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PLANNING YOUR DIRECT MARKETING CAMPAIGN
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Determining the Cost of Your Mailing
When I began my career in direct marketing, whenever I made money on a mailing, the controller of the company would come down to my desk and chew me out for not marketing effectively. And believe it or not, he was right. Because our goal was not to make money on a mailing, it was to build our customer base by replenishing our list.
If you’re making money on a mailing, you’re generally milking your best lists. Growing your customer/prospect database is the most important thing you can do. That is how you will grow your business. Making money is the easy part. The harder part is replenishing the people that have made purchases in the past and replacing those customers that are no longer buying from you.
So your goal with this first mailing will be simply to break even on the costs to acquire new customers. And in order to determine your breakeven point for this, you will use estimated response rate.
Determining Your Response Rate
When you first begin a campaign, the first step is to determine the breakeven point for your response rate. Later on, when you have more experience and some history under your belt, you will use the lifetime value of your customers to determine how much you can afford to spend to acquire new customers. But for now, your goal should be to simply cover your costs as you get rolling.
Here is the calculation for determining the breakeven point for your response rate:
| Mailing Cost Per Thousand (M) / Net Profit Per Unit Sold |
As you can see, you will need to start by first calculating the cost of your mailing. For this, let's look at an example of a what a classic direct mail campaign might cost (note that in the examples below we show cost per thousand).
| Average Mailing Cost Per Thousand (M) : Direct Mail |
| All Components |
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Cost Per Thousand (M) |
| List rental |
$120.00 |
| Outside envelope, BRE, letter, brochure, response device |
$100.00 |
| Postage ($190/M - zip sort) |
$190.00 |
| Merge / Purge |
$15.00 |
| Insert / Mailing |
$25.00 |
| Total |
$450.00 |
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The cost for a classic business-to-business e-mail campaign would be comparable to that of a classic direct mail campaign.
| Average Mailing Cost Per Thousand (M) : E-Mail* |
| All Components |
Cost Per Thousand (M) |
| Base list rental (business-to-business) |
$320.00 |
| Additional list selects (assume 3 selects) |
$30.00 |
| Transmission fee |
$100.00 |
| Total |
$450.00 |
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*Most people wrongly assume that e-mail marketing costs less than direct mail. Not so! As you can see in the example listed above, list rental prices for a b-to-b e-mail campaign are significantly higher. It's true however that a business-to-consumer e-mail campaign will cost you less today (about $250 for the average campaign as compared to the $450 above for b-to-b). This is largely due to the fact that many of the consumer e-mail lists you can rent today are so unreliable. So if you're looking to rent e-mail marketing lists and especially if you're looking at consumer e-mail lists, make sure to talk to us first. We'll steer you clear of the e-mail lists that aren't worth your time -- regardless of whether you rent them through us or not!
Next, we need to calculate net profit per unit sold in order to determine our breakeven point. We will keep the fulfillment cost at the same percentage of the selling price in order to make our comparisons relative.
Let's look at a few examples:
Selling a Child's Doll
| 1. Calculate the net profit for each unit sold. |
| Selling price per unit |
$30.00 |
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| Fulfillment cost per unit |
-$10.00 |
| Net profit per unit sold |
$20.00 |
Now let's put it all together:
| 2. Calculate the Breakeven Point. |
| Divide mailing cost per M |
$450.00 |
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| By net profit per unit sold |
$20.00 |
| = 22.5 orders per M or 2.25% to break even |
Income:
|
$30.00 x 22.5 orders = |
$675.00 |
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| Fulfillment: |
$10.00 x 22.5 orders = |
- $225.00 |
| Net Income: |
$10.00 x 22.5 orders = |
$450.00 |
Selling a Software Product
| 1. Calculate the net profit for each unit sold. |
| Selling price per unit |
$100.00 |
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| Fulfillment cost per unit |
-$30.00 |
| Net profit per unit sold |
$70.00 |
| 2. Calculate the Breakeven Point. |
| Divide mailing cost per M |
$450.00 |
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| By net profit per unit sold |
$70.00 |
| = 6.43 orders per M or .643% to break even |
Income:
|
$30.00 x 22.5 orders = |
$643.00 |
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| Fulfillment: |
$10.00 x 22.5 orders = |
- $192.90 |
| Net Income: |
$10.00 x 22.5 orders = |
$450.10 |
Multi-Product Offers: Catalogs and Fundraising
| If your response rate is: |
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To breakeven you need an average order / donation size of: |
| 10,000 mailed @ |
.50% |
= 50 responses / $4,500 |
= $90 |
| 10,000 mailed @ |
.75% |
= 75 responses / $4,500 |
= $60 |
| 10,000 mailed @ |
1.00% |
= 100 responses / $4,500 |
= $45 |
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How Do We Know Which Of the Above Is The Best Response Rate?
Which of these three response rates do you believe is the best one to aim for? Is it 1% or 1/2%? Which one will help us grow our business at a faster rate? Or at a higher profit margin?
We can't tell with just this information. Until we know what the long-term value of our customer is, we can't say what our best return should be. When we break even or make money on a mailing are we doing what is right for our company? Tune in next month to find out!
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