The ‘Rithmetics of Direct Mail
Dear Business Builder,
Happy Friday! When I started my career in direct marketing, I knew nothing about the business. A series of chance meetings lead me to a job offer from a small academic and professional (also known as “trade”) book publisher.
Like so many that fall into this path, I started in customer service. And as I happily entered orders into the system and took customer phone calls, I watched as the direct mail coordinator slowly melted down.
It was no wonder … the publisher was a brilliant marketer with a quick temper known for his ruthless treatment of both employees and vendors alike. And the poor direct mail coordinator … well let’s just say, she never stood a chance.
After she gave her notice, the publisher offered me her job. Now after having witnessed firsthand her unceremonious breakdown … you’d think I’d have run screaming from the building. Instead – always one to recognize an opportunity – I accepted.
I actually liked the publisher … even though he did scare the daylights out of me. And I suspected he liked me too … which was a lot more than I can say for the poor coordinator I was replacing.
There were several really memorable things about that job … crazy things that you only get in a really small office. For instance, my desk was in what would have been the reception area, had we been an office that saw lots of outside visitors or clients. It was an awkward place to have your desk to say the least … especially when someone did come to visit.
My boss had a reputation for fierce negotiations with vendors. And the biggest love/hate relationship for a mailer is either with his printer or the post office. Since you can’t negotiate with the USPS (but that didn’t stop him from trying) … the printer was his frequent victim.
My first day on the job, I was pulled into a meeting with my boss and the printer. My boss launched into a tirade against the printer … he started with insults, then turned to accusations of overbilling and then ultimately to a heated negotiation in which my boss insisted the printer lower his price by a ridiculous percentage across the board or he’d take his business elsewhere.
The poor printer looked like he wanted to jump out the window … and we were on the seventh floor. Little did I know at the time, the printer was a seasoned pro and was used to these frequent beatings. He made some minor adjustments to his price which made his client feel like he’d won the battle and ultimately retained the business. They both knew full well that the business wouldn’t be taken elsewhere … no one else would put up with my boss’ nonsense.
I’m actually still friends with that printer … he’s an honorable, honest and decent man that didn’t deserve that poor treatment. But sometimes that’s the cost of doing business and he always handled it like a real pro.
Direct Mail like Putting Together a Puzzle
This first job was a quick, by fire lesson in exactly how you target your direct mail prospect. Because I worked for a trade book publisher, we served small niches of professionals working in very specific industries. For many books, our universe of prospects was just a few hundred people.
We’d comb trade association directories and professional trade journal subscribers looking for just the right prospect for our mailings. Because we were so intimately involved in these niche industries and constantly on the look-out for new authors, we received tons of related incoming direct mail. Everyday, I’d come to work to a stack of mail with notes scrawled across the top … “f/u - see if they have a list.”
When I started, I had no idea what f/u (follow-up) meant … so you can imagine what I thought.
Lists could often be found in the most unlikely places. It wasn’t unusual to find a printed list of attendees to some obscure meeting of 25 – 50 professionals on my desk with a note scrawled across it … “input these names, print labels and mail the Medico-Legal book promo to these people.”
Our monthly mail volume wasn’t high … maybe around 25,000 pieces a month, but we promoted to so many different niches that the production was an absolute monster to manage.
What astounds me to this day is we tested and measured nothing. We never looked at ROI or response rate … or even how many orders were generated from any specific effort. There were no spreadsheets that showed exactly how each list performed … no head-to-head headline tests to determine which copy performed better. We just mailed and as long as orders came in and costs were kept low, my boss was bearable.
This was a different time in mailing when Cheshire (paper labels that were glued on the envelope) and peel and stick labels were the norm. Ink-jet technology was just coming on the scene … and automated mailing and variable data printing were soon to follow. But list owners were skeptical of the new technology … afraid if they gave mailers their list on a floppy disk they’d steal it and mail to it over and over again.
No doubt, the year I started in direct mail was a real turning point for the industry.
Direct Mail Mathematics
We’ve talked quite a bit in the previous issues I’ve written on direct mail, about the costs of direct mail and exactly how you can start small, and slowly work your way up to larger and more statistically valid results.
We’ve seen comments from readers that have done their own direct mail production from printing labels to stuffing and sealing envelopes … all to keep their cost as low as possible. And, the story I told you today is a perfect example of how a mailer can start really small … sometimes with just 50 to 100 mail pieces.
And the bottom line is most any mailing can work if the cost is low enough. If the list is dirt cheap or free and the mailing consists of the cost of paper, envelopes, postage and a little sweat equity, you’ll be amazed at the results you can achieve.
But what happens when you get to the point where your mailings are too large to produce yourself? Well, it’s time to bring in a professional. And when you bring in a professional … you better have a good understanding of the math.
Here are a few metrics you’ll need to understand:
CPM – Direct mail is priced and measured in thousand piece increments. Mailing lists, printing and mailing services are sold at a cost per thousand (CPM) pieces. Only postage is consistently quoted as per mail piece. The total of these will make up the total cost of a mail piece.
So for instance if your list cost is .15 per name, printing and mailing are .25 per piece and postage is .25 per piece – then the cost per piece would be .65 so you’d take 1,000 x .65 and get $650 CPM (often shown as $650/M). So if we did a 5,000 piece mailing it would cost us $3,250 (5 x $650 = $3,250)
Response Rate – Response rate measures the number of people that respond to your mail piece as a percentage of the total number of people you mailed to. So if you mailed to 5,000 people and 25 people responded, you’d have a .5% response rate.
You come to this number by taking the number of responders divided by the number of people you mailed multiplied by 100% (25/5,000 x 100%). Next time you mail, you can use this response rate as a projector or a benchmark of how your campaign should perform.
ROI – In my opinion, ROI is the most important measurement in direct mail. ROI is the measurement of how much revenue your direct mail campaign generated vs. how much it cost … whether you made money or not.
ROI is shown as a percent and is just a division of the two numbers – total revenue divided by total cost multiplied by 100%. So if our campaign cost $3,250 and we generated $4,500 then our ROI would be 138% and we would make a 38% profit ($4,500 /$3,250 x 100%).
AUS or AOS – Average unit of sale or average order size, depending on who you ask, is another important calculation. With this measurement in your arsenal, you can then fully project how a similar future mailing or roll-out should perform.
AUS is calculated by dividing the total revenue generated by the total number of orders. For example, if you had 25 orders that generated $4,500 in revenue your AUS would be $180 ($4,500/25).
Putting it all together:
So using the example I created above. You have a 5,000 piece mailing that had a .5% response rate with an AUS of $180 and you generated a 138% ROI. With this great response, you’ve now decided to roll-out to 15,000 more prospects. How exactly could you project what the end result might be?
Here’s what you’d do:
Take 15,000 and multiply it by your response rate of .5% and you’d get 75 orders (15,000 x .5% = 75).
Then you’d take those 75 orders and multiply them by your AUS of $180 and you’d get $13,500 total revenue (75 x $180 = $13,500).
Then you’d determine your cost by multiplying 15,000 mail pieces by your $650 CPM for a total cost of $9,750 (15 x $650 = $9,750).
Then you could determine your projected ROI by dividing your total revenue of $13,500 by your total cost $9,750 for an ROI of 138% ($13,500/$9,750 x 100%).
This is a simple example that assumes all your costs stay the same. But as the size of your mailings grows take a cue from my previous boss and negotiate for lower costs … bringing your overall CPM down.
Hope that helped.
Have any questions? Have advice or In The Trenches stories? Post them to the blog and help a fellow marketer out.
Have a great weekend!
Until next week,
Julie McManus
Editor, In the ‘Net Trenches
THE TOTAL PACKAGE™
And Web Media Goddess
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