WHY PUT THE PENCIL TO THE NUMBERS-FIRST
Direct mail is expensive. Telemarketing is even more expensive. You cannot afford to waste your advertising dollars at any time, but certainly not when the chips to play the game are so expensive.
Few people go all out and mail large quantities, or make a large number of phone calls, before they have properly tested and learned that what they are doing is at least a break-even proposition. Maybe that is why we can determine “par” in direct marketing in a break-even analysis.
You know your advertising cost and what you can afford to obtain an order or a lead. By dividing what you can afford to spend at break-even for an order into your advertising cost, you know how many orders you have to get to break even.
For example, let’s assume your advertising cost is $10,000 to mail 20,000 pieces, and you can afford to spend $10.00 to get an order. Your break-even is a 5 % response rate:
- $10,000/$10.00 = 1,000 orders per 20,000 pieces of mail
- 1,000/20,000 = is a 5% response
Unless you are pulling better than a 5 % response-or if you can see your way clear to do that in the future-you have a losing business proposition.
Knowing what “par” you must reach with any direct mail, catalog, or telephone operation is vital in knowing what to do next. If you aren’t getting a 5 % response in our hypothetical case, you could do any one or combination of these things to get to or surpass break-even and make a profit.
- Raise your price so you can afford more promotional dollars per order.
- Lower your costs so you can afford more per order.
- Try different lists or segments of lists to get a higher response rate.
- Improve your offer to generate a better response rate.
- Improve the impact of your creative effort.
- Improve the size of your average order so you have more to spend.
This last item, average order size, is a new wrinkle we’ve added which deserves special comment.
WHY AVERAGE ORDER SIZE IS IMPORTANT
It stands to reason that, if your advertising cost and response rate are fixed, and your gross margin is the same, a $60.00 order will generate more contribution to profit than a $10.00 sale. It will be more than six times as much.
- Sales $60.00 $10.00
- 25% cost of goods ($15.00) ($2.50)
- Cost of advertising (50% sales) ($25.00) ($25.00)
- Contribution $20.00 ($17.50)
A contribution of $20.00 is acceptable. A loss of $17.50 obviously is not. That is why you often hear the expression, “You can’t make any money on a sale under $19.95.” As inflation continues, that is, perhaps, a low figure. Many catalog professionals use a figure of $50.00 on an average order size to make any money, which is why low priced gifts and gadget items have dropped out of the mail order scene.
There are several ways you can get an average order size up:
- Increase price
- Increase the quantity of units sold per order
- Make a sale that reaps continuing income (that is, magazine subscriptions, book clubs, or insurance policies)
- Increase the average selling price of your line of merchandise (that is, go to the upper end of the market)
- Offer a promotion to encourage larger orders, such as: a free widget with every order of $100 or more. (Don’t forget to factor in the cost of the free widget.)
YOU DON’T HAVE TO SHOW A PROFIT IF . . .
Believe it or not, most people do not show a profit at the start of their business. And most professional mail order experts don’t show a profit on new customer acquisitions.
You lose money attracting donors or customers because you know you are going to more than make up for the cost by the profit you will generate from future orders from that same customer.
Not only is that customer probably going to buy more from you as he or she gains confidence in your product and its prompt delivery, but your cost of advertising to present customers is only 1/10 or 1/20 the cost of getting a new prospect.
As you progress, you will put your pencil to more and more numbers: response rates, average orders, number of orders per year, average size of order, and number of years they will continue to order. Fund-raisers note that the same applies to donations.
In lead generation business mail, the numbers are often not as critical as in consumer mail because the selling price of the item is usually much greater and the size of the mailing smaller.
WHY BUDGETING IS SO VITAL
There are many unique advantages direct mail has over other media but budgeting is not one of them. However, with a moderate amount of technique blended with anticipation, it can be done with minimum effort.
In all the forms of advertising, the production of advertising is a minor factor. The big hunk is space costs, radio time, or television time. Rate cards and deals are usually known ahead. Even if not, you can usually switch a little bit of “this” with a little bit of “that” and come out okay.
Direct mail, on the other hand, is all production cost except for postage, which is usually one third to one tenth of total cost.
Further, no two printing quotes are the same. There are a million variables, such as number of pieces included, size of each piece, paper quality, and color. All of these vary drastically, based on quantity.
So, you have relatively fixed rates in conventional advertising and the opposite when you use direct mail.