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Founded in 1953 by Harold and LuEsther Mertz and their daughter, Joyce Mertz-Gilmore, Publishers Clearing House (PCH) is the largest multi-magazine subscription agency in the magazine industry and is a respected leader in the direct marketing field. The name "Publishers Clearing House" is synonyous with the sweepstakes which the company has used since 1967 to draw attention to the discounted magazine deals and product offers that fill its colorful mailings.
Publishers Clearing House (PCH) is one of the largest magazine subscription agencies in the United States. The company is known as a "stampsheet" marketer for the perforated stamps consumers stick on their subscription forms. Publishers Clearing House is best known for its dramatic sweepstakes, a marketing campaign that offers millions of dollars in prizes every year. In the mid-1990s, PCH claimed to be reaching 75 percent of U.S. households with at least one mailing per year. However, the company's fortunes fell after a series of lawsuits for deceptive business practices targeted it and its competitors in the late 1990s and early 2000s. While its major competitor ceased offering sweepstakes, PCH continues to run its sweepstakes, best known for the ostentatious Prize Patrol that disburses the winnings. PCH also sells consumer goods through direct mail and through its Web site. Items include videos, music, books, jewelry, health and beauty products, and collectibles. The company operates as a limited partnership, and members of the founding Mertz family still retain a majority interest.
Origins and Development
During the 1950s, salespeople, usually college students going door to door, were the largest source of subscriptions for magazine publishers, other than their own direct-mail efforts. Harold Mertz was manager of some of the crews of foot soldiers who trudged through residential neighborhoods to drum up business. In 1953, however, he founded Publishers Clearing House in the basement of his Port Washington, Long Island, home to sell magazine subscriptions through the cheaper method of mail promotion. His simple, but revolutionary, idea was to increase the chance of making a sale by offering a selection of 20 magazines, rather than just one, in a single mailing.
Mertz's first mail package was a simple white envelope containing a folder depicting several magazines, an offer, and a reply form. In 1967, however, the company borrowed an idea that Reader's Digest initiated in 1962 and began making sweepstakes promotions, offering prizes to entrants who filled out a numbered entry blank and mailed it to the company. "We started giving out bunches of singles, fives and ten-dollar bills as prizes," a former PCH executive recalled in 1996. "It barely made a ripple, so we went up to $5,000."
Since the numbers were preselected, Publishers Clearing House could promote the sweepstakes truthfully with the words, "You may already be a winner!" According to a 1980 Advertising Age article, direct-mail marketers had discovered that they could increase sales 50 percent more through sweepstakes than by any other promotional technique. Cash, automobiles, and vacation trips were said to be the most appealing and popular awards. As a sweepstakes, rather than a lottery, the contest was open to all entrants whether or not they chose to be customers. At first PCH did not feel obligated to award prizes if no winning entry was received, but later a second random drawing came to be held from entries submitted if no one turned in the winning number for the top prize.
Publishers Clearing House had its chosen field to itself until 1980, when a consortium of Time Inc., McCall's Corp., and Meredith Corp. formed rival American Family Publishers. Still based in Port Washington, where it now had 100,000 square feet of office and warehouse space, PCH was representing nearly every major publisher in the United States and was promoting some 395 magazines. Its mailings were going to 40 to 60 million households a year, with the addresses obtained from other direct-mail sources to take in people who bought by mail, who had spent more than a specified amount in the last few months, and who paid their bills promptly. PCH also had its own mailing list of recent customers.
PCH normally conducted two major mailings a year at this time: one around the Christmas/New Year's period and a second in early July, each closely timed to television commercials telling viewers to be looking for the mailing. Between 50 to 110 magazine subscriptions were being offered in any given mailing. A typical sweepstakes mailing contained up to eight separate printed pieces. One of these was a sheet of gummed stamps offering the various magazine subscriptions at discounted rates. Also essential were the order vehicle (generally, a return card) and the sweepstakes offer, often a four-color brochure. Occasionally, the mailing also contained product coupons.
Refining the Concept: 1981-93
Publishers Clearing House's annual sales were about $50 million in 1981, when Robin Smith, a former Doubleday executive, became its president and chief executive officer. Annual revenues passed the $100 million mark in 1988. After American Family Publishers raised its biggest prize from $200,000 to $10 million in 1985, PCH had to follow suit. In 1987, the company added a "Catalog Clearing House" sweepstakes that included inserts promoting 36 products from a selected group of catalogers. It was mailed to more than 1.5 million households and offered $10 million in prizes. PCH processed the orders, collected the payments, and sent the orders to the catalogers with an invoice representing the difference between the product price and its advertising and acquisition costs. During the late 1980s, PCH also expanded its product line to include books (mostly children's and how-to books) and audio and visual items.
By late 1991, Publishers Clearing House had 700 full-time employees at its 14-acre complex, plus another 700 part-timers hired during promotional drives. The staff included about 12 copywriters and four art directors. One of the company's brightest ideas--a tag listing a recipient's sweepstakes numbers that could be hung from a television dial--had resulted in a 5 percent increase in entries returned. By then, PCH had distributed more than $50 million in prizes to more than two million people, including $13 million in fiscal 1991.
The grand prize of $10 million was being delivered since 1988, along with flowers, champagne, and balloons, by a Prize Patrol clad in blue blazers--and a cameraman. Advertising Director David C. Sayer, who said he personally had handed out more than $30 million in his years with the company and now headed the patrol, told a reporter, "The best part of my job is seeing how people react. One woman didn't believe me at first, and while I kept trying to tell her that she had just won $1 million, she just kept doing her laundry."
By this time, Publishers Clearing House was receiving subscription requests from eight million people each year through its 25 annual mailings, which included millionaire-of-the month mailings, fast 50s ($50,000) for early entrants, and car giveaways. It was compiling its database by processing 450 million names from its own list and those rented from others, and it was dropping people who, after a certain period, failed to turn in entries or turned them in without ordering products. Mailings were aimed primarily at the middle-aged, middle-class consumer and disproportionately outside "the more skeptical and cynical Northeast," as Sayer put it. Prime prospects--those who ordered frequently--might receive 30, even 40, mailings a year.
The need to "mail smarter" had grown more urgent because the price of a typical sweepstakes mailing had increased to between 40 and 50 cents. The stampsheets alone cost seven cents, but, said Smith, "Every time we think about getting rid of them, testing always proves they are worth the money." PCH planners also had found, over the years, that given its middle-American target audience, cold cash, rather than exotic prizes like a private airplane or a thoroughbred racehorse, were the grabbers. Vice-president Tom Owens told a Washington Post reporter in 1993, "You talk to winners, all they want to do is pay their bills and do very mundane things."
The 1992 year-end package arrived with a new "snap-pack" on the front of the envelope, which had to be peeled open to find the finalist notification label to paste onto the finalist notification certificate--in other words, the entry form. According to Owens, the rationale behind the "snap-pack" was to make the recipient react at once in the critical first step of opening the mailing. The pasting regulations were described as "involving devices." As Owens explained, "The longer you have someone looking at what you're trying to sell, the better the odds are they'll make a purchase."
PCH's share of the subscription price ranged from 74 to 90 percent. These subscriptions were being offered at deep discounts, and PCH insisted on a magazine's lowest advertised price. Publishers, therefore, collected little money directly, but the increase in circulation allowed them to charge advertisers more money. PCH also was endearing itself to publishers by paying the magazine's share up front, and besides, as one magazine circulation manager said, "If we mail one million names and get no response, we still have to pay for the mailing. If Publishers Clearing House does the mailing, we don't pay for anything." On the debit side, however, subscribers obtained from stampsheet agents like PCH had a low percentage of renewals.
Problems in the 1990s
By 1994, Publishers Clearing House and its sweepstakes rivals were running into three problems: contest fatigue, increased government oversight, and private lawsuits and other bad publicity. Despite relentless promotion of its sweepstakes, including expenses of more than $20 million a year for advertising, response rates for PCH mailings were said to have dropped by 7 to 12 percent, and perhaps more, in 1994. Sales volume from the mid-1995 mailings of PCH and American Family Publishers was reported to be down 22 percent. A PCH executive acknowledged that the company had cut back some of its mailings because of paper and postage increases but said these cost reductions were only in the 5 percent range and hence could not fully account for the drop in orders. The company, however, also had cut its advertising expenditures by 7 percent in 1994.
Government officials seemed to be casting a jaundiced eye at Publishers Clearing House's promotions. The Federal Trade Commission's expert on sweepstakes said the odds of winning could be one in 100 million or worse. Being labeled a "finalist," he declared, generally merely meant that the contestant had sent in a previous entry. It was also noted that the $10 million prize was not given in a lump sum, but over 30 years, with $2.5 million not paid out until the final year. Million-dollar winners received only $50,000 in the first year.
In 1994, PCH agreed to pay $490,000 to 14 states to settle allegations that it used deceptive advertising in its annual sweepstakes. The company agreed to stop using the word "finalist" on most solicitations and to employ the phrase "final round" only in the last weeks of the promotions. Some states had reported that all persons receiving sweepstakes entries were identified as finalists. PCH also agreed to explain to consumers that if they were dropped from the mailing list they could write the company to be reincluded in the sweeps and then entitled to all entry mailings produced for the next 12 months.
A lawsuit was filed in 1992 after New York City sanitation workers found several thousand Publishers Clearing House envelopes discarded by a roadside and "literally blowing in the wind." PCH settled the suit by agreeing to enter the names and addresses of everyone who had received mailings between February and October 1992 for the January 1993 $10 million contest and April 1993 $1 million contest whether they had returned their entries or not. The company said it had discontinued its use of outside processors, one of which it blamed for improperly handling the discarded entries.
Disgruntled contestants were a fact of life for all sweepstakes agencies, but Publishers Clearing House could have done without the page-one Detroit News story in April 1997, in which Stephen Worhatch complained he had waited in vain for the Prize Patrol in response to a PCH letter asking him and his wife--bed-ridden with multiple sclerosis--to draw a map to their West Bloomfield home so that the patrol could deliver a check for the first installment of a $10 million prize. A company executive pointed out that the fine print in the entry form said the patrol "would come to your house if you were selected the winner." He added that the map request was merely "a fun way to get them interested ... in the spirit of fun and entertainment."
Another disappointed Michigan contestant, Raymond Workmon, sued PCH in federal court for breach of contract and violation of the state consumer protection law. He was turned down for the second time by an appeals court in 1997, which declared, "Although Workmon believed he had won, his belief was not reasonable. ... If Workmon read the entire certificate, he would have known, or reasonably should have known, he was not automatically the winner." An attorney for the company said that it was only the third time in 20 years that a contestant had sued PCH and that all three had lost.
By January 1996, PCH had awarded more than $92 million in prizes since instituting its sweepstakes. The $10 million prize winner that month was presented in a 30-second spot aired shortly after the completion of the Super Bowl. Camera crews from Dateline News and Extra were present, giving the event even more publicity. Like a majority of sweepstakes winners, the lucky recipient, Mary Ann Brandt of Phoenix, had not ordered a magazine with her entry and had been selected in the alternate drawing from entrants after the holder of the first randomly assigned number had failed to return his or her entry.
Publishers Clearing House's offerings in 1997 included not only magazines but such items as a Cal Ripken, Jr., commemorative baseball, a Star Trek Communicator pin, a "6 in 1" hose nozzle, a reversible lint brush, and a collection of five mercury dimes. The company began selling subscriptions through its Web site in 1996. This site offered sweepstakes promotions (including Internet-only offers), discounted subscriptions to 300 magazines, and general merchandise.
More Legal Woes in the Late 1990s and Early 2000s
By the late 1990s, only about 12 percent of total U.S. magazine subscription sales came from the stampsheet purveyors, including principally PCH and its main rival, American Family Enterprises. PCH was thought to have revenue of $345 million by 1997, and this year was the last before the start of a rough patch, defined by numerous lawsuits and a steep drop in subscription orders. The troubles were actually sparked by American Family but spread to PCH as well. PCH had settled a significant lawsuit as recently as 1994, but state attorneys general were not done with the company. In 1997, an American Family sweepstakes contestant, 88-year-old Richard Lusk, flew from his home in California to Tampa, Florida, in the belief that he had won an $11 million prize. Unfortunately, Lusk had not perceived the fine print, which stated only that he might be a winner. His odds of winning were actually in the range of 150 million to one. The incident got wide media coverage and started a new round of state lawsuits against both American Family and PCH.
The bad publicity had an immediate effect on subscription orders. Magazine industry sources claimed that orders were down by between 30 and 50 percent by late 1998. PCH officials admitted that orders had fallen off but would not confirm a figure. A PCH executive told Advertising Age (October 19, 1998) that subscription volume was down, but "certainly nowhere near the neighborhood of 40 percent." This seemed to argue for 30 percent, by any measure a significant loss. The bad publicity seemed to be the primary reason for the slacking of orders, but other factors may have been at work as well. Some magazine industry analysts suggested that consumers were tired of the whole sweepstakes phenomenon and needed something new. Another factor may have been the widespread legalization of state-run lotteries. Consumers may have been less likely to fill out a laborious magazine sweepstakes form when they could easily buy a lotto ticket for a cash prize equal to or better than what the PCH contest offered.
The lawsuits continued to pile up. Magazine industry sources reported a 30 percent drop off in PCH subscription sales for 1998 and flat sales for 1999. The fall off in magazine sales also presumably led to a decline in sales of PCH's merchandise. In August 1999, PCH settled a federal suit against it, agreeing to pay $5.5 million to cover claims of some 40 million consumers. Two months later, its main competitor, American Family, announced it was filing for bankruptcy, unable to handle the expenses of litigation. PCH ended 1999 with the vaunted relaunch of its Web site. The company hoped this would be a new way to entice consumers to buy its magazine subscriptions and goods. Yet in early 2000, the company announced it had taken a drastic cost-cutting measure, laying off about a quarter of its employees. Later that year, PCH settled another raft of lawsuits, paying $18 million to 24 states and the District of Columbia. The settlement came with a new set of rules, such as that PCH would no longer use "involvement devices" such as the 1992 "snap-pack" or other game pieces that seemed to offer an increased chance to win. The company also agreed to stop contacting its so-called "high activity" customers--people who mailed in with extreme frequency to increase their chance of winning.
PCH continued to run its sweepstakes, including the offer of a large prize at the annual football Super Bowl. Its competitor American Family declared it would exit the sweepstakes business in 2000, leaving PCH alone on the field. In 2001, PCH settled an additional round of lawsuits, paying $34 million to 26 states. The company agreed to another set of rules governing its contests and also set up a "special compliance counsel" for continuing liaison with the states. By this time, it had settled with all fifty states and the District of Columbia, so the litigation seemed to be at an end. The company had released no financial information after the late 1990s. PCH continued seemingly much as usual after it put its litigation problems behind it. The company celebrated its 50th anniversary in 2003, with festivities in Port Washington. In 2004, the company's Prize Patrol delivered a $25,000 check to a retired Wichita couple who had been married for more than 50 years. The husband was 91 years old and hoped to put the money away for a rainy day.
Principal Competitors: Synapse Group, Inc.; Cross Media Marketing Corporation.