Calculate Risks and Rewards of Direct Mail

How to calculate the risks and rewards of a direct mail campaign

If you're looking for a simplistic method to calculate the risks and rewards of a direct mail campaign, follow these steps to arrive at pre-mailing analysis and projections. The same formulas can be applied whether you're in the business-to-business arena, business-to-consumer, or if you're a fundraiser.

By the time you've finished this exercise, you'll be able to:

Project response rates needed to break-even
Project the number of new customers needed to break even
Project response rates needed to generate income
Project the number of new customers needed to generate income

Let's begin by assuming you’re a business-to-business marketer and you have a product or service to offer. Your goals are simple - to acquire new leads for your sales force and to generate $2,000,000 income.

Your product prices and margins will vary from my example, but all you have to do is swap your numbers with mine to arrive at a solution that is accurate for you.
Our example will use the following sales information

Average first-time sale of your product is $5,000
Cost to produce your product is $3,000, therefore your net income on each sale is $2,000 (40% of the total income.)
Your history with newly acquired customers has shown that they remain as buyers for 3-5 purchases over a 2-year period, thereby making the total income of a newly acquired customer somewhere between $15,000 - $25,000. The net income then falls between $6,000 - $10,000 per newly acquired customer.

Since your product falls into a high-value category, your typical sales approach has been to offer value and to instill confidence in your product. To insure that your direct mail gets noticed, you want a campaign that stands out among the mediocre. We're also assuming that you've done your homework on list acquisition. If that's true, it's pretty easy to determine that the creative approach is the area that will propel your campaign and get it noticed, so we'll spend a little more of the budget on creative.

For our example, we're going to mail the same 10,000 names and addresses three times. The repetition helps recipients notice your mailer and familiarizes them with your presence in the market.

Step 1 - Calculate the costs of the mailing

Expense categories for your mailer:

Creative - design and writing - $7,500
List - $1,750
Printing - 30,000 each:
    9 x 12 outer envelope
    Large full color, 6-panel brochure sized at 8-1/2 x 11” when folded
    Letterhead
    Reply card
    $15,000
Lettershop/Mailing – merge list with personalized lasered letter, insert, seal and meter - $9,000
Postage - Standard rate at $.32 each, total $9,600

Total cost for the 3 mailings of 10,000 pieces = $42,850

Step 2 - Calculate your income

We've stated above that a newly acquired customer will make a first-time purchase of your product at $5,000 and that newly acquired customers usually buy up to 5 times within a 2-year period. To be conservative, we'll assume 3 total purchases, totaling $15,000.

Your cost to produce the $15,000 product is $9,000 ($3,000 for each $5,000 purchase)
Net income per sale is $15,000 - $9,000 = $6,000

Step 3 - Project the number of new customers needed to break even

Divide the Total cost of the mailing ($42,850) by the Net Income ($6,000) = 7.14

With our example you need 7.14 new customers to break even over a 2-year period. The breakeven covers the cost of the product and all costs related to the mailing. Here are a few calculations that prove the numbers to be accurate:

Total Income
7.14 new customers buy $15,000 worth of your product
7.14 x $15,000 = $107,100

Net Income
Calculated as 40% of Total Income $107,100 x 40% = $42,840

The cost of the mailing is equal to the net income, therefore at 7.14 new customers, you break even, but who wants to break even? Especially if it takes 2 years!

Step 4 - Project the number of new customers needed to generate 2,000,000 income

This is the easy part. Once you've acquired 7.14 customers, you've covered your expenses. Looking forward, for each additional customer gained, using our formula and your sales history, your income will be $15,000.

To reach the $2,000,000 goal, you’ll need 133 new customers, calculated as follows:

$2,000,000 divided by $15,000 = 133

Response Rates

Of course everyone who responds to your mailing won't become a customer. If you can turn half of the responders of your mailing into buyers, you'll need 266 responses. That calculates to a 2.66% response rate:

266 (responders) divided by 10,000 (total number of people mailed) = 2.66%

There are many other ways to calculate your breakeven and profitability. For answers about quantifying other variables, contact directmailanswers@direct-axis.net or phone toll-free, 800-849-3056.