I originally titled this article "How to calculate your customer's value against the ROI of your direct mail," and reading that made me want to stick a fork in my eye out of boredom. Businesses sometimes grumble about the cost of direct mail, feeling as if it's stealing away at profit margins. Hopefully, this blog will serve to turn that thinking around a bit and help you understand that your customers are the ones actually paying for your direct mail! If they aren't, then that's a problem that we'll need to talk about....Owning Message in a Mailbox, a company focused on direct mail -- and more specifically, direct mail flyers and postcards, you'd expect me to pronounce that direct mail is critical for every business.
However, I'm not going to say that, because it would dilute my credibility. I am all about helping small businesses, and I will be the first person to tell a business when their money would be better spent in other areas. However, I will say that most businesses find direct mail both beneficial and essential when it comes to growing their customer base. So, how does one determine if direct mail is right for them?
Businesses need to have a good sense of their own numbers, before looking at any form of advertising. What is the lifetime value of a customer to your business? This is not how much a customer spends on a sale, but rather how much profit that customer brings to you. Not only is it the profit from their transactions over a lifetime, but it also includes the value you receive from them in terms of referral business and the increasingly important social engagement (Twitter, Facebook, etc.) If you are a realtor, you are looking at a commission of between $8,000-15,000 for an average Lake Norman home, and upwards of $30,000 on one sale if you're selling some of the exclusive lakefront properties. If you gain the trust of your clients and handle more than one real estate transaction for them during their lifetime, that customer could have quite a large value to you.
Let's say as a realtor, you want to send out 10,000 postcards per month all year long. That would be 120,000 pieces of direct mail in a year. For simplicity sake, we'll stick with flyer box delivery and calculate the total cost of your direct mail piece at .20 per household. This would come to $24,000 per year spent on direct mail (printing and delivery). Direct mail averages around a 2.5% response rate. Now, I'm not going to calculate the response rate based on the total number of pieces mailed. I'm going to assume you are repeating your mailing to the same 10,000 people each month (repetition is the key), and use the reach (number of households) and not the number of pieces mailed (each of the 10,000 homes will receive 12 postcards/year). If the target group that you're mailing to is 10,000, and we conservatively factor a 2% response rate, this would be 200 responses over the course of the year from this campaign. The conversion rate of a response to an actual sale is estimated at half the response rate. Now we have 100 sales that came from your mailing to the same group of 10,000 people each month over a given year. If your average commission is even $10,000, then you've spent just $24,000 and received over $1 million in new commissions. Keep in mind, that realtors need to subtract overhead and other expenses so that $1 million would not be pure profit, but they've more than covered the cost of that direct mail campaign several times over. This is why realtors dominate when it comes to direct mail -- they know it pays off big for them.
Let's walk through another example and take an owner of a heating and air company. They might have two groups of customers -- those who have only used them for routine or minor repairs, and those that have actually used them to replace a major unit in their home. Their goal is to maintain customers over a long span of time, so that the majority will require a large purchase at some point in time. Conservatively speaking, let's say their average customer has a value of just $1,000 to their business over a lifespan. This would be someone who uses them for maintenance and repairs for a span of 5-10 years or a customer who just had his AC and furnace replaced. Clearly, calculating the "value" of the average customer is a little trickier in this line of business. For this example, their target reach might be less. We'll look at mailing just 3,000 postcards a month for 12 months. This equates to 36,000 pieces of direct mail at a cost of less than $7,200 for the year. Using the 2% response rate on the 3,000 homes they've targeted each month, they will get new sales from half of the 60 that responded over the course of a year. If their average customer is worth $1,000 (in profit) to their business over a lifetime, they've spent $7,200 but received over $30,000 in profit.
You can see why direct mail continues to lead among preferred advertising channels for many types of businesses. The more "value" a customer brings to your business over a lifetime, the better rate of return you will see. Above I mentioned that direct mail is not for every type of business. It's hugely successful for businesses like realtors who can realize a $10,000 commission off of just one sale. It's also successful for businesses who have repeat and steady business from their customers over the course of a lifetime (financial planers, doctors, dentists, cleaning services, landscapers, hair salons, etc.) What kinds of businesses aren't served well with direct mail? Those where the sale is neither a one time big revenue generator (realtor, builder, home remodeler) or a steady stream of repeat business over a lifetime. Let's say I wrote a book and wanted people to buy it. I target 5,000 people each month and send out 60,000 pieces of direct mail at a cost of $12,000 for the year. Out of those 5,000 people, 2% respond and 1% actually purchase my book. I've sold 50 books. I'd be lucky to receive a $5 profit on that book, so I've now paid $12,000 for $250 profit. Oops...not a great return on investment at all! For any businesses that might be selling a single product or a service that's under $500 and would only be purchased once in that customer's lifetime, I would not recommend direct mail marketing.
I hope these examples help as you analyze what kind of rate of return you can expect through direct mail. Stay tuned, as we'll soon be discussing "how much" and "how far" your direct mail efforts should be for your business goals.
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