Microeconomics of Spam and Direct Marketing

The nature of spam - as with the nature of other forms of direct marketing - can be described in classical microeconomic terms. The value of direct marketing can be described by what looks like a classic supply and demand graph:

$		Supply (Advertisers) Consumer Demand
	Quantity

In this case, the blue curve represents the direct marketing that a consumer is able to accept for a given cost to the consumer, measured in terms of their purchases, and the red curve represents the value that the advertiser needs to get out of the advertising in order for it to be successful.

Consumer costs for traditional direct marketing techniques include: the time it takes the consumer to deal with the messages, one way or the other, and the effect that has on their ability to identify important communications among the marketing material. The available time is finite, so as volume increases, the amount of time the consumer spends reading direct mail, or accepting telemarketing calls, decreases for each advertiser. At some point, the ability of the consumer to spend time on direct marketing solicitations disappears completely, returning zero value to the advertiser.

The supply side is easily understood - traditional direct marketing costs money, and the advertiser needs some return on that investment to justify the cost of the direct marketing campaign. In fact, the supply curve is derived from the cost of the advertising fairly directly:

$		Cost of Direct Marketing Required Returns
	Quantity

For a direct marketing campaign to be worthwhile, the advertiser must make a return on investment that exceeds the return that could be achieved by putting the money in a bank (or, for large vendors, the overnight cash market). This means that the required returns are larger than the costs. The required returns curve becomes the supply curve on our supply and demand graph.

Now let's examine what happens in the case of spam. The cost to send spam is trivial. It can be done with a $25 ISP account and two telephone calls, for a total cost of $25.48. There is almost no incremental cost to the sender to send to a million recipients over sending to a single recipient. Here's what happens to our cost of marketing and required returns:

$		Cost of Spamming Required Returns
	Quantity

With a very low cost to the sender, and almost zero incremental cost, the cost of spamming to the sender, and the required returns, becomes a horizontal line very low on the graph. Now let's see what happens when we put this back into the original supply and demand graph:

$		Supply (Advertisers) Consumer Demand
	Quantity

Here we see that the quantity, that is, the volume of the advertising, has increased beyond reasonable proportions. While at first glance it might seem that this graph suggests consumer demand for the advertising is massive, recall that the consumer demand curve here describes consumer spending on products advertised by spam - in reality it shows that the spending by the consumer on products advertised by spam has fallen massively compared to the number of spams received.This reflects their inability to copy with the massive volumes of spam coming their way.

There are costs costs of spam to consumers that are not being shown above. Quite simply, the cost of spam to consumers increases with the volume. These costs include:

• time taken to deal with the spam;
• bandwidth charges for receiving the spam:
  • reflected directly in the case of consumers billed by data used;
  • reflected in terms of increased time charges for consumers billed by time spent online; and
  • reflected in terms of increased price of ISP service, particularly for consumers billed a flat rate.
• cost of lost communications which were mistaken for spam (this is very common); and
• other direct, indirect and opportunity costs.

$		Supply (Advertisers) Consumer Demand Consumer Costs
	Quantity

This graph clearly demonstrates that in the case of spam, the economics means that the consumer is bearing the cost of the advertising. While one spam seems insignificant, the aggregate cost of all spams, and all spammers, is significant, and far greater than the costs of spam to the spammer. This is what we are talking about when we say that spam is a cost-shifting advertising medium. It is not so much that one spam is expensive to the recipient, but that the microeconomics of spam causes the aggregate cost of all spams to be unacceptable.

This cost of spam has resulted in massive consumer backlash against spam. In fact, some of that backlash spills over to affect traditional direct marketing techniques. Consumers who are sufferring from an overload of spam are more likely to throw away direct mail without even browsing through it. This reflects back into the original supply and demand graph for direct marketing:

$		Supply (Advertisers) Consumer Demand (Dotted line represents original demand)
	Quantity

The end result for direct marketers is clear - not only does spam make your customers hate you, but it does damage to the effectiveness of your own traditional direct marketing techniques. In reality, spam is not a direct marketer's dream - it is the direct marketer's worst nightmare. It is doing damage to the viability of all forms of direct marketing.

Contents
Preface - Why this is the most important lesson in Internet marketing you will ever read.
Overview - What the problem means to you.
Microeconomics of Spam - the economist's view.
Getting Permission - how to get permission for the first mailing.
What to do - Easy ways to avoid being labelled as a spammer, and still get what you want out of email lists.
The law - The current state of the law on this issue.