(FORTUNE Small Business) – When Ray Rytel decided at the last minute to hold a private sale at the Textile Studio, his fabric and design store based in Cincinnati, he had no time to notify the subscribers on his direct-mail list. Instead he sent e-mail announcements to around 900 customers. The Sunday sale was a smashing success. But this was 2001, when e-mail marketing was still in its infancy. Rytel's e-mail service provider told him that his contract did not give him the right to send out bulk solicitations and warned him to never do it again.

Frustrated, Rytel spent $1,000 on a list of 8,000 e-mail addresses of educated, higher-income consumers living within a 25-mile radius of the store. He hired an outside consulting firm to send another sale announcement to the entire list on his behalf. But this less targeted approach backfired. The results were "nil," according to Rytel, 55, the Textile Studio's president and co-owner.

Rytel then called Exact Target, an Indianapolis e-mail software company, which agreed to host bulk mailings to Textile Studio customers who signed up in advance to receive information about products and upcoming sales.

Today Rytel can't imagine his business thriving without so-called permission mailings. Each month the company adds about 200 new e-mail addresses collected at store cash registers and on its website. Private sales events announced via subscriber mailings generate three times the company's normal daily revenues. Rytel sold an estimated $3 million worth of fabric in 2004, up from $2.3 million in 2003.

In 2003 growing consumer fury over the plague of spam e-mail prompted Congress to pass the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, better known as the CAN-SPAM Act. Under the law, most commercial mailings must include the sender's postal address and an option for the recipient to decline future solicitations. (See box to make sure your e-mails comply with the law.)

It's no surprise that more companies are turning to permission marketing, which normally generates more sales than spam while ruffling fewer consumer feathers. The average consumer received 26 permission-based e-mails a week in 2004, up from 18 in 2000, according to a 2004 study by the e-marketing agency DoubleClick.

The Textile Studio sends out around 12 e-mail solicitations every year. After each mailing Exact Target provides a detailed report that tells Rytel how many subscribers received the e-mail, how many opened it, how many clicked through to Textile's website, and how many exercised the option to unsubscribe. Rytel even sees the messages that customers type when they forward the pitch to their friends. Rytel uses this information to gauge which products attract the most interest. He can also track sales by including a printable coupon in the message.

Exact Target is a leader in the fragmented permission-marketing industry, though it faces stiff competition from Bigfoot Interactive, Digital Impact, E-Dialog, Silverpop, Yesmail, and DoubleClick, among others. Exact Target's proprietary software allows the Textile Studio to reach subgroups based on data such as region, age, gender, and interests. For example, Textile can send out two entirely different versions of a sales pitch, one to hobbyists in Ohio and another to decorators in Myrtle Beach, S.C., where Rytel plans to open a store in 2005.

The targeted marketing has paid off: Rytel estimates that his revenues from sales advertised via permission e-mail are double what he used to pull in from direct-mail campaigns. He quit collecting postal addresses a year ago. Instead he pays Exact Target about $1,500 for every 30,000 e-mails that he sends.

At a nickel an e-mail, that's a more compelling value proposition than direct mail, which typically costs 75 cents to $2 per piece. "It's so cost-effective, especially in comparison with direct mail or direct-response channels, that companies continue to spend and are generally pleased with the results," says David Daniels of Jupiter Research, a technology consultancy that is based in Darien, Conn.

Amy Kearns, Textile's marketing director when it implemented the e-mail campaign, says anyone can learn to use Exact Target's mail software. To send an e-mail, she types the message, uploads graphics, and inserts links to Textile's website. Before Kearns sends each message, the software runs a content detective to screen for words and characteristics that a spam filter might pick up, such as profanity, the words "free" or "win," all capital letters, a large font, or numerous exclamation points.

Even with this detective, Textile's messages don't reach all the subscribers on the e-mail list. (Internet service providers fail to deliver about 19% of permission e-mail, according to Internet consulting firm Return Path.)

Although Rytel wishes every e-mail reached its destination, he's happy enough with the results. "This is our target group," he says. "These are people who want to know, or they wouldn't sign up."