How profitable is direct mail for your company? Whether you’re a direct mail veteran or just thinking about launching your first direct mail campaign, with a little excel magic, you can calculate how profitable your potential direct mail campaign will be. The keys are appropriately estimating the specific costs of sending mail and being conservative with your direct response conversion rates. We hope that this article will convert you into a data champion for your organization.
A direct mail campaign has two types of expenses: fixed costs and variable costs. Your fixed costs are the art direction and creative development of the mailer itself, consultation fees, and other one-off expenses to get started sending direct mail. Your variable costs are the costs you pay per each subscriber on your list. They include circulars, postage, addressing, folding/stuffing, list rental, order forms, envelopes, inserts, cover letters, and other miscellaneous expenses that increase as the size of your list increases. In some cases you may simply know the total cost of the mailer, and not the cost of the individual pieces, which is okay. Simply calculate the total costs, fixed and variable, to send out your mailings. This is your total investment.
Your revenue in a direct mail campaign will be based on your gross margin and total cost per product unit sold. Your product unit selling price, as well as any shipping and handling charges, are your gross revenue. Next, calculate the cost to produce, ship, and manage the transaction, and subtract this from your gross revenue. This will include the cost of the goods being sold, your S&H charges, order processing, the SPIFF paid to telesales, the cost of your 1-800 line, your bad debt/cost of return calculations, and any other expenses. The result will be a gross margin per product. If you already have the figure, you can also replace this calculation with your customer’s lifetime value.
Increasing your Profit Per Campaign
Your profit per campaign depends primarily on your costs, profit per sale, and response rates. Since we can’t accurately assess our projected response rate on a first-time mailer, it’s best to work from a sliding scale. Starting from 0.5%, calculate your profits if 1%, 1.5%, 2%, 2.5%, 3%, and so on, of mailings result in a customer. You can determine your ROI by taking your campaign’s projected net total profit (total investment over projected gross profit) and dividing it by your total investment. You should notice that at certain response rates, your mailings will likely have a negative ROI. At higher response rates, your ROI can become significantly positive.
If you send your mailer out to a small subsection of your list, like the first 1,000 customers, and you achieve profitable response rates, then you’re in good shape to continue sending your mailer. If you don’t hit the required profit number, take a step back and rethink your strategy. It may be that the list you’ve purchased is not the right list for your product, or your creative may be falling short. Consider all the options, and start testing new variations until you find a campaign that turns a consistent profit.
At Ballantine, we’re ready and eager to answer any further questions you may have. Give us a call today at 973-305-1500 to speak with any member of our experienced team.