Posted by lesley on May 28, 2013
In just about every aspect of running a business, financial formulas and numbers are a central factor. And that isn’t just to do with your books and accounts, because numbers are crucial when assessing business performance, waste, efficiency and relative levels of success or failure.
In particular, numbers are inescapable in marketing and selling, and your efforts could well be wasted or questionable if you are not calculating and measuring how well your marketing activities are performing.
For the purpose of illustrating the importance of numbers in marketing let’s take a look at direct mail as a particular example.
Direct mail is a numbers game, pure and simple, because if the numbers work in your favour, direct mail can become a profit-generating machine. But, if the numbers don’t work to your benefit, direct mail can be a cash-draining black hole.
Here are the direct mail terms you need to understand and the arithmetic that is involved in every campaign:
• Product price. This is the selling price of your product or service.
• Product cost. This includes all variable costs (cost to acquire or manufacture the product plus packaging and marketing costs).
• Overhead cost. This includes all fixed costs (such as salaries, equipment, utilities etc).
• Response rate. This is the number of responses you receive from your mailing, divided by the number of mail pieces you sent (response rate = total responses/total mailings).
• Conversion rate. This is the number of people who purchased from you as a result of your mailing.
• Return on investment (ROI). This is the amount of money you made on your mailing divided by your investment to do the mailing (ROI = net profit/total investment).
• Break even point. This is the amount of products or services you must sell to equal the sum of money invested to do the mailing (break even = overhead cost/selling price minus product cost).
And these are the rules of direct mail arithmetic you need to know:
• Rule 1: Ask yourself “What must my conversion rate be at break even, for my assumed selling price?”
• Rule 2: Only start a direct mail campaign if the most conservative conversion rate estimate results in a break even or profit (a 1% conversion rate is considered pretty good in direct mail terms).
• Rule 3: (Caveat to rule 2) If you have a healthy back-end (e.g. repeat sales and renewals) it may be smart to gain customers through direct mail even at a loss.
• Rule 4: Response rates mean nothing! A 1% response rate on a mailing for some products can be wildly profitable (just ask credit card firms).
• Rule 5: ROI is everything. In the end, what counts is how much money you made on the mailing.
Of course,understanding these formulas, numbers and rules doesn’t provide a guarantee that you will immediately know whether your mailing campaign has been a success or failure. Sometimes, even after a few mailings, it can be unclear whether you have a disaster on your hands or a true winner. The only way you will know is if you test.
Your first mailing should always be small. When you measure your initial response rate, if it is less than 1% then you should change something (e.g. the offer, price, or headline) and then test again.
The initial mailing piece you send is your ‘control’ piece and the response rate from your next mailing should be compared against it. If your response rate goes up then your second piece becomes the control on your next mailing. If you tweak something and your results go down, then your second mailing continues to be your control piece. You continually tweak and test until you have a control piece that is bringing in your desired response rate.
Testing and measuring results is the key to direct mail success – or success in any form of marketing – but only if you understand the numbers and have a grasp of the arithmetic in the first place.
