Natural circulation levels, basic stability - magazine sales

Folio: The Magazine for Magazine Management, May 15, 1993 by Ron Scott

It's a delicate balance of cover and subscription pricing and circulation, but an essential goal in today's marketplace.

There is such a thing as a natural circulation level--a level of circulation at which both subscription and newsstand sales are profitable on their own merits, and based on which advertisers pay a cost per thousand that does not require them to subsidize circulation. The problem with this concept, however, has been that it is not sexy: Natural circulation levels are just too stable, sensible and profitable to have attracted much press.

But as we work our way through the economic challenges of the nineties, with low inflation, low growth and low expectations, that may be just what today's circulators need.

Bob Crandall of American Airlines said, not long ago, that the eighties were the decade of growth, and the nineties will be the decade of value. There are plenty of signs that Crandall is on to something: Wal-Mart's everyday low pricing, Procter & Gamble's decision to reduce special pricing for its packaged goods to retailers, the reduction in deep-discount subscription offers by major publishers, and very low interest rates--all of these point to a significant slowing in the pace of growth--not just in the United States, but in most of the world's developed economies.

If we are in the decade of value, what does that mean? Value has two elements: the value of the product, and the "value" at which the product is offered for sale I, for one, have rarely been concerned about the value of information and entertainment, which are the essence of magazines. But, as I have said often in these columns, I have become concerned about the price at which we offer our magazines for sale. First, we have been offering subscriptions at prices far too low for the value of the product, and second, we have been charging the retail buyer too much for the value of the product.

Of course, these two pricing techniques are linked. In order to make the subscription price appear to be an even greater bargain, publishers have been raising the newsstand price--and thereby protecting the subscription discount. In my opinion, this has been a major cause of the erosion of newsstand sales over the last decade. And this erosion confirms my point: Fewer people will buy any product when they perceive its price as being higher than the value they assign to the product. The converse is also true: More people will buy subscriptions when they perceive the price at which the subscriptions are offered as lower than the perceived value of the magazines themselves.

Our pricing problems crystallized when packaged-goods producers decided that their advertising budgets would be more productive subsidizing consumer-product prices (with store coupons), rather than magazine subscription prices (with ad pages). This strategy worked for them for a while--that is, until all the retailers started offering special sales and consumers realized that if they were willing to read the store fliers to discover which supermarkets were offering the lowest prices with the best coupons on a given day, they could save a good bit of money.

So consumers began chasing price, not brand--which is a very inefficient way of doing business indeed. And of course, magazine sales suffered because the fluctuating number of consumers at any given retail outlet made determining the number of copies of any magazine title to put on sale at those outlets difficult, to say the least.

But now we have come full circle: Product prices will soon stabilize, and their producers will have the advertising-budget money to re-establish brand value through advertising--just at the time when magazine publishers have reduced their rate bases to lower levels. And it is here that natural circulation levels should come into play.

We know that a 25-cent increase in the newsstand price of our $2.50 magazine will usually produce a 10 percent drop in net copies sold. But we don't know if a 25-cent reduction in that same $2.50 cover price will produce a 10 percent increase in net copies sold. Nor do we know if the subscription response would change if we were to leave the subscription price (not the discount) exactly where it is and then reduce cover price.

However, with the testing techniques we now have in place for both subscriptions and newsstand, it should not be difficult to answer each of these questions. It is not necessary to "bet the store" on the outcome.

In fact, among the highly specialized magazines, there are any number of cases that answer these questions and prove the theory of natural circulation levels. Because highly specialized titles are rarely driven by advertising revenue, these publishers have had to price their two primary circulation sources to produce profits--or at least not to produce losses. As a result, many achieve natural circulation levels. That is, any further increase in price produces a concurrent drop in sales; and any decrease in price does not produce an increase in circulation that can be offset by increased advertising revenue.