How to Calculate Expected Direct Mail Results

One thing that I've learned about direct mail over the years is that there are as many different profitable response rates as there are business and consumer mailers. But direct mail response rate, while important, is only one factor in determining overall profitability. In fact, a response rate of 3% can be a disaster, depending on how your costs and prices are structured.

Response rate (or capture rate) alone is not usually a meaningful metric upon which you should base a mailing decision. Rather, the expected gross margin on the direct mailing is what should determine whether or not you will make money or lose your shirt on a particular mailing.

A couple of years ago, a marketing manager contacted me about helping him improve his direct mail response rate. Once I began working with him, he shared that his response rate was only 4/10 of one percent (.004). In his prior job in the same service industry, response rates regularly averaged 5/10 of one percent--- or 25% higher. That distressed him greatly, but after some careful analysis, we learned that he was actually doing better in his new job!

I have detailed the calculations below. (I know there are a lot of numbers, but stay with me for just two paragraphs because it will be worth it!)

At his old company, his average mailing was 40,000 pieces with a response rate of 5/10 of one percent at a cost per mailer of $.59 yielding 200 contracts worth $270 each or $54,000 in revenue. With a mailing cost of $23,600, the GROSS MARGIN on the mailing was $30,400. Since he was selling a service, there were no product costs. Bottom line was that each mailer sent generated 76 cents in GROSS MARGIN. (This analysis was fairly easy to spreadsheet with Gross Margin in this case being equal to Revenues less Mailing Costs.)

In his new position, he was mailing far more mailers--- 80,000 per campaign at a lower per piece cost of $.52 each. With a response rate of 4/10 of one percent yielded 320 deals worth $325 each or $100,400. With a mailing cost of $41,600, the GROSS MARGIN on the mailing was $62,400. Since he was still selling a service, then there were no product costs. Bottom line was that each mailer at the new company generated 78 cents in GROSS MARGIN --- two cents higher than at his last job!

At his new job my client was buying printing at a better price because he was mailing more pieces, had a slight postage savings due the fact that he was mailing to a tighter geographical area, and his new company had a higher selling price. On his next campaign--- with the help of some copywriting enhancements, we worked out together, he was able to improve his response rate by 10%--- (to .044%) improving his GROSS MARGIN per mailer to 91 cents. His company was later able to build on that even more with some additional training for their inside sales reps.

The same goes for direct mailings that are designed to yield leads. Sales as a result of those leads can be tracked back to a specific mailing campaign through a coding system. I’ve used some as simple as different colored response cards.

In the final analysis, direct mail response rate is not always the definitive measure that it is often thought to be, but just part of the total picture!

--Jim McCraigh