Our mail merge functionality supports attachments, but inline images do not always work as intended.
We recommend hosting your image publicly and using Gmail's Web Address (URL) option for including your image inline.
Open a new Compose window
Click the Insert Photo button from the toolbar at the bottom of the window
Select the Web Address (URL) tab and paste the URL into the input form.
Confirm by clicking Insert.
Need image hosting?
If you don't have your own content delivery network, you can utilize Google Drive for image hosting purposes via Doc.
Open Google Docs and create a new document and give it a name like "Images for Emails"
In the top right corner of the Google Docs interface, click the Share button.
From the sharing window, select Advanced
Under Who has access click Change... from the right column.
Select On - Anyone with the link and confirm the change by clicking Save
Insert the image into the Google Doc
Select the image and copy it from the Google Doc and paste it into the Compose window.
As long as the Google Doc is not deleted from your Google Drive, the image will always be accessible and will display properly when sent.