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THE INDEPENDENT ADVISER FOR VANGUARD INVESTORS
Although Dan Silver’s MBA education was backed by considerable experience in editing
and publishing, he felt challenged by some of the details of his new job as director of Marketing and
Operations for the Independent Adviser for Vanguard Investors (TIAVI), a financial newsletter. In
particular, many of the complexities surrounding the renting of mailing lists and the direct-mail
solicitation of additional customers were new to him. Currently there was growing pressure within
his company to cut back on prospecting because several recent efforts had lost money. It was clearly
his responsibility to respond to the pressure.
Newsletter Background
Dan Wiener, a former U.S. News & World Report associate editor, started the Vanguard
Adviser in 1991. The newsletter’s purpose was to give investment advice to investors in the
Vanguard-Group family of mutual funds and to make money doing so. In 1993, the Vanguard Group
of Investment Companies was the second-largest group of mutual funds, managing over $100 billion
of assets in its more than 70 funds. Approximately 2.5 million individual investors had money
invested in one or more Vanguard funds. For many of these investors, the advice of a Wall Street
outsider like Wiener was seen as particularly valuable. Not only was Wiener not associated with
Wall Street, he had no ties to the funds about which he gave advice. Because he had nothing to sell,
Wiener’s independent advice was seen by subscribers as more valid and trustworthy. In addition,
mutual-fund companies such as the Vanguard Group were prohibited by law from giving advice on
their own funds.
In early 1992, Wiener and his company, the Fund Family Shareholder Association, had
brought in two partners from the publishing business to manage the day-to-day operations of the
newsletter. Wiener, of course, remained the president. Later that summer, the Fund Family
Shareholder Association hired Dan Silver as director of Marketing and Operations. In May 1993, the
newsletter made Marketing Services International, Inc., (MSI) the manager of its member and
inquiries file.
This case was prepared by Professor Phillip E. Pfeifer as a basis for class discussion rather than to illustrate effective or
ineffective handling of an administrative situation. Some elements in the case are disguised. Copyright © 1994 by the
University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an email to sales@dardenpublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used in
a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or
otherwise—without the permission of the Darden School Foundation. Rev. 11/04.
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The newsletter received some early publicity about its feud with the Vanguard Group over
the newsletter’s original name, the Vanguard Adviser. Because the Vanguard name was the brand
name of the Vanguard family of funds, they at first strongly objected to its use by Wiener as the title
of his newsletter. According to their lawsuit, because Wiener had no connection with the Vanguard
Group or the Vanguard family of funds, he had no right to call his newsletter the Vanguard Adviser.
The Vanguard Group dropped their lawsuit and made several concessions in June 1993, in return for
the newsletter changing its name to the Independent Adviser for Vanguard Investors. The publicity
surrounding the feud was thought to have contributed to the newsletter’s rapid growth (from 10,000
subscribers to 25,000 within a year). A description of the newsletter can be found in the promotional
piece included as Exhibit 1.
Prospecting for New Customers
The newsletter relied heavily on direct-mail “prospecting” to attract new subscribers.1
Slightly over $1 million was spent in 1993 to mail promotional material to carefully selected lists of
individuals in the hope that they would purchase an introductory subscription to TIAVI. The
promotional package was a regular four-by-nine-inch envelope stuffed with information on the
newsletter (see Exhibit 2 for the front and back views of two such envelopes). An initial one-year
membership was offered at a price deeply discounted from its usual price of $139. Six-month and
two-year memberships were also available. The average amount received with an initial membership
was $56. With a one-year membership, subscribers received 12 issues a year of TIAVI, five special
reports, and one year’s access to the Fund Family Shareholder Association hotline, a private
telephone number offering weekly updates and late-breaking financial news on a 24-hour-a-day
basis. As the promotional material stated, “That’s a total value of $307 for only $99, a savings of
$208!”
Dan Silver relied heavily on both MSI and Kim Scott, a free-lance circulation consultant, to
select rental lists of individual names and addresses for these prospecting activities. For the most
part, the selection of lists was left to the experts who knew that Silver and his partners would
carefully monitor and track their results. In general, Silver thought it was a good idea to rent lists
through a broker because the seller (renter) of the list paid the broker’s commission. Thus, the
broker’s services were “free” to Silver when used to rent lists. In addition, the use of a broker
eliminated many of the day-to-day hassles involved in prospecting—something particularly
important to a small organization like Silver’s.
Silver’s decisions, then, were not so much about which lists to use but rather about how
aggressive to be. Recently, for the first time, some promotional mailings had failed to break-even.
One line of thinking within the organization was that promotional mailings should “pay for
themselves.” In other words, the total cost of the mailing (printing, postage, list rental, etc.) should
be recovered from the initial subscription revenues achieved from the mailing. Given that response
1
For the purposes of this case, we will use the terms “subscriber” and “member” interchangeably. Technically, the
Fund Family Shareholder Association sold memberships that included a subscription to the newsletter.
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rates almost always declined when a list was used again and again, it was argued that once a mailing
failed to break-even it made no sense to return to that list. Taken to its logical conclusion, this
suggested that a promotional mailing that failed to break-even was also a mistake—the company
would have been better off without it.
Exhibit 3 shows the results of the most recent promotional mailing to 10 rental lists.
Included in the last column is total net cash—calculated as subscription revenues minus prospecting
costs. Several of the lists showed a loss, and the percentage of lists showing losses had been
increasing over time.
Nevertheless, Silver knew he was offering a good product. About 50% of those who tried an
initial subscription at the promotional rate converted it to a regular subscription at the end of the
year. And the majority (75%) of subscribers renewed in each subsequent year. It cost about $5 per
subscriber to produce and send the promotional material designed to convince them to resubscribe.
Because all subscription prices after the initial trial were higher, revenues were higher—about $99
on average. Fulfillment costs (costs to print, insert, and mail the newsletter) were about $12 per year.
At a recent Newsletter Publishers Association conference, Silver had obtained a copy of a
formula that could be used to calculate the total number of subscriptions (circulation) to expect from
a promotional mailing (see Exhibit 4). At the time, it reminded him of the dividend discount growth
formula he had learned in his MBA Finance class.
Silver knew he needed to respond to the growing pressure from within the company to do
something about the recent prospecting losses. The $64,000 total gain from the recent prospecting
effort was not nearly enough to cover his share of company fixed costs. He wondered if there was
anything else he could do in addition to developing new and better promotional materials, which was
something he worked on all the time. Were the losses something to worry about? Exhibit 5 presents
a new set of mailing lists his brokers had recently recommended he try on his next prospecting
effort. In the past, he would have mailed promotional material to all of them. But now he was not so
sure.
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Exhibit 1
Promotional Material
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Exhibit 2
Example Prospecting Envelopes
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Exhibit 2 (continued)
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Exhibit 3
Results of Promotional Mailings
Names
List
Quantity
In-Mail
Cost
Total
List
Rented
CPM
Mailed
Cost
per M1
Resp.
AAA
50,000
$100
49,525
$21,8782
$442
501
1.01%
$6,1783
BBB
50,000
$145
47,820
$23,598
$493
321
0.67%
($5,622)
CCC
50,000
$125
39,683
$20,072
$506
723
1.82%
$20,416
DDD
50,000
$200
45,920
$25,758
$561
340
0.74%
($6,718)
FFF
50,000
$150
40,100
$21,451
$535
662
1.65%
$15,621
GGG
50,000
$100
41,250
$19,308
$468
578
1.40%
$13,060
HHH
50,000
$190
35,644
$22,067
$619
902
2.53%
$28,445
JJJ
50,000
$140
48,303
$23,498
$486
128
0.26%
($16,330)
KKK
50,000
$145
38,906
$20,830
$535
393
1.01%
$1,178
LLL
50,000
$160
37,783
$21,232
$562
526
1.39%
$8,224
500,000
$145.5
424,934
$219,692
$517
5,074
1.19%
$64,452
Total/Avg
% Resp.
Net
Cash
ASSUMPTIONS
Activity
Merge/Purge
Printing
Lettershop
Postage
CPM
$30
$242.50
$45
$23
Average Cash Per Order = $56
1
Cost per M and CPM refer to cost per thousand.
$21,878 = 50 × ($100 + $30) + 49.525 × ($242.50 + $45 + $23).
3
$6,178 = 501 × ($56) − $21,878.
2
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Exhibit 4
Formula for Total Circulation
Variable
Definition
Circ
Circulation: the total number of subscriptions (including conversions and
renewals) resulting from a promotional mailing.
Pcs
Number of promotional pieces mailed.
resp
Response rate to the mailing (a fraction between 0 and 1).
C
Conversion rate: the fraction of responders who are later converted to a
regular subscription (a fraction between 0 and 1).
R
Renewal rate: the fraction of regular subscribers who renew (a fraction
between 0 and 1).
⎛1+ C − R ⎞
Circ = ( Pcs × resp )⎜
⎟
⎝ 1− R ⎠
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Exhibit 5
Recommended Mailing Lists for Future Prospecting
List
Type of List
1
No. of Names
(thousands)
CPM
Average
Purchase2
QQQ
Financial
Newsletter
15
$200
$70
RRR
Health
Newsletter
200
$170
$35
SSS
Personal
Finance
Magazine
500
$150
$30
TTT
Business
Magazine
1,000
$150
$25
UUU
Financial
Newsletter
75
$210
$129
VVV
Political
Newsletter
250
$160
$40
Books
200
$90
$20
XXX
Tape Series
50
$90
$99
YYY
Financial
Newsletter
30
$180
$65
ZZZ
Financial
Newsletter
40
$190
$81
WWW
1
Each of these lists consisted of names of purchasers of a subscription similar to TIAVI. At the request of the
company, the exact names of these subscriptions were kept confidential.
2
The average amount the individuals on the list paid to purchase the subscription.
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The Independent Advisor to the Vanguard
Investor
• Is the company’s determination of the value of the recently
purchased list valid? If not then how would you define “breakeven?”
• Using the historical response rate and conversion rates as well as other
relevant details in the case what would you determine to be the life time
value of their average customer. Does your results change the profitability of
the recent promotional results ( Exhibit 4)?
• Given your determination of LTV per customer, what is the breakeven response
rates needed to buy the first 4 lists detailed in Exhibit 5. Given those response
rates and the company’s prior experience should Dan Silver buy any, some or all
of the lists you reviewed??
Purchase answer to see full
attachment