VARIABLE DATA DIRECT MAIL-
Surprise! Digital press applications multiply, but not where expected

Ruminating on how variable data direct mail is fueling digital press growth, our I.T. Strategies consultants extract some provocative generalities:

"Digital press vendors have been marketing to the wrong people."

"Data mining for targeted direct mail is too complex even for digital people. It needs a management person."

"Printers that want to survive need to do data."

"The key is to create market pull."

"It's bigger than this. It's make-or-break time for our industry." With us at our discussion are Liz Ziepniewski, Patti Williams and Marco Boer. Liz opens, reminding us that growth in the digital press segment has been generally disappointing. "Compared with what people had hoped, market penetration has been slow. What do we have? There's HP Indigo, Xeikon, Nexpress, and Xerox with the iGen3. Some predicted Xerox would come out with an economy version of the iGen3. They are bringing the price down, but price is not proving to be the primary hurdle. Rather, it's the applications.

"Years ago the big thing was that they were going to take lots of pages from offset, but of course this never happened. And the reason is that the speed and the cost is not there for traditional offset applications, and that is not what it should be about. Offset is not and should not be a target for digital; digital's market is outside the offset world. Where we have seen success is where many have never expected it. One successful application we've talked about is point of purchase signage, right?"

WalMart is an example. The prices at WalMart in Boston will be different from those in California, so signage has to be site specific. This is creating some demand for digital presses, which are appropriate for small signage.

Another growing application is photo album printing. The Shutterfly/Kodak online photo album service prints albums on a high volume digital press. Personalized calendars are a similar application.

But today we're zooming in on an application that in the long run is expected to have much greater industry-wide significance: variable data direct mail. Direct mail formats have multiplied. Analog technologies have served static direct mail for decades. More recently digital printing has enabled targeted direct mail by overprinting the press-printed piece with variable content.

Offset "shells" are commonly sent out to a data center to add variable text such as pricing, product names, and perhaps a personal salutation with mono or highlight color laser printers. This can be costly in terms of extra labor and turnaround time. Plus, if personalized, there's the chance of a mis-match in collation, although Patti reminds us that there are bar code control systems that can monitor collation accuracy. Another direct mail variation mentioned are mailings with a customized letter collated with a static brochure.

Variable data has been around for a long time, it remains a relatively small, but now the gates seem to be opening much wider with volumes getting large enough to become a cost effective digital press application.

We now see full variable data accelerating-not just addressing and salutation, and not just text, but also with product-specific color images. "Thanks to new software and digital presses, they can get way beyond the traditional 'Dear Ted' level of customization," Liz explains. "Now they can do the 'Dear Ted' and also include a picture of the new Mercedes you had looked at a few days earlier. If it was the red one you looked at, that goes in their database, both the specific model and color. It's no longer just data. The variable picture goes way beyond just data. There can be a thousand or more variations to a given promo piece . . . location of the dealer you visited, day of your visit, color of the interior as well as exterior of the model that attracted you, and on and on."

Supermarkets have been using programs to profile customers' individual preferences for years, more recently through customer loyalty cards. Cards are linked to store discounts on certain items to encourage customers to accept the card. From then on the store can track individual buying patterns for targeted direct mail promotions. There are now three major database companies serving various industries, continually building this sort of data.

Another business pioneering targeted customer loyalty applications is the casino. Liz tells us about how Foxwood has seen a huge revenue jump by issuing cards to all their casino visitors. "What these utilization cards do is give you extra points, or whatever, to motivate you to take the card. And it gives the casino the ability to track what games you play and your wins and losses. If you've lost money, they might send you a coupon to come back and get an impressive premium such as a free hotel room or something else compelling to keep you as a customer. If you've won money, they will send you something else-it might be smaller since you have more incentive to come back anyway. They're mining their data and doing some interesting things with it."

The Pieces are In Place
So, we see applications appearing here and there. What will it take to make it grow? "Just pushing targeted variable data printing won't do it", Marco says, noting that there's a huge base of transaction printing waiting to be mined. "It's already there. It's connecting the dots. Will take some time, but the pieces are in place. Recognizing the importance of this resource waiting to be mined, Kodak now has a 'transaction' group along side of their graphic group."

But transaction printing doesn't necessarily mean applications for digital presses, Liz cautions. "We're talking about applications for digital presses, OK? Yes, it's just starting, but in our interviews with digital press users, we found some great examples of successful applications. They have the data, the loyalty card data, and now there is software that lets them use that data for a new level of targeted, variable data direct mail. Users are getting high response rates. Clients are getting 15-40% response rates on direct mail pieces that might cost them around a dollar each."

Our credulity is challenged. "Thirty percent response rate?! In my house we hardly open any direct mail at all."

"Normal offset printed direct mail usually pulls in just a 1% to 4% response."

"That's the whole point of targeted direct mail," Liz exclaims. "Who here opens direct mail? Raise your hand if you do."

We don't see hands. It helps if there's something, a personalized "grabber" on the envelope as well. But you can't print envelopes on a digital press. Marco, the car buff, says he always opens up direct mail from his car company since he knows valuable coupons are often enclosed. "But the variable direct mail we're talking about normally isn't in an envelope," Liz explains. "It's a folded piece, such as a tri-fold self mailer.

And it works, it wins for the mailer and is a winning application for the print supplier as well. Many of the interviewees reported charging $1.00 per variable data direct mail piece, compared to pennies for an analog static piece. Clearly there's motivation for both print provider and the marketing world. But implementation is still spotty, with insufficient volume to significantly impact market numbers. It will take time to develop. Digital presses are not the problem, they've had the capability for years.

The Infrastructure Hurdle
It will take time for the data infrastructure to catch up. We see islands of applications right now, the aforementioned auto dealerships, casinos, supermarkets and the like. They now have the data and are beginning to leverage it. The data is there, but widespread mining of that data will take some time. How much? Years? Decades? Liz emphasizes that it's here now, and predicts it will get big, will be mainstream in just a few years.

"Five years, I think."

"We have bits and pieces already, but only bits and pieces."

"I would agree with that; it depends, though, on your definition of 'mainstream.'"

"Well, it's when we see a lot more companies doing it," Liz continues. "And this will happen once people are educated about it and get the data infrastructure in place. The grocery stores, for example, know everything, but don't know what to do with it. Most don't have the resources to do it themselves. So what's happening is that some of the big data mining companies are starting to buy this sort of data and bring it all together, and easily RIP it to the digital printer."

An example is XMPie, a company founded in 2000 by some Scitex veterans. Still a privately held company, it has enjoyed rapid growth, self-described as "a leading solutions provider for cross-media dynamic publishing." Their proprietary software lets marketers efficiently develop what they term "customized, information-driven cross-media campaigns." Another example is GMC Software. The Switzerland based company was founded in 1986 and since then has narrowed its focus from hardware integration services for digital printing to developing turnkey solutions for designing and producing customized variable documents. GMC now claims 150 employees and offices in several locations around the world including the USA.

Although digital presses have been around for ten years or more, these applications have only recently begun to take off, in part because the vendors didn't have the resources. "One thing really interesting about this," Marco notes, "is that ever since HP acquired Indigo and Xerox launched the iGen3, that's what got this moving. Previously, the digital press vendors like Xeikon and Indigo simply didn't have the resources to do it. So now we have the big digital press vendors supporting their users with training programs for these kinds of applications." Some vendors also encourage users through membership in PODi.

We also have this application segment being bolstered by some of the larger and more adventuresome commercial printers. Just this month it was announced that RR Donnelley has agreed to acquire The Astron Group, a move to strengthen their document-based outsourcing group. The move has raised some eyebrows in the financial world because RR Donnelley paid 2X revenues. The Europe-based company is said to have around 5,000 employees in 70 locations worldwide with revenues of around $550M expected this year. The company currently is owned by PPM Ventures, the private equity arm of Prudential PLC that bought it just five years ago and will be making 500% on its investment. (Reacting to the news, Donnelley's shares dipped down a bit and Prudential's went up.)

According to Liz, Astron's main job is to go into corporations and get around the print buyer. "The print buyer has always tended to be a barrier to digital printing," she explains. "Astron seeks out the COOs and marketing directors and educates them about how they can benefit from digital printing. They don't do the printing, they are the go-betweens."

"Market initiators," Patti suggests. "Their mission is to get the market moving, and it seems to be working for them."

Clouds on the Horizon
"So far all of this has been driven by US companies," Marco says. "We don't see Canon or Ricoh getting into direct mail applications. Yes, in part because direct mail isn't very big in Japan or other countries. Direct mail fits us culturally. But beyond this, it provides an opportunity in some ways. In time it could be a desktop application, or equivalent to Photoshop. I believe that over time, once this is perfected, my guess is that the Japanese vendors will be able to execute much better on this, will be able to scale it down much better so that even the smallest companies will be able to do more effective, targeted direct mail."

A possible downside, Marco muses, is whether as targeted variable data direct mail gets more common, direct mail volume will go down since one targeted piece is more effective than a dozen or more static content pieces. Targeted databases are smaller. So the print runs will go down. For the print providers who go digital, it may not matter, because their margins will probably be a lot higher. The paper mills, on the other hand, will be unhappy, as well as the commercial printers who haven't gone digital.

It's been reported recently that buyers of any product over $400 are most likely going to research it on the Web and not rely on print advertising-one more thing helping to shrink the commercial printing industry. It hasn't totally collapsed, but contraction is accelerating. Patti notes, however, they are willing to do ever shorter runs on their presses because they are paid for. "They'll take their offset presses down to very short runs to get the job. So they become more competitive in terms of run length. But for variable data printing, they can't compete at all. Which is why within the industry the growing conventional wisdom is that they need to diversify, offer broader services, and expand toward digital. In short, printers that want to survive need to do data."

But developing variable data applications calls for a lot of training and know-how. You have to be able to mine customers' databases, or find people that can. This means high up front cost not just for the printer but their customers. And many customers aren't willing to risk the investment. "They would rather stick to what they know, and not take the financial and time risk. It's too big a hurdle for them, as well as for the small commercial printer that has been doing their marketing collateral," Marco says. "In fact, it can be too complex even for digital people. Putting together this sort of program requires a data management person. And remember, part of their caution is that if they mess up just once, if the wrong people get the wrong message, they'll never get that customer's business again, right?"

Another impediment to promoting this application is confidentiality. Because of the large up front investment, and because it is new, companies that put together a successful campaign generally don't want to share it. "So when printers turn to their next prospect for such an application, they often can't talk about what they've done for some one else since that customer requests confidentiality," Liz says. But for this article, a couple of vendors have given us examples of variable data direct mail pieces.

"That's why the big digital vendors, Xerox and HP, try to get out as many case studies as they can to spur interest in this application," Marco adds. "That's why people such as the software and hardware vendors are so free with these case studies. If you search "direct mail" on the Internet, you'll see white papers all over the place."

Landslide Effect?
For the digital press vendors, this application is worth promoting on several levels. It seems important to be there first because complexity helps ensure loyalty. The users who report they went to the iGen3, for example, did so because they were already Xerox users. Then, with one iGen3 and considering a second digital press, they won't think of going to NexPress because of the high transition and retraining cost. Transitioning to a digital press from a competing vendor is not practical, they say. Once with a given press, their staff was trained to use it, technicians trained to fix it, and workflow in place, not easily switched to another type of digital press.

Variable direct mail is also important because the application takes digital out of competition with offset.

And finally, promoting the payoff for early users will generate market pull.

This leads to a closing, rapid fire dialogue-part speculation, part pep talk, part sermon.

If direct mail goes more and more digital, that looks like demand for a lot of digital presses. Analysts estimate U.S. direct mail dollar volume at over $30B now, and according to the DMA, it is still growing, albeit slowly.

Transitioning from static direct mail to variable seems inevitable thanks to documented payback for the user: up to 30X with each variable data direct mail piece.

Stores may begin to use their customer data as a revenue generator by selling their lists to other businesses and/or database companies.

Software will drive it. We're just peripheral.

Right, you need solutions to drive the market.

It's the printer vendors working to drive it, so it's push, not pull. We have the presses that can do it-we aren't the problem! Pushing presses is something like trying to push a rope up a hill. You are trying to create kinetic energy. By showing people what you can do, others start thinking about it and they'll come up with things we've never thought of.

It's like the cell phones in Shanghai. Once it happens it will happen big. I see it like pushing a huge boulder up a hill. Once it gets to the top, it will race down the other side, there will be no stopping it.

It sounds like salvation. But when people talk about salvation, it's time for caution.

A problem might be that consumers will rebel in greater numbers via some sort of "do not mail" list. As databases become more integrated, it becomes easier for people to remove themselves as well.

In the end, we're not replacing offset printing. We're replacing monochrome printing. Replacing some inkjet, and low-end EP, too.

But maybe that doesn't matter since these products are the ones being squeezed by commoditization.

Right. Xerox knows this. That's why they are betting the future of their company on it.

It's more than interesting. It's essential, Marco argues. "The reason this is so critical is that basically what we need to do is to get people to put more toner on pages. That's the bottom line. The digital printer industry as a whole has been growing only around 5% per year in recent years, and this year growth is expected to be quite a bit lower than that. Digital presses have been growing at 6% per year, but from a relatively small base. This needs to be accelerated. Hard to believe, but we're a single digit growth industry now. This means we are mature. So I agree with Xerox: in order to regain growth we need to move everybody over to color as fast as we can. Get users to spend more per page. And the only way we can do that is with applications like this. We're at a make or break point, I think."

In short, we need to get the word out about this application, about how it can make money for those who invest in it. Then there will be true market pull for our technology.