SPECIAL REPORT:
With the arrival of the Internet, many marketing experts predicted the end of direct mail. They said its obsolescence would be a direct result of the availability of the information on the Internet. They posited that e-mail would replace all communication—both commercial and personal—once handled by “hard copy” forms.
But marketers have seen for themselves how wrong many of those experts were. Just as television didn’t do away with radio, the cyber revolution hasn’t eliminated direct mail. In fact, the Internet and e-mail actually made direct mail more effective.
Direct mail has myriad benefits. On a basic level, direct mail offers customers and prospects a chance to learn about your business. It opens up the conversation. More specifically, it can promote interest in a new product or service offering, drive traffic to 
your store or Web site and/or increase brand recognition.
Most important, it works. And it will be around for a long time to come. The critical part will be determining whether or not direct mail is a profitable and worthwhile effort for your small business.
Designed for small businesses new to direct mail, this report outlines the basic benefits of direct mail while offering specific guidance in terms of costs and return on investment. It also includes additional reference resources in order to provide you with a well-rounded repository of information on direct mail – and how to make it work for you.
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Direct Mail 101
While most companies know about the anecdotal benefits of direct mail, many still aren’t clear on the standard “musts” when planning and executing a direct mail campaign. In order to understand whether or not the investment is worth it, it’s important to first have a clear understanding of direct mail, its elements and standards.
For small businesses just starting down the direct mail journey, we’ve compiled some direct mail basics to help guide your efforts.
- Identify your target audience. Do you want to target existing customers or new ones? What are they like? Try to be as specific as possible: Knowing your audience is crucial when putting together a mailing list and creating a successful direct mail piece.
- Compile a good mailing list. Your list must be as targeted, accurate and current as possible. You can purchase lists from list-rental companies, magazine publishers, trade membership directories or public records.
- Prepare the list. Make sure no names are duplicated, and check for typos and incorrect ZIP codes. According to the U.S. Postal Service (USPS), 43 million people — one out of every six families — move every year. Whether you use your own list or rent one, be sure it’s been updated recently. The USPS has various services (some free) to help you check your lists.
- Test. Too many businesses learn the hard way that their direct mail piece is ineffective. You should test out anything you plan to use to market or advertise your business to see if it makes an impact. Most experts would advise testing 10 percent of your list and no fewer than 250 pieces. Before you test, you should decide what response rate will support the planned mailing and this will depend on your budget (more specific guidance on budgeting will be discussed later in the report).
- Personalize your mailing. How your direct mail piece looks, how it’s sent and what it says are the other critical factors that work together. The more personalized your mailing, the more likely it is that your prospect will open it, read it and respond. If you can afford regular First Class mail (which can be crafted in a more personal way), then it’s worth the investment. You can control costs by choosing a different weight paper or cutting down on the number of pieces you send.
- Create a consistent look and feel. Since repetition is a key element of direct mail campaigns, it’s important that your mailings leverage your company’s identity or brand. Display your logo and tag lines consistently, and stick to a limited color and font palette.
- Include a call to action. While you must aim to make your message meaningful and succinct, the most critical part of the message is the call to action. You need to tell people what you want them to do and how they’ll benefit. Special offers get responses. For instance, “Save 20 percent on your purchase by ordering before April 23rd!” tells prospects they can save money if they act by a certain date. Remember, it’s easier to get people to call you than send something back to you. If you require that customers return an order form or something else via mail, include a stamped, pre-addressed envelope.
- Learn from results. This is perhaps the most important aspect of the campaign. Every direct-mail campaign you run should contribute not just to your sales figures but to enhancing your customer database. Did the final results match what you expected from the test? What parts of the demographics responded better than expected? Code all promotions so you can track which direct mailings work and which ones don’t. Ask customers how they heard about your sale, your promotion or your company, and record the data. Refer to this data as you prepare future mailings and campaigns.
A Closer Look at Direct Mail for the Small Business Even with all of these standards, there also are many differences between direct mail for small and large businesses. One key difference is the name recognition of a large company. When a prospect receives a mailing, the likelihood of response is naturally greater. Frequently, the small business has no name recognition, is selling a product priced over $100, and does not have a large marketing budget.
As a result, the small business must do some things differently.
The key to small business direct mail success is repeated mailings to a quality list to build name recognition among prospects that are likely to be interested in your product or service. It’s also critical to distinguish between a response and a conversion. A response is classified as a resulting contact of someone who receives your direct mail piece. A conversion is the resulting sale from that response.
Response rates may be low in the first mailing, but usually rise in the third mailing and can continue to rise for several more mailings to the same list. Similarly, conversions will rise over time. In addition, the campaign is more likely to succeed if the end objective is not a giant step for the prospect. For example if you are marketing services costing more than $1,000, the response rate to sign up for the service will probably be very low. However, the response rate to attend a free seminar will likely be ten times higher. Then, if you convert 25% of the seminar attendees, you come out ahead of trying to make the complete sale in the mail piece.
Direct mail can work for small businesses as long as some simple guidelines are followed. Rather than starting your efforts by mailing to a list of 1,000 - 5,000 purchased names, try starting with a smaller more targeted list of 300 - 500 names and keep mailing. It is not uncommon to get very few responses in the first two or three mailings. Also, plan to mail to that list at least five times within six months. Tests show that the response rate starts to increase after the second mailing. A well-crafted offer mailed to a good list can get response rates over 5% after three mailings.
Keeping these elements in mind, we’ve gone one step further to help you understand not only the costs involved in a direct mail campaign but also the type of return you can expect.
Navigating the Math of Direct Mail
Any company that wants to undertake a direct mail campaign is likely going to want to understand the costs and return involved. First, it’s important to determine the basic costs of direct mail. From printing to postage to design, these cost elements can understandably vary based on the number of targets you are mailing.
Here are some basic cost estimates and guidelines, as noted by the New England Business Service (www.nebs.com):
|
|
500 | 1000 | 5000 | 10000 | 25000 | 50000 |
| Postcards This is a 5 x 7″ postcard printed on both sides. The price estimates assume 2-color printing and bulk mail postage rates. Please adjust your costs if you plan to mail first class, or print in more than 2-colors. |
$2.50 | 1.44 | .59 | .45 | .39 | .36 |
| Letter This is an 8 1/2 x 11″ sheet of paper printed on both sides and inserted into a standard #10 size envelope. The price estimates assume 2-color printing and bulk mail postage rates. Please adjust your costs if you plan to mail first class, or print in more than 2-colors. |
$3.58 | 2.00 | .68 | .50 | .41 | .38 |
| Letter/Brochure/Order Form This includes an 8 1/2 x 11″ letter printed on both sides, a fold out brochure, an order form and a reply envelope. This format is appropriate for product mailings or for services that require a significant amount of information. The price estimates assume 2-color printing and bulk mail postage rates. Please adjust your costs if you plan to mail first class, or print in more than 2-colors. |
$6.64 | 3.58 | 1.05 | .74 | .53 | .46 |
| Newsletter This is an 11 x 17″ page folded to 5 1/2 x 8 1/2″. The price estimates below assume 2-color printing and bulk mail postage rates. Please adjust your costs if you plan to mail first class, or print in more than 2-colors. |
$3.08 | 1.78 | .71 | .54 | .45 | .41 |
We’ve decided to simplify this a bit to offer some basic guidelines. Start with basic costs. A letter mailing costs 50 cents per piece. So, if you mail 10,000 pieces, it’s going to cost you $5,000.
Some people say direct mail is expensive; some say it’s cheap. Your point of view will depend on how much income you make on each mailing.
ROI
As a reasonable conclusion you could expect anywhere from 1%-4% on direct mailers regardless of the industry. The DMA released results of its 2006 Response Rate Trends Report, noting that on average, direct mail produces a 2.16% response rate.
To figure out if a mailing will be successful, you’ll need to know what percent response you must receive to show a profit. For example:
- Your mailing is 10,000 pieces
- Your mailing cost (at 50¢ each) is $5000
- Your product sells for $100.
- Your product (and shipping) costs you $50.
- Therefore, you will make $50 gross profit on each sale.
How many people have to buy your product for you to break even?
- Assume a conservative 1% response rate on 10,000 pieces mailed = 100 orders or sales
- 100 sales = $10,000 in gross revenue
- With costs for the product and fulfillment at $500, your gross profit on these 10 sales is $5,000
This will cover the cost of the mailing. Therefore, you need a 1% response to break even. Anything more than 1%, and you will actually make money.
The ROI calculator is another helpful tool for you to quickly determine the ROI and required response or conversion rates you need for a campaign to break even and make money: http://www.marketingtoday.com/tools/roi_calculator.htm.
Customer Lifetime Value (LTV)
Customer lifetime value can be calculated in any industry, business to business or business to consumer. In the early days of database marketing few knew how to calculate it or how to use it. Today it is widely practiced. In fact, firms are looking to direct mail as a way to increase customer lifetime value.
Lifetime value is the total benefit (tangible and intangible) that you and your business provide to a customer throughout the life of the relationship. The concept of client value requires assumptions and new thinking. But there’s no better way to gain perspective on each and every client relationship, or to predict the impact of every management decision on long-term revenue goals.
Lifetime value is a concept that matters to ensure long-term survival through recessionary times and to know how much to pay for customer acquisition and for customer retention and to keep the business focused on increasing a customer’s lifetime consumption of products and services through cross-selling and up-selling.
Direct mail comes in when you’re trying to estimate ROI. Your ROI (as noted in the previous section) can be determined solely by the cost of one campaign in relation to resulting sales. However, if you correlate your direct mail campaign’s cost to the lifetime value of a prospect, the results can reveal even greater impact.
Here’s a simple way to determine customer lifetime value:
- Assume how much your ideal customer will buy from you during the entire buyer/seller relationship. For example, if you are a consultant, and a typical client stays with you for 2 years, and they are paying you $10,000 a month, then the current lifetime direct transaction value of a client is $10,000 x 24 months = $240,000.
- Assume how much business each client will refer to you over the next two years. Let’s say the typical client sends you one new client every two years at $10,000 a month. That’s $240,000 in referral value.
- If you have an advisory team of customers helping you design or launch new products or services, estimate the value of one successful sale for that new offering based on your customer’s input. (For this illustration only, assume that one new sale equals $20,000.)
- Add all three figures. The true lifetime customer value, including referrals and advisory support, is $500,000.
And that’s just assuming that the customer’s actual “lifetime” with you is two years. Think about the potential longer-term LTV if you are able to extend that relationship over more years with new, valuable products and/or services. When thinking about your campaign’s cost in relation to LTV, the results demonstrate quite an impact.
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