Did Google Just Kill Email Marketing?

Jordan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A small, mostly unnoticed update to Google’s (NASDAQ: GOOG) Gmail service may have a lasting impact on email marketing.

Google rolled out a fresh new design that divides your mailbox into three parts. A “primary” box, a “social’ inbox, and a tab for “promotions.”

Here's the new view:

<img alt="" src="http://g.fool.com/editorial/images/57746/newview_large.png" />

Why it matters

Online marketers know the value of an email address. Every business from retail to B2B collects customer emails to build a list of their most loyal customers.

Email is one of the least expensive marketing methods. Where a snail mail promotional piece may cost as much as $0.50 per person, emails can be sent for fractions of a cent. Huge businesses like Constant Contact (NASDAQ: CTCT) and Salesforce.com (NYSE: CRM) provide businesses with the tools necessary to build and maintain an email list.

For as little as $15 per month, businesses can get started with Constant Contact, build a list, and work on a newsletter or promotional template to drive repeat customer business. The ROI is high…very high!

Gmail’s ad block

Gmail’s new features take advertising right out of a user’s inbox, placing ads a click away in the “promotions” category. That view is only available to desktop users.

When I access my Gmail through my Android phone app, I can only access my primary inbox. Anything in my “promotions” category is out of sight unless I use Gmail on a desktop or tablet that has enough screen space to display the fully-featured inbox.

This change is huge. First, it takes promotions out of the line of sight, so fewer people are likely to see email campaigns. Secondly, it reduces the impact of email marketing on mobile phones, since promotional campaigns are hidden entirely.

Gmail claims as much as one-third of all worldwide active email users, according to Comscore data. Thus, as many as one-third of all promotional emails are now sent into a vacuum, placed among other promotional pieces that users may find too spammy to open.

<img alt="" src="http://g.fool.com/editorial/images/57746/emailmktshare_large.png" />

Will Gmail crush internet marketing companies?

Gmail’s change has a lasting impact on the effectiveness of companies that rely on email marketing to drive repeat business. It also affects the companies that make money by providing businesses the push marketing tools of the trade.

However, it does not appear that a change to Gmail will erode the economics of the industry. First, the returns on email marketing are so high that even a 33% decline in customer response would not send marketers running from the hills.

According to Constant Contact’s 2012 annual report, 97% of its emails avoided spam filters to flow right into the customer’s inbox.

Investors who own Constant Contact and Salesforce should stay on the lookout, however. If Yahoo! and Outlook (formerly Hotmail) mimic Gmail’s new multi-inbox platform, the email marketing game may come to an end.

Constant Contact generates substantially all of its revenue from email-based marketing. The 2012 annual report claimed more than 500,000 email marketing customers. Other products, like EventSpot, SinglePlatform, and Save Local claim only a fraction of the company’s customers, and thus a fraction of customer revenue. (All of its businesses, with the exception of its small Social Media business, rely on email marketing.)

Perhaps, the most concerning issue for Constant Contact is that 67% of its business is derived from small businesses with fewer than 10 employees.

<img alt="" src="http://g.fool.com/editorial/images/57746/ctct_large.png" />

Its customers are most likely to stop email campaigns from lower conversions -- they don’t have the scale to leverage email marketing at lower ROIs. Email marketing has high fixed costs (setting up campaigns, managing the list) and almost no variable costs. Thus, smaller businesses operate on a thin margin of profitability.

Salesforce is less levered to email marketing itself. The company provides analytics services to track response rates, but after its acquisition of ExactTarget, it has some skin in the game, so to speak. Luckily for Salesforce, its business is secure with or without aggressive email filters.

Because Salesforce works primarily with large firms, a decline in email marketing ROIs won’t hurt its bottom line. Email marketing is a permanent fixture of its customers’ marketing plan, unlike Constant Contact, which focuses on much smaller businesses.

The Foolish bottom line

If Yahoo! and Outlook replicate Gmail’s newest feature, companies that rely on email marketing to boost sales will undoubtedly see a real drop in email effectiveness. That could spell disaster for the likes of Constant Contact, which has made a business of being the go-to B2B service provider for small businesses.

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Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Google and Salesforce.com. The Motley Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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