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The Economics of Direct-Mail Marketing

They say it takes money to make money, and this is something all companies understand when it comes to advertising costs. If consumers don’t know what you have to offer, you’ll waste a lot of time sitting around waiting for the phone to ring. There are many ways to market your product and service offering, each with its own fees, development cycle and other considerations.

Direct-mail marketing has stood the test of time to remain one of the most cost-effective advertising techniques today. Like all forms of advertising, direct-mail marketing has certain fees involved. Unlike many forms of marketing, direct-mail marketing allows you to create highly targeted campaigns that can yield a great rate of return. The key is in understanding and properly applying the economics of direct-mail marketing.

There are many ways to spend money on a direct-marketing campaign. These include your mailing list, copywriting fees, designer fees, printing, mail services and postage. Conversely, there’s only one way to make money: Turn your list of prospects into a list of customers. Naturally, the bottom line when it comes to direct-mail marketing is running a campaign that makes more money than it spends.

For new businesses, it can be difficult to estimate the rate of return. Since you don’t have previous campaigns to use as a measuring stick, you’ll have to rely on estimates when budgeting. So how do you calculate your return on investment? Here’s the formula:

(Number of Mailed Pieces x Response Rate x Conversion Rate x Average Sales Price) – Campaign Cost)/Campaign Cost = ROI

So what does all this mean? Here’s the breakdown:

  • Number of Mailed Pieces = How many mailers you’re sending out
  • Response Rate = The percentage of people who respond to the mailers
  • Conversion Rate = The percentage of people who make a purchase, based on the Response Rate and not the Number of Mailed Pieces
  • Average Sales Price = How much, on average, each customer spends as a result of the campaign
  • Campaign Cost = The total spent to develop and deliver your campaign, including your mailing list, special offers, printing, mailing services, postage, design and copywriting
  • ROI = Return on Investment (your percentage of return)

Let’s say, for instance, you’re marketing a new widget that you sell for $100. You decide you want to send a postcard direct mailer and purchase a targeted consumer mailing list for $500. Next, you hire a copywriter and a designer at $300 apiece. Finally, you order 10,000 pieces printed, addressed and mailed for $3,500. Your total Campaign Cost is $4,600. Now, let’s say you get a Response Rate of 2 percent and a Conversion Rate of 50 percent. Let’s calculate the ROI:

(10,000 x .02 x .50 x $100) – $4,600)/$4,600 = 117 percent

To determine the monetary return, multiply your Campaign Cost by your ROI (in this case, 4,600 x 15 percent = $782). This means that a 100 percent ROI is your break-even point; you’ve neither spent money nor made money on the campaign. A ROI of 117 percent means that you made 100 percent of your investment back plus an additional 17 percent. The additional 17 percent is your estimated profit.

In this scenario, this campaign accounted for $782 in profit. That’s easy to calculate after a campaign has run, but how do you estimate Response Rate and Conversion Rate so you can create the most successful campaign possible? Most response rates fall between .1 and 5 percent; and most good campaigns have a response rate between 1 and 3 percent. Typically, 30 to 50 percent of respondents ultimately make a purchase (Conversion Rate).

These are just estimates, however, and reflect good campaigns, but you need to come up with estimates without any previous campaigns to base them off of. If you’re a new business, it’s also difficult to tell whether you have a good campaign or bad campaign. The best way to do this is to test your campaigns against small segments of your target audience and measure the responses. Try tweaking the offer, the copy, or even your mailing list and launch several small test campaigns at once to see which performs the best. Once you’ve found a direct-mail campaign that yields consistent ROI, stick with it and launch it on a large scale to realize the true potential of highly targeted direct-mail marketing.

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