I like numbers. I like math. I even like algebra when numbers start fraternizing with letters. (I draw the line at calculus, though. I don’t understand why numbers have to go all lumberjack on me.)
It is a good thing because there is a lot of math in Retail. Some of my favorite math, however, was not the pre-made formulas like calculating inventory turns or cash-to-current ratios. It was the math used to figure out if something was working or not.
One of those occasions was trying to figure out the results of a Direct Mail campaign we used to do at Toy House. For several years I sent out postcards around Halloween for $20 off purchases of $100 or more redeemable by the end of November. I used to send out that type of coupon five times a year, but realized I was training customers to wait for the next coupon. When a customer called me to ask when the next coupon was coming so that she could buy a new car seat, I knew I was heading in the wrong direction.
We weaned our customers down to just the one postcard in November. Now I wanted to know how well it was working and whether it was worth the money.
I kept track of the number of coupons redeemed and the amount spent per coupon. I knew what I spent to produce and mail the postcards. Now I just had to do the math to see if the campaign was worthwhile.
Here is the math from the last Direct Mail campaign in 2014 …
- We produced 14,000 postcards @ .23 each = $3,220
- We mailed 13,500 postcards to our mailing list @ .34 each = $4,590
- We had 687 post cards redeemed (5.1%) x $20 discount each = $13,740
Total cost of promotion: $21,550
- Average ticket (before $20 redeemed) was $117 = $80,379
- Profit Margin was 48.7%
- Gross Profit on coupon sale transactions: $39,144
Net Proceeds from campaign (after deducting costs): $17,594
The total sales of $80,379 represented about 29% of our sales for the month, so it was a significant portion of our business. The real question of the day, however, was how much of those sales did we get because of the coupon and how much was simply us just giving money away on sales we would have already had?
The better question was … “Do I have somewhere else I could spend $21,550 that will generate more than $39,144 in gross profit?”
The mailing was sent to our own in-house customer base of people already familiar with us, so it wasn’t like we were reaching new people. If all of those same people came in and spent only the average for non-coupon sales of $48 we would have been only slightly worse off (687 x $48 = $32,976, which equals $16,059 in net proceeds).
Once I did the math I knew that anything less than 5% return on my direct mail wasn’t worth the time and effort. We weren’t getting the return we needed. Plus, we were advertising for the short-term instead of the long-term. On top of that, we were training customers to wait for the next coupon.
That is the issue with Direct Mail.
On the plus side, you get to tailor a message specifically to the people on your mailing list, and you can do the math to see exactly how much money you made. The downside, however, is that it takes a fairly high response rate to make it worth your while. Unfortunately, response rates rarely get as high as what we were getting each November. (That 5.1% was our lowest. We had a high of 9.6% in 2007!)
We were getting those numbers, though, because we were sending the coupon to our own fan base during the peak shopping time of the year for toys. We never came close to those numbers with the coupons we used to send out at other times of the year.
According to this post on expected response, if you are using an outside mailing list, meaning people who don’t yet know you, your response is likely going to be between 1-2%
If I only had 1.5% response (202 of the 13,500 redeemed), my numbers would look like this:
- Total cost = $11,850
- Total sales = $23,634
- Gross Profit = $11,510
- Net Proceeds = -($340)-
With numbers like that, the math is pretty easy to understand.
Does Direct Mail have a spot in the world of advertising? Can it be effective? There is one more equation worth doing. What is the lifetime value of a customer? If finding new customers is difficult, but once you find them, they become a gold mine, then yes, Direct Mail can work.
You just have to do the math.
PS What I found interesting was how our response rate went down over the years. Some might attribute that to the numbing of the deal. Our deal never changed so it became less appealing to some customers. Some might attribute the declining response to the aging out of our customer base. While we did cull our list for bad addresses, we didn’t track ages of the kids and grandkids of the people we sent the postcards. As birth-rates declined, our list became top-heavy with older customers. During the same time that our response was declining, however, our market share didn’t change. I think in many respects, since we were more hyper-focused on our Relational Customers, our list shifted more in that direction. Most importantly, since we were doing the math, we could see the diminishing returns and looked for better ways to spend our money.
PPS We used to mail out a complete newsletter with our coupon. The newsletter went out bulk mail rate to keep costs down. Unfortunately with bulk mail it doesn’t always get delivered in a timely fashion. When I switched to postcards I also switched to first class mail to make sure our postcards got out in time for customers to redeem. We still, however, had several customers who never got theirs or got it too late. That’s why we had a few extras printed above and beyond the mailing list.