what's my new rate?' " says Mr. Coleman. "So it's not a sin like it was 10 or 20 years ago when people chastised you for being weak or assumed something was the matter. People understand more and more that we're allowed to manage our business."

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