How to calculate the ROI on direct mail campaigns

March 12, 2014

Businesses sometimes grumble about the cost of direct mail, feeling as if it's stealing away at profit margins. Hopefully, this blog will serve to turn that thinking around a bit and help you understand that your customers are the ones actually paying for your direct mail! If they aren't, then that's a problem that we'll need to talk about....

 

Owning Message in a Mailbox, a company focused on direct mail -- and more specifically, direct mail flyers and postcards, you'd expect me to proclaim that direct mail is critical for every business.However, I'm not going to say that, because it would dilute my credibility. I am all about helping small businesses, and I will be the first person to tell a business when their money would be better spent in other areas. I will say that most businesses find direct mail both beneficial and essential when it comes to growing their customer base -- the key is determining whether it's going to pay for itself.

 

So, how does one determine if direct mail is right for them? Businesses need to have a good sense of their own numbers, before looking at any form of advertising. What is the lifetime value of a customer to your business? This is not how much a customer spends on a sale, but rather how much profit that customer brings to you. Not only is it the profit from their transactions over a lifetime, but it also includes the value you receive from them in terms of referral business and the increasingly important social engagement (Twitter, Facebook, etc.)

 

Let's walk through an example and take an owner of a heating and air company. They might have two groups of customers -- those who have only used them for routine or minor repairs, and those that have actually used them to replace a major unit in their home. Their goal is to maintain customers over a long span of time, so that the majority will require a large purchase at some point in time. Conservatively speaking, let's say their average customer has a value of just $2,000 to their business over a lifespan. This would be someone who uses them for maintenance and repairs for a span of 5-10 years or a customer who just had his AC and furnace replaced. Clearly, calculating the "value" of the average customer is a little trickier in this line of business. For this example, their target reach might be very large. We'll look at mailing just 3,000 postcards a month for 12 months. This equates to 36,000 pieces of direct mail at a cost of less than $7,200 for the year. Using the 2% response rate on the 3,000 homes they've targeted each month, they will get new sales from half of the 60 that responded over the course of a year. If their average customer is worth $2,000 (in profit) to their business over a lifetime, they've spent $7,200 but received over $60,000 in profit.You can see why direct mail continues to lead among preferred advertising channels for many types of businesses. The more "value" a customer brings to your business over a lifetime, the better rate of return you will see.

 

The rule of thumb is that for every dollar spent on direct mail, it returns $12 (on average).

 

The real estate industry sends more direct mail than any other business category because they understand the importance of "farming" a territory and really owning it. The profit a realtor recieves on an average sale is also much higher than nearly any other business category. A customer isn't worth a few thousand dollars, a customer is worth over ten thousand dollars on average -- and in the Lake Norman area, a commission can easily yield $50,000 or more.

 

A realtor who sends out 10,000 postcards per month all year long is spending $24,000 for that effort. If just a small handful result in sales, the ROI is huge. The return on investment from a campaign costing $24,000 would be close to 300k. This is why realtors dominate when it comes to direct mail -- they know it pays off big for them.

 

Above I mentioned that direct mail is not for every type of business. It's hugely successful for businesses like realtors who can realize a $10,000 commission off of just one sale. It's also successful for businesses who have repeat and steady business from their customers over the course of a lifetime (financial planners, doctors, dentists, cleaning services, landscapers, hair salons, etc.)

 

What kinds of businesses aren't served well with direct mail? Those where the sale is neither a one time big revenue generator (realtor, builder, home remodeler) or a steady stream of repeat business over a lifetime. Let's say I wrote a book and wanted people to buy it. I target 5,000 people each month and send out 60,000 pieces of direct mail at a cost of $12,000 for the year. Out of those 5,000 people, 2% respond and 1% actually purchase my book. I've sold 50 books. I'd be lucky to receive a $5 profit on that book, so I've now paid $12,000 for $250 profit. Oops...not a great return on investment at all! For any businesses that might be selling a single product or a service that's under $500 and would only be purchased once in that customer's lifetime, I would not recommend direct mail marketing. 

 

If you're still not sure about how to calculate your ROI, or you haven't had the success you wanted in the past, call us -- we're here to help!

 

I hope these examples help as you analyze what kind of rate of return you can expect through direct mail. Stay tuned, as we'll soon be discussing "how much" and "how far" your direct mail efforts should be for your business goals.

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