Here is a good way to evaluate the degree of direct mail order expertise of someone you are consulting. Ask them what response you might expect for your new project. If they answer the question with a figure, you can be sure you are talking to someone who knows very little about direct response advertising. Take their reply with a grain of salt. Then get to work and dig out some meaningful figures yourself about response rates. The truth is you can only get a good handle on response rates by testing.
Would a doctor give you a date your tennis elbow pain will go away? Will a lawyer indicate what the jury will do? In all cases, the reason for not being able to answer is the same-there are too many factors involved to give a meaningful reply.
Dozens of factors affect mailing and coupon results. Some of the important ones are likely to be: price, uniqueness of product, competition’s price, penetration of competition’s advertising, ability to select lists, creative approach, guarantee statement, seasons, the image of the mailer, and most important these days, economic conditions.
You still need an answer. How does one go about preparing a budget or pro forma to set monetary needs to start in mail order, or set a business lead budget? One way to do it is to budget breakeven response rates and work backwards. Then you will at least know where you are as you go along. If you have a bench mark, and your project should be aborted quickly, you’ll know it quickly.
Using a hypothetical example, allow 50% of sales for promotion, product costs of $10, and selling price of $20. The finer points-returns, no-pays, shipping charges, and so on-can all be refined later. At what response rate will you break even? First, figure out your advertising (mailing) or acquisition cost. Assume it is $300 per thousand. This may be difficult to estimate, as your mailing quantity is a key factor in estimating costs. For now, pick a printing quantity that you think may be reasonable and start with it. You can adjust it later, if necessary.
Use this formula to get the number of orders or responses at break-even: Mailing cost per thousand divided by the net of unit selling price less unit cost. If your mailing cost is $300 per thousand, your product sells for $20, and its cost is $10, then you have $10 for advertising and promotion, based upon the 50% formula described above. You must get 30 orders to break even ($300 per thousand divided by $10 = 30 orders per thousand to break even).
You can use this formula to solve break-even response rates- maximum allowable for mailing costs at break-even, or break-even price.
Here is how you can use this same formula to establish minimum selling price. Using our example above, let’s now expect a 1 % response rate. What is the lowest price we can sell at and still break even?
A 1% response rate is 10 orders per thousand. Divide the 10 orders into the advertising cost per thousand (in our case, $300 per thousand) and your fixed advertising cost per sale is $30. Add that to your product cost ($10) and you must sell the product at $40 to break even-before bad pays, returns, overhead, and profit. Add these and compare your selling price to the market. Are you in the ball park?
See how important putting the pencil to paper is!