How much are your readers worth to your business?

I know you love them and respect them and all that, but how much money do you gain or lose when they disappear or reappear?

The first variable, of course, is the money you make from the cover price.

And the other factor that makes it essential to understand the value of our readers is the inter-relationship between readers and the ad revenue they attract. Generally, ad revenue is proportionate to the size of a newspaper’s circulation.

In the United States, for example, the circulation revenue derived from one copy of a daily newspaper is around 41 cents. The same paper will gross about $2.71 per copy from advertising.

In Europe and Japan, the mix of revenues is very different, and the most striking figure is how much higher advertising revenues are in the United States than anywhere else in the world. In America, advertising accounts for almost 87 percent of revenues. In Germany, the United Kingdom and Japan, ad revenues represent 56 percent, 65 percent and 41 percent, respectively.

U.S. publishers also have a lot more revenue per copy to work with: nearly twice as much as their counterparts elsewhere, and my guess would be that costs are no higher.

All equal, except when not

But when it comes to the advertising revenue that readership generates, some readers are worth more than others.

From my observation (outside the United States, it must be said), the value of advertising that a reader generates is exponentially greater than his income.

Being a class-obsessed Brit, I of course turn to our rather outmoded method of classifying individuals. In the U.K., those with the highest income are known as ABs, who represent about 20 percent of the population.

They earn roughly twice as much as the rest of the population. Yet ABs generate 30 times as much advertising and attract more than 80 percent of all ad revenue.

This figure is calculated by taking the advertising revenues of each title and correlating those sales with the readership profile of the newspaper. The same holds true for the U.K.’s regional titles. What’s more, in every other European market where I have examined this factor, I have found the same trend.

If we extrapolate this formula to the United States, then the top 20 percent of a paper’s most well-compensated readers generate ad revenue of $12.66 per copy while the rest of the circulation base chips in a relatively meager 42 cents.

To be fair, I’m doing these calculations, based on data from two pages of a directory, sitting on the banks of the river Clyde in Scotland. My results may be skewed partly because high-income readers may more often examine ads displaying luxury items rather than commodities, but I’ll bet the model holds true in principle.

What does revenue cost?

Now let me leave that analysis for a minute and confuse you with another one.

How much does your revenue cost you? Take circulation.

Given the high costs of subscription generation, customer service, household distribution and marketing, many newspapers actually lose money on circulation management since the revenue generated is less than the cost of its generation.

The current circulation model is therefore an investment in reaching a defined audience who appeal to advertisers.

Conversely, let’s examine ad revenue. In Europe, the costs associated with selling an ad will carve between 8 percent and 20 percent of the revenue generated.

The question: If 20 percent of my readers account for 80 percent of my ad revenues, then the rest of my readers are simply overhead. Why continue to maintain my current form of distribution?

Would it not be just as cost effective to distribute free of charge newspapers to those readers that matter and drop the rest? With that model, how much advertising would you retain? More important, how much profit?

Free papers gaining steam

This model, in fact, is exactly where the Metro concept of free distribution dailies is going. The Swedish inventors of this concept realized that context - that is, where we are, what we are doing and when - is as valuable a barometer of advertising appeal as who we are.

I believe we are about to see an explosion in this business model, with different daily newspaper forms aimed at different audience segments and contexts.

Why not launch a free business daily that is distributed in all the biggest, most luxurious office buildings?

Alternatively, deliver a paper targeting high-income residents residing at luxury developments.

How about a trendy daily aimed at students?

Not only does each of these approaches bring a more targeted readership whose reading interests are more easily defined and therefore satisfied, they will also attract advertising categories we do not see in mass-market newspapers.

A few months back, I wrote about the format frenzy that has enveloped the U.K. and the migration by The Independent and The Times to switch from broadsheet to what is quaintly identified as compact.

There has been an astonishing amount of interest in this subject and I’ve received e-mails from all over the world. But let me offer a word of caution.

I’ve worked on a number of format changes over the years, and in every case, the move from broadsheet to tabloid has failed to improve the fortunes of the newspaper. What readers and advertisers want isn’t necessarily a change in format. Instead, they want more relevance for less time and money.

If we can offer readers more of what they want, when they want it - which is not necessarily at home - and we can offer advertisers more of what they want with less wastage, then newspapers will be around for a long time to come, whatever their format.

Editor’s note: If you have access to readership and revenue data on a range of titles, Chisholm would be happy to produce an analysis regarding your per-copy circulation and ad sale revenues. Contact him at jim.chisholm@futureofthenewspaper.com.