Published November 2, 2022
1
Free!
About 25 years ago, the launch of free consumer email services from Hotmail and Yahoo changed the way we communicate with each other. Until then, getting an email address meant the need for an institutional affiliation or buying a domain and setting up one’s own email server. Both offered an email address free for life with a service that could be accessed via a web browser. Anyone with an internet connection could now get a personal email address. Personal communications grew exponentially in the coming years, accelerated further with the launch of Gmail a few years later which removed storage constraints for the email inbox.
WhatsApp did something similar with the launch of its app just over a decade ago. Its target was P2P (person-to-person) SMS. The mobile phone was rapidly becoming the primary device in our lives. Yet, SMS was tethered to operator plans and each 160-character SMS cost money. By using the Internet rather than the telecom network, WhatsApp freed personal communications from the control of the telecom operators. Family and friends across geographies came together via WhatsApp.
“Free” is different from cheap. A free service removes consumption constraints. Free services delivered digitally have changed the way we communicate, consume content and media, and get entertained. Of course, there is a cost to every free service. If we are not paying with our money, we are paying with our attention and data – which then get monetised by service providers via ads. Digital advertising has become a nearly $450 billion industry globally, dominated by Google and Facebook.
I recently started wondering if B2C email services could become free – and if free, would businesses be interested. Most small (and some mid-sized) businesses use services like Mailchimp, whose standard offers a $17 monthly plan (for 500 contacts and upto 12 emails per contact). A contact list of 100,000 would cost $605 per month. Of course, Mailchimp offers a lot more than just emailing – bundling in automation, segmentation, and tools for content creation. Klaviyo’s equivalent pricing is $20 (for 500 contacts) and $1,380 (100,000 contacts).
Most businesses would not move to save $15-20 a month. But at $1,000 monthly savings, they could be interested. So, I started wondering: what would it take to offer businesses a million free emails monthly (100,000 contacts x 10 emails a month)? How disruptive could that be? And what if the emails sent could be made more engaging – more opens, more in-mail actions, more engagement? Would such a free service work? Or would it be too good to be true?! What else could be added to make it a compelling switching proposition? From a service provider’s view, what would it take to offer such a free service – and do so profitably? Could it be scaled to every business irrespective of email volumes and database size? These are the questions we will explore in this series.
2
Email, Netcore and Me
Netcore has been in the email business for 25 years. It began by offering Linux-based email servers to Indian businesses (as an alternative to Microsoft Exchange and Lotus Notes) in the late 1990s and early 2000s. That business continues to date – with cloud email having been added. Netcore also resells Google and Microsoft’s cloud services, thus offering enterprise customers multiple choices.
Netcore’s ESP business started 15 years ago – appropriately for that era, we called it EMM (Email Mass Mailing). That business has grown remarkably well – Netcore delivers 20 billion emails monthly for its mid- and large-sized enterprises globally. Netcore is very strong in India and emerging markets, while the US-UK-EU footprint is still small (though growing fast). Given that most of the larger competitors have been acquired or consolidated, Netcore today ranks among one of the largest independent email service providers globally. (Netcore too has moved into other channels such as SMS and WhatsApp, and also up the stack into martech to meet the marketer’s need for omnichannel engagement and personalisation.)
I was largely hands-off from Netcore during 2011-2018 as I worked at the periphery of politics. So, while I knew the numbers (financials), I did not spend much time on the business and innovation. All my life, I have tried to do new things – most end up failing, but a few do succeed. And so, when I returned to Netcore full-time in early 2019, I had to relearn the business we were in and understand the problems we were solving. I attended multiple conferences through 2019 to understand the email and martech industry. Then came the pandemic which ended all travel. I then began conversations with CMOs in India and SE Asia to understand the challenges they faced. I also started blogging daily after a gap of 7 years.
A blog which needs to be updated daily forces what I call an RLTW discipline – reading, listening, talking, writing. For the past year or so, I wrote a lot more about entrepreneurship and India than about email and marketing. That started changing a year ago – as the dots started connecting, new ideas started forming, and a clearer view of new ideas and opportunities emerged.
I didn’t know it when I started but I can now clearly see the four strands of my interests in marketing: it had begun with Velvet Rope Marketing, followed by Martech 2.0 and Email 2.0, and more recently, Loyalty 2.0. In each sub-area, each essay pushed the envelope a little further. What seemed like jigsaw puzzle pieces scattered around came together to form a clear picture.
And then came the realization: at the centre of all the ideas lay the new ideas around Email. Given email is Netcore’s “hedgehog” (hat tip: Jim Collins), could we use email to carve a larger place for ourselves globally?
3
ESPs
There are some technologies which survive the test of time. Email is one of them. It has been around for over 50 years, challenged throughout its existence by instant messaging, SMS, WhatsApp, and social platforms. Yet, it has stood firm. Although there is a belief that younger people don’t use email much, the reality is that the email address has become identity. It is the only communications platform not intermediated by someone else (a Big Tech platform or a mobile operator). Yes, an email box is typically hosted on a third-party server and law enforcement could get access to that, but there are secure alternatives available. Despite all the challengers, email still thrives.
Email has its share of problems and limitations: the ease of sending combined with its openness means that spam outnumbers genuine email (even though inbox providers have become better with their spam filters); zealous marketers also tend to overdo the broadcast mailings given the low unit cost of email; the in-mail experience has not changed much through the years with the only two primary actions being possible are open and clickthrough to a landing page.
B2C emailing has become a $7-8 billion annual business. For brands seeking ways to bring customers back to their digital properties (website or app), email offers the best RoI among all channels. The power of push messaging gives control to the brand to initiate a communication, rather than waiting for a consumer pull. In developed markets, it is the email address which serves as the login ID to most platforms. (In emerging markets, it tends to be the mobile number.)
Yet, there hasn’t been much innovation on the email front in the past 15 or so years – other than plain vanilla text emails becoming HTML-ised. There has been a lot of action around email – in its creation, sending (send time optimisation, triggers), personalisation and segmentation (as opposed to mass broadcast), automation (journeys), and AI-driven utilities like predictive segments, subject-line optimisation, and churn prediction. But the email itself – it has mostly remained the same.
The result? 9 out of 10 emails go unopened and links in 99 of 100 emails go unclicked.
The enterprise email service providers (ESPs) have also morphed through the years. The first-gen ESPs were bought a decade or so ago by the marketing cloud providers: SalesForce bought ExactTarget, Adobe bought Neolane, Oracle bought Responsys, IBM bought Silverpop. The large second-gen ESPs were all bought by CPaaS players in the past few years: Sendgrid was bought by Twilio, Sparkpost was bought by Message Bird, and Mailgun (Pathwire) was bought by Sinch. In one of the largest deals in the email space, Intuit (known for its accounting and financial software prowess) bought Mailchimp a year ago for $12 billion. There has also been some consolidation: CM group and Cheetah Digital merged.
My take is that innovation takes a backseat after founders sell to bigger entities, especially those not with an email background themselves. That’s what happened in email. The status quo continues: email (like SMS) generates plenty of cash, and there is good organic growth each year. Besides, what can be done within the email?
This is where I believe the entrepreneurs and acquirers have gone wrong. Email can be made much better. And the revenue opportunity that email can tap can be many times bigger.
4
ESPs’ Mistakes
ESPs positioned themselves as “competent communicators” – reliable senders of brand messages to their customers. Over time, this has become “commodity communicators” with the result that competition has ensured email prices stayed almost constant despite an array of increasing features as part of the wider martech stack. Also interesting in email is that prices are more or less the same globally – there is no “cheap” emerging market pricing option!
So, email gets about 1% of the total marketing spends – about $7-8 billion of the annual $750 billion. The $7-8 billion figure seems big until one realizes that in the $450 billion digital spend on adtech ($400 billion) and martech ($50 billion), there is about $200 billion (half of the adtech spend) that is being wasted on reacquisition and wrong acquisition.
The “AdWaste” opportunity is 25 times larger than the size of the Email Service Provider (ESP) market. The mistake made by ESPs is that they never looked at that as an opportunity – sticking instead to the role of message sending. It is a classic case of missing the forest for the trees.
What brands want is business growth. In a digital world where geographical boundaries disappear, the customer pool becomes larger even as competition becomes more intense. As a result, the focus is on the land-grab: acquire as many customers as quickly as possible. What brands don’t realise is that they have a leaky bucket – customers come in and then also churn out because they are not being looked after well. After all, only 10% of the marketing department’s budget is being spent on existing customers – the excitement is in splurging on new customer acquisition because that is what top management wants. Little wonder then that retention and engagement channels like email are given short shrift.
So, the first mistake ESPs made is that they did not position email as the “profit channel” – by investing more on existing customers, brands could actually reduce their dependence on new customer acquisition via Big Tech. This CAC (customer acquisition cost) has been compounding at 30-40% annually – more than the CAGR for most consumer-facing companies. Brands are running (spending) faster just to stay in place. ESPs missed the opportunity to reposition email as a channel because their businesses were being sold to new owners who did not really understand the power of email; and the ones who did (the founders) ended up exiting or reporting to voice-SMS managers.
The second mistake ESPs made was to not innovate inside the email. All the bells and whistles developed around email in the pursuit of ‘automation’ and ‘omnichannel’. The simplicity of email was touted as its advantage even as other channels like WhatsApp were pushing greater interactivity under their broader umbrella of ‘conversational messaging.’ The belief was that not much was possible within the email.
These two mistakes have been expensive for the email industry in terms of lost revenues, profits and influence. Email vendors do not have a seat at the table where marketing strategy decisions get made; they are not “in the room where it happens” (to borrow a phrase from a song in the “Hamilton” play). But email’s durability means the game is not yet over.
5
E-nnovations
Five innovations can transform email as we know it, open up a much larger TAM (total addressable market) for email service providers, and make email central to a brand’s marketing strategy. These innovations are: AMP, Atomic Rewards, Email Footer, Email Ads, and Micronbox. Most ESPs today are not even doing one of these, leave alone all five. I have discussed some of these innovations individually in my past writings under the theme of “Email 2.0”; it is time to bring them together.
AMP: AMP is a technology from Gmail that enables the creation of dynamic and interactive emails. Simply put: no clickthroughs, no landing pages. Various actions can now be done within the email itself: a form can be filled, feedback can be collected in-place, additional info can be viewed with an expandable widget, items can be added to the shopping cart, an interactive chat session can be initiated, and much more. AMP brings emails to life. The drawback (for now): it is only supported by Gmail and Yahoo. So, it works inside their mail apps, but not if one is using Apple’s iOS mail client. But for the emails where it works, it can lead to a significant uplift in conversion actions.
Atomic Rewards: Incentives work in our lives, so why not bring these to email actions? Atomic Rewards are micro-incentives to solve the twin problems of attention recession and data poverty. Think of this as a loyalty program – not for money and transactions, but for time. They bring in a touch of gamification within emails. Eventually, the reward points could become Web3 tokens and transcend the challenges of existing loyalty programs: centralised control, redemption hurdles, expiry of points, and lack of tradability. With tokenisation, asset appreciation can be an added advantage.
Email Footer: While AMP and Atomic Rewards can work within the body of the email (the main marketing messages and offers), I think they can really come into their own via the Email Footer, which has been largely ignored; it is time to change that. Footer AMPlets can collect data, drive engagement, and bring in gamification with the ability to earn and redeem the Atomic Rewards. In other words: the Email Footer aggregates AMPlets with Atomic Rewards. It can help make emails more fun, bringing convenience, information and gamification right into the inbox. Think of it as the attractor (like the Comics page in a newspaper) which drives the consumption of the main course (brand content).
Email Ads: AMP can also create a new ad format, where the interaction can be done in-place. Ads can be targeted because of the availability of identity information. These ads can provide a revenue stream for the brand. These ads can also be part of the Email Footer. From new acquisition to reactivation, email ads can get the job done.
Micronbox: Similar to how WhatsApp brought order to personal messaging, the Micronbox can do for brand messaging. Think of it as a new inbox is needed for emails which factors in all these innovations – an app which relies on recipient permission and prevents spam from getting through. It can also eliminate the dependency on the email client for AMP support.
Taken together, these five innovations usher in an upgrade to Email. They make email cool (again). The 1-way broadcast channel becomes a 2-way hotline with interactive, dynamic and real-time content. The promise of gamification and asset appreciation will also drive greater engagement, which should lead to better brand-customer relationships. The better the retention, the lesser will be the need for new acquisition to plug the gap – thus reducing AdWaste and helping improve profitability at brands.
To this, it is time to add a sixth innovation: Free B2C Email. It is the unifier and the enabler for the other five innovations.
6
Costs
The interesting question to ask is: in a world where so many digital products and services have become free, why has B2C email not become free? ESPs have no incentives to make emails free since there is no alternate source of revenue for them. There is a cost for maintaining the email infrastructure and someone or something has to pay for it. Traditionally, ads have paid for free services. In emails, ESPs would need to carry ads to cover the cost of sending emails. These ads would be no different from the ones that appear on web pages or in apps, thus offering no special benefit. There is another possible big negative of free B2C email – the possibility that spam may just explode, and that would cause a big deterioration in the inbox experience. Spam could also come from brands themselves – today since each email costs something, marketing budgets serve as a constraint on the number of messages being sent.
Each of these three issues have solutions. In the first case, an ESP could generate revenues from ads which could be split with the brand to cover the cost of sending emails. The spam issue could be addressed via the Micronbox with inbox access only available to brands the consumer explicitly opt-in for. Also, WhatsApp has to a large extent addressed the issue when it comes to mobile numbers – so similar methods could be applied to the Microbox. On brands overdoing messaging, the eventual control is with customers with their power of disconnecting the hotline with the “unsubscribe” option. This will ensure brands keep their messaging relevant and limited.
We still have to address the first issue – how to create the economic incentives for ESPs for delivering free B2C email?
Let’s take some examples. In the pricing we saw earlier, Mailchimp and Klaviyo make about $34-40 for 1000 contacts at the lower end (extrapolated from their pricing for 500 contacts) and about $ 6-14 for 1000 contacts at the higher end (based on their pricing for 100,000 contacts). Assuming 10 emails sent monthly, the price for 100 contacts or 1000 emails comes to $0.6-4. Let’s take $2 as the average so we just need a single number to work with.
So: the revenue for an ESP focused on SMBs is about $2 for every 100 contacts (=1000 emails). Of course, there is much more being offered than just email sending. If anything, email sending accounts for just a fraction of this. At the developer level, Amazon’s pricing for its API access is 10 cents for every 1000 emails. Quite clearly, the cost of sending emails is a fractional part of 10 cents. Thus the markup on the cost of sending an email to the revenue from selling the platform is very large for ESPs like Mailchimp and Klaviyo.
So, what would it take for an ESP to offer free B2C emails funded entirely by ads?
7
Revenue
Let’s see the revenue possibilities via Email 2.0. We have so far looked at the sending side; let’s now look at it from the recipient’s viewpoint.
A typical recipient engages with about 20-30 brands and thus gets about 100-300 emails (assuming a range of 5-10 emails each month for a brand). Assuming open rates with the new email ideas we have discussed go up from 10% to 40%, about 40-120 emails are being opened. Can we expect a 10% response rate to ads in these emails – given that the ads are highly personalised, and do not require a click? If so, a single user is expected to respond to 4-12 ads in a month. Even here, let’s take the mid-point of the threshold – say 8 ads, or 2 ads per week. Can just 10 cents in revenue be generated from each interaction? If so, the revenue possibility is 80 cents per user per month, or about $10 per user per year.
With 2 billion email users, this comes to about $20 billion annually, about 2.5X of the global ESP market.
Seen from a different perspective, 100-300 emails can generate 80 cents in revenue. This comes to about $3-8 CPM in revenue from email ads, compared to the $2 in revenue being generated today by SMB-focused ESPs.
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We have only looked at ad revenues here. Brands finding greater engagement would also be willing to invest more in Atomic Rewards as incentives to their existing customers, thus creating an additional revenue opportunity for intermediaries. Whichever way we look at it, there is a plausible case for offering free B2C email. Perhaps, what it needs is a next-generation ESP who thinks Email 2.0 and is willing to take a very different view of email – not just as a communications channel but as a hotline between brands and their existing customers. If such an ESP can persuade brands that they are better off using Email 2.0 as a core plank of their retention, growth and cross-sell strategy to drive higher revenues and profitability as opposed to simply using new customer acquisition spending to show topline growth, then there is a huge opportunity that can be opened up creating a positive sum scenario for brands, customers and the next-gen ESP. Who will bell the cat?
One point to note: an email delivery service funded by ads will probably be more relevant to SMBs; the mid and large brands will probably not be excited with the possibility of their email sending costs being defrayed with ads. Nevertheless, the SMB market in email is very large: Mailchimp alone generates over $1 billion in annual revenue.
8
Who and How?
An existing ESP will be very reluctant to offer free B2C email. It will be putting at risk most or all of its current revenues. The transition away from SaaS revenues will not be an easy one for an ESP to make. Only a challenger ESP will consider doing it; it has no existing revenues to lose and only new ones to gain. But it will need deep pockets to fund the email infrastructure costs until the non-SaaS revenue streams hit their stride. Let’s look at it from the point of view of a challenger ESP. How would it enter the market with its new free B2C email revenue model?
First, the focus will need to be on the developed markets. Email volumes and revenues in emerging markets are not large enough to build a big business. As comparison, the Indian ESP market is a hundredth that of the US ($35 million vs $3.5 billion). Second, the challenger ESP will need to have significant skills in handling large email volumes. Building a new ESP from scratch is not an easy task and will take time. Third, the SMB market will probably make a good starting point; enterprise customers will be reluctant to switch just because something is free. Fourth, there are two possibilities: offering an email API alternative or a full-stack martech solution. Email API works well for developers but marketers need an easy-to-use automation platform. Enterprises like the former, but SMBs will need the latter.
In short, a challenger ESP’s first target segment will be developed market SMBs sending a million emails or less and spending upto $1,000 a month on their ESP. It will need to offer not just an email API solution but also a complete marketing automation platform, with the ability to migrate easily from competitors. It will need to be completely self-service since providing customer support and onboarding to SMBs will not scale cost-effectively.
What will be the switch pitch to SMBs? A mix of cheaper, better and more — cheaper as in free, better in terms of performance (more opens, more in-mail actions), and more meaning the potential to actually generate revenues via the email ads. While the free angle will get initial interest, what SMBs will want to see before switching is better RoI. The challenger ESP should be able to deliver 3-10X superior performance with the mix of AMPlets and Atomic Rewards. This will be the real reason for switching, with the free offer making the decision easier. What the SMB will need to agree to is to carry the Email Footer in every email – along with an indicator in the Subject that the email has rewards.
Admittedly, it is not going to be an easy sell – the ESP business model hasn’t changed much even as some of the players have. So, what are the prospects of such a challenge to existing ESPs succeeding?
9
ESPs
The challenger ESP with its free B2C email proposition can be thought of as the fifth generation of ESPs. The first generation ESPs focused on large enterprises and offered a basic campaign management platform for mass mailing. The second generation ESPs brought in APIs for developers and also self-service to attract the smaller businesses with lists. The third generation combined elements from the first two generations (APIs and campaign management) and added marketing automation features (journey orchestration, segmentation, and more). Fourth generation ESPs are now expanding the capabilities of the stack by adding support for a CDP (customer data platform) and omnichannel (SMS, push notifications, WhatsApp, social). Pricing was never a factor in any of the first four generations; the core business model remained unchanged. SMBs paid based on number of contacts while enterprises were billed based on volume slabs (effectively per email).
So why would any ESP consider making email free? There are three reasons. First, as a market entry strategy. Hotmail, Yahoo and then Gmail used free to transform the consumer email market and drive massive adoption. Google built one of the most valuable franchises in business with its free search. Media companies used free content to attract readers and then monetise them via ads. Social media companies did the same – our attention and social graph working as attractors for advertisers. All of this has helped grow digital advertising to nearly half a trillion dollars in revenue and trillions in market cap for the Big Tech platforms. A free service removes friction in getting started.
Second, there is a huge market opportunity which is many times bigger that can be tapped. The largest ESPs today are probably at the scale of a billion dollars or so in a market which is under $10 billion. In contrast, AdWaste is estimated at $200 billion. The importance of existing customers and push messaging can help tap into a large chunk of the AdWaste that’s happening. Brands realise that a big part of their ad spending is not effective, but there are no solutions being offered to change that. This is where free B2C email can stand out – by enabling a 2-way hotline between brands and customers with the removal of the cost constraint in messaging.
Finally, email needs innovation. The entire existing ecosystem has conspired to keep email as it is for a very long time. While email has survived many challenges, the shrinking attention span of millennials and Gen-Z customers along with better and more interactive channels like WhatsApp may just relegate it to a limited role in the future. Email needs to change and none of the existing ESPs are leading it because the big ones are owned either by the marketing cloud companies or CPaaS companies, and have very little incentives to think long-term and fix what doesn’t seem broken.
It is in this context that a challenger ESP thinking Email 2.0 innovations can make a mark. Simply offering a new product may not be enough to get adoption in change-resistant marketers. Hence, the need for a breakthrough business model. Throughout history, ‘free’ has been a magnet for attention. This is what a challenger ESP will need to get the industry transition started.
10
Trillions
Email is the crucial link in the global media and ecommerce industries. Imagine a world without email, and many industries will collapse. Without the power of push messaging via email, how will they bring customers back to their properties (website or app)? Brands with apps can send push notifications, but even these are now blocked by many. Utility brands have an advantage because their apps become a habit. But for most others, either they have to spend a lot of money connecting a category with their brand name, or its push messaging. And that is what has kept email alive through the years; there simply is no better push channel in terms of RoI than email. It is the humble email that still works as the lynchpin for trillions in consumer spending decisions.
The problem in email has been a lack of innovation. Because it is an open standard, different entities have to build the components to create the end user experience. So, there are ESPs which ensure the sending of emails. There are mailbox providers like Gmail and Yahoo which provide the identity (name@MailboxProviderDomain). Then there are the email clients which help with the consumption of email. In the past, it was either the browser (for web mail) or the mailbox provider apps. Apple’s device dominance changed it all. In countries like the US, half of the emails are opened on the native iOS apps. So, even if a consumer has a gmail.com address, the odds are that they are using the default mail app on their iPhone or iPad to read their emails.
This has given Apple great control over the email experience. Apple’s decision a year ago to prevent tracking of email opens in the name of privacy disrupted tracking parameters used by brands. Apple caches images so all emails sent to Apple mail clients end up showing as ‘opened.’ Apple also does not support AMP (a standard from Google) which means emails cannot be made interactive and dynamic.
The good news about an open standard is that anyone else can build a better mousetrap. This is what the email industry should be focused on. But everyone is seemingly happy with the status quo. The mailbox providers get their content to scan and enrich their personal data. Apple gets to show its customer-first face. ESPs are not measured on outcomes so don’t really worry about the low open rates because the RoI is still fantastic for emails. Marketers also haven’t been overly concerned since their primary focus is the 90% money spent on new customer acquisition. And thus email innovation has languished even though a better email solution can save brands hundreds of billions in wasteful spending.
This is why I believe the time is right for reimagining email. The ideas I have discussed previously under the Email 2.0 theme (AMP, Atomic Rewards, Email Footer, Email Ads, Micronbox) combined with free B2C email can lay the foundation for a better brand-customer hotline and profit-centric marketing. All it needs are entrepreneurs and innovators willing to challenge the status quo!
