Direct Mail Profitability Guide: Forecasting Your ROI

When you’re just starting out in direct mail, or if you’ve been doing it haphazardly, without the guidance of a professional direct mail agency, then it might seem as if Direct Mail “ROI” (Return on Investment) is a crapshoot:

• Pull together your list.
• Come up with an offer.
• Slap together a creative.
• Cross fingers and send.

Maybe you’ll get lucky.

Maybe… you won’t.

Well, we’re here to tell you that direct mail is not a crapshoot. And you don’t have to rely on Lady Luck. Here are a couple of examples showing you how you can estimate the ROI of your next direct mail campaign with confidence.

In the third example, we will show you a secret on how to leverage your campaign further, for pennies on the dollar, by multi-channeling your direct mail. We recommend you to not skip ahead, since each earlier example will build to the next.

Let’s begin.

Example 1: Expected Return on Direct Mail Investment for a Pizza Chain

Let’s assume these facts:

• The average pizza transaction nets you $30 gross profit.
• On average, people buy from you once a month.
• The average customer stays for three years.
• The average lifetime revenue per customer is $1,080 (36 months x $30 = $1,080)
• Let’s say the cost of launching the campaign, including design, copy, print, mail, and postage totals $35,000 for 50,000 postcards (70¢ each).

Assume a-quarter-of-one-percent (0.25%) response rate (conservative for this type of campaign, according to the Direct Marketing Association).  Also assume that 50% of people who show up, end up wanting anchovy pizzas (and you don’t do anchovy pizzas!) so you have to turn them away.  This means you only need 65 responses (out of 50,000!) to break even. See the details below.

There’s a lot of more insights you can glean from the ROI calculations  above, but the bottom line recap is:

• Assuming a below-average response rate of 0.25 percent, 125 people will respond. Remember, you only need 65 responses to break even, so you are ahead of the game already.
• ROI from the campaign will be $32,500. (125 calls x 50% close rate x $1,080 per customer = $67,500.  Subtract cost of the campaign $35,000, then ROI = $32,500).
• That’s almost doubling your money! (93% ROI). And this assumes conservative response rates.

Awesome, right?

Here’s another example.

Example 2: Expected Return on Direct Mail Investment for a Dental Practice

Let’s assume these facts about your dental business:

• The average gross profit is $300.
• On average, people come in twice each year.
• The average customer stays with you for three years.
• The average lifetime revenue per customer is $1,800 (again, conservative assumption) [Source]
• What if you’re sending something more elaborate this time (with higher Customer Lifetime Values, you will be best served with a more comprehensive and targeted direct mail campaign). Let’s say this time is costing you $48,000 for 50,000 highly targeted sales letters, including everything. (96¢ each).

More assumptions:

• Assuming a below-average response rate of 0.5 percent (conservative expectations from a highly targeted, rented mail list), and…
• Of the people who called, you close only 25% of them (most service-based businesses close between 10-50% of their leads).

This time, you need 107 people to respond, and 27 people to convert, only to break even:

• But we can expect 250 leads flowing in, netting you with 63 sales.
• This is a Return on Investment of $64,500, or 134 percent. Check out the full stats below.

Don’t Stop Yet: Boost Direct Mail Response Rates With Facebook Retargeting

We hinted earlier that we can do even better, so here it is: integrating direct mail with Facebook is one of the most effective way for marketers to boost response rates (and therefore ROI).

In a nutshell, we: A) send your direct mail campaign through the postal service as usual, and then B) overlay your mail file with the Facebook member list. The people on your list who are also on Facebook will be retargeted multiple times, giving you the ability to get more touches of the same eyeballs on your offer—without spending another penny on postage.

That’s extra leverage!

Note that we are not saying you should switch to digital marketing. On its own, social media or digital marketing perform very poorly. Our strategy is deeply rooted in direct mail, with Facebook as extra leverage.

But why would anyone want to pay more for Facebook? Because the biggest chunk of a direct mail campaign cost is always the postage and the fixed costs of setting it up, so integrating all that hard work with a secondary marketing channel is extremely cost-effective!

Does it make you more money? In general, using Facebook Retargeting can help boost response rates by 5 to 25 percent over (an already awesome) traditional direct mail approach. So… yes.

Read all about it in the next post.  We will dig into another example, and we’ll use the dental practice again so you can compare.

Contact us for a free one-on-one consultation.  Still, we figure you might want to check us out before you do business with us.  As a customer-first business, we owe our success on a set of Core Values: 1) Partner, Not Just Vendor, 2) One-stop-shop, 3) Never Shortsighted, and 4) Delight Our Clients. 415.795.8333 • ideas@propelomedia.com