Direct Marketing Essentials – Simple Ways to Calculate and Measure Your Marketing

The mathematics of direct marketing primarily rests on three key elements:

Marketing Costs
Contribution Costs (e.g. Overheads)
Now there is no clear-cut balance for these elements as any direct marketing activity needs to be tailored and fine tuned according to each business. This is why I will never state off-the-cuff a direct marketing response rate for any business or industry type as there are significant variables involved such as the product itself, the demand for it, market preference and the nature of the offer.Another point to highlight is that the mathematics used is underpinned by the belief that the future will be similar to the past. Hence if any variable within the equation changes significantly (e.g. magazine circulation significantly declines), then you have to expect a different response rate.So to dive straight into it, I’ve listed below a few essential calculations which every small business should use:Calculating the Allowable Using Your DM BudgetThis equation lets you calculate the amount of money you need in order to make one sale. This is really important to know!Revenue Selling Price: $1000Minus Costs Production: $500Overheads: $150Postage & Handling: $50The Breakeven allowance is $300 (the money you are allowed to spend to acquire a customer).NOTE: If your business requires 10% profit, then your allowable would effectively be reduced to $200.Using the Allowable to calculate your DM budgetSo using our allowable recruitment spend per customer x target No. of Sales = $200 x 100Marketing Budget = $20,000What happens if you don’t make the sales required?It is essential to test the market first using a small quantity before rolling out the entire campaign. Typically your allowable is based on what resources are required to acquire a customer already, plus I would expect some form of marketing research carried out in order to understand the size of your potential market. It is also important to include contingencies within your marketing activities if you don’t make the required sales. I always save 10% of my budget if something goes wrong. Or better still, if a potential list I’m targeting returns a huge ROI, then I have a bit left over to chase the money and market these top prospects again.Measuring Costs, Responses and SalesHere are a few very simple, yet essential equations to help measure costs, response and sales:Cost per Unit:Total cost / Total Quantity = Unit Coste.g. $20,000 / 4,000 = $5Response Rate:(Total Responses / Total Mailed) x 100% = % Responsee.g. (200 / 1,000) x 100% = 20%This equation is exactly the same as measuring the Conversion Rate which would be Converted Leads / Total Leads ContactedCost per Sale:Total Cost / Total Sales = Cost per Salee.g. 20,000 / 500 = $40Example: Let’s say you were a travel insurance broker wanting to advertise in the local newspaper to sell premium travel insurance for $500 per person. I’ve listed some assumed sales and marketing costs to acquire a customer:Advertising Cost: $7,800Newspaper Circulation: 150,000Promotional Cost: $5 per lead (e.g. Call centre costs)Revenue per sale: $500Total Marketing Cost for 100 leads is therefore: $8,300The Cost per Inquiry or Sale will vary depending on the response rate, which you won’t know until you advertise. But the main focus on advertising is to achieve a required level of profitability in order to justify the expense. I like to refer to it as measuring the Profit Index. (This is exactly the same as using your allowable to calculate the number of sales you require in order to justify any marketing spend).Profit Index (%) = Total Marketing Cost / Total RevenueProfit Index (%) = 8,300 / 10,500In this instance the Travel Insurance company requires 20% profit from print advertising. If my profit Index falls below 20%, then the advertising is deemed unprofitable. I’m so harsh!Hence, 21 travel insurance premiums need to be sold to meet a profit index of 21%.In other words, the allowable DM Budget would be set at $8,300 for advertising in the Local Newspaper.Using Spreadsheets to Negotiate SpendIf you’ve seen the spreadsheet then you’ll wonder why I’ve highlighted the following cost fields – Ad Cost and Promotional Costs. Promotional Costs are harder to change in the short term, but negotiating advertising costs can be extremely effective. You’d be amazed to discover that by saving 10% of advertising you drive down your Profit Index, which means your advertising dollar doesn’t have to work as hard to acquire customers or sales. In the example used, you would only have to sell 19 Travel Premiums in order to meet the minimum profitability requirements. It also does hurt asking for a trial advertising rate to test the viability of a product in a publication. Some account managers will assist if it means you become a regular advertiser.There are a couple of examples which the above calculations can be applied to in order to gain some further perspective for your next lead generation campaign.Lead Generation Conversion Programs1. Generally the more time you have to qualify an enquiry, the more it costs to generate. For example, if your telesales representative took 15 minutes to convert a prospect, while others may take only 5 minutes, then this will drive your overall costs to acquire a customer, and must be factored into your overheads or marketing costs.2. Lead generation lists (Prospect Lists) can also support repeat conversion contacts, but you’ll always get a reduced response rate with each effort. For example, if you mailed 1,000 prospects, it may generate 250 leads. The second time you mail the list (minus the 250 leads you generated the first time round), you might get another 100 leads. This means you have generated a total of 350 leads from the prospect list. But we wary that if you use the list too many times then it will get to the point of being unprofitable.As a general rule of thumb, you should change a portion of the DM piece the next time you mail (e.g. The offer, or a larger discount), as customers may respond to varying aspects of your direct marketing campaign, which is why it is always important to test.You may hear direct marketing consultants talking about list building, and how much of their time is dedicated to developing a database of qualified prospects and customers. These lists are in fact a key ingredient which differentiate direct marketing from traditional marketing.But I will say that typically, a list of present customers will respond much better or at a higher rate to a new product compared to non-qualified, or “cold” prospects.It is also important to point out that while companies always depreciate their expenses over time such as equipment, machinery and inventory, they almost never capitalise what could be their most important asset, their customer. Therefore, small business owners should view their customers as investments and be able to measure and monitor customer data, and capitalise on it for the future.Just remember that the maths of direct marketing sets it apart from all other marketing disciplines!

Direct Marketing Essentials – Developing the Offer

In direct marketing terms the OFFER may include free information, incentives, or rewards for loyalty and continuing to purchase from you. Basically it can be anything that helps drives your target market to purchase.So even if you have the best product on the market, you can achieve better results by developing a RELEVANT offer to make your small business stand out from the crowd.So what are the main considerations when developing the offer?Offers should be designed to be relevant to your target market and to the product or service you are providing. They should also be timed well to help position your product effectively.If the direct marketing offer you’re providing doesn’t complement or add value to what you are trying to sell, then your prospects won’t commit. In most cases, the offer is the difference between success and failure.I’ve found that the biggest motivator is prospects’ perception of the value of the offer you provide relative to cost of the actual product. Further still, most people are motivated by something for free or any special privileges associated with the purchase of a product.But I think it’s important to discuss some of the pros and cons for all the various offers out there, plus some of their associated hurdles before you start discussing options with your designers, printers or mailhouse.Free Offer: Buy a newspaper and get a free CD! Offers like this helps to increase short term sales. On the other hand, if you provide free information in an offer-package then you encourage customers with a higher commitment potential. E.g. Get the first lesson free!Samples: If you include a free sample in a direct mail piece then you need to account for cost considerations. If you ask for a nominal price then it encourages commitment and a bit more interest.Free Gifts: This must be appropriate to the product or service sold or your prospects won’t commit. The FREE set of steak knives would only be of value if you were selling other kitchen appliances…..or an abattoir perhaps?Free Trial: This is fairly standard with most direct mail pieces. The good news is that it can double orders when compared to offering just a money back guarantee.Free Shipping: Spend more than $100 and we’ll post it to you for free! If your product is available internationally, then you may want to revisit your cost margins and breakeven point before going to market with this type of offer.Sweepstakes: This is great at commanding attention and causing excitement. Sweepstakes always boost sales, but these days it is better to offer a prize everyday of the month to keep your prospects interested, rather than offering one big lofty prize. Just make sure the sweepstakes doesn’t cast a shadow on what you’re actually trying to sell.Time Limited: You can further overcome buyers inertia by making your direct marketing offer time limited, as everyone hates to miss out! If you give a reason for your prospect to act immediately then you will have a greater chance of making more sales in the short term.Exclusive Membership: Subscribe for a fee and receive exclusive discounts, benefits and experiences which aren’t offered to the general public. Just make sure the membership has the right mix of benefits to get your prospects lining up at the door.A lifetime membership could also be used as it offers no commitment to ongoing purchases required.Discount Offer: Always be careful offering discounts as your primary goal is to make a profit and not to cannibalise sales you would have made anyway. Just because you get a great response, doesn’t mean you will have healthy margins. Plus, if you always offer a discount then you are teaching your target market that your prices are too high.The only time you should discount is when you believe you can gain an incremental purchase. For example, if you have a new visitor who becomes a repeat visitor a certain number of times but doesn’t buy, then perhaps a discount will help overcome this.Invitations: We invite you to attend a free seminar to learn more about XYZ! Invitations are used primarily for business to business direct marketing. Just make sure that you get enough attendees showing up on the day or it may be detrimental to your product or service.How you can add value to your offer to increase response?As an expert marketing consultant, I recommend four ways to add value and help lift the number of responses to your direct marketing efforts. I always tend to include at least three of these in every Direct Mail piece to help further overcome buyers inertia.1. Payment Terms: You should give as many options for payment as possible, and pay particular attention to the age group of your target market. Baby Boomers and beyond like the option of paying using bank cheques and many elderly buyers still do not know how to use the internet compared with younger generations who were brought up on computers. Other payment terms to consider include credit card purchases, BPAY, EFT Transfer, Cost on Delivery (COD), part payments revolving credit and offering open accounts.2. Response Methods: Some people like to pick up the phone while others prefer email contact. Either way, you need to ensure response options stand out from the remainder of the DM piece. These include Freecalls, 1300 numbers, switch numbers, coupons, faxes, email. I’d also like to point out that 1800 numbers (Freecall) are only free when you call form a landline. Many mobile plans charge for 1800 numbers over and above your monthly cap, which has recently aggravated many users in Australia. So beware!3. Endorsement Letters: These always prove effective provided they are legitimate! Testimonials and publishers letters are great to help endorse a product and overcome buyers inertia. I generally use three testimonials as a minimum to help sell a product or service.4. Money Back Guarantee: This is standard practice these days. If you believe in your product or service then you should include this anyway. Plus it helps reassure purchases without the need of viewing the product.