Direct Marketing Arithmetic Demystified

To make the right decisions for your company, you’ve got to understand “the numbers.” Here’s how they work.

 

Published in Target Marketing

 

It should come as no surprise that many people find direct marketing math overwhelming — scores of those who use direct marketing methods haven’t had the benefit of learning how to determine financial objectives and measure program performance. But measurability is a hallmark of targeted marketing programs, and no matter what your role is in your organization, you need a basic understanding of how to arrive at “the numbers.”

 

Knowing “the numbers” will allow you to think through your marketing program from a highly quantifiable standpoint. When you have that information at your fingertips, you’ll know if your marketing assumptions are sound. But it’s possible you may need to rethink your marketing program. You may need to reduce your marketing costs by decreasing the cost of your promotional activity. Will the cost of extra color on your letter pay for itself? Can adjustments in the trim size of your brochure save a few crucially needed dollars? Will that unusual sized envelope pull the extra orders you need? Will a bleed on your four color full page ad pull the extra orders you require? Of course, testing will answer these questions, but it will be the math that helps you analyze every situation and make smart marketing decisions. It’ll also be to your advantage to make sure your production staff are your allies so they will always tell you how and when you can knock a few dollars off your costs.

 

Perhaps you need to improve your offer so it will pull more orders. How many extra paid orders do you need to justify an expensive premium? Is there an item with high perceived value that doesn’t cost as much? Should the premium go to everyone who responds, or only those who pay? Maybe you’ll need to increase your price, increase your conversion to sales, increase the frequency of purchases, or decrease returns and cancellations. Or potentially change one of dozens of other tactics which will change the dynamics of the numbers.

 

You see, it’s the numbers that stir the thought process for every marketing decision you make.

 

Marketing mathematics needn’t be a mystery. Perhaps the most difficult challenge is collecting data and making it meaningful and actionable. Once you overcome that hurdle, and understand the immense power the math provides you in making smart marketing decisions, you may find it becomes addictive.

 

Average Customer Value

Knowing how much an average customer is worth from their first purchase is a good starting point. While an obvious question, the key word here is average. If you are selling one product at one price to every customer, the answer is a no-brainer. But companies prosper because of a variety of products and a variety of offers. An average customer may vary depending on the offer (discounted price compared to those who paid full price). An average customer could purchase from several product lines which increases their value. An average customer, in the catalog arena, will be the average order size.

 

The most important purchase, as seasoned direct marketers know, isn’t the first purchase. It’s future purchases. Another critical number to know is the retention percentage rate and average order from future purchases. Not necessarily the response rate from your next contact. Since the next purchase may not occur during the next contact, it is important to evaluate over an established period of time (a full year, for example), the number of times you contacted each first time buyer, the number of first time buyers who purchased from you again, how frequently, in what dollar amount, and within what period of time.

 

Importantly, you should also know how much time elapses between the first and second purchase and each purchase thereafter. Knowing this information may lead you to conclude that if you can make the second purchase occur faster with a special offer, the overall value of the customer could improve.

 

You may already realize you should be making these calculations, but your computer system is unable to track this detail. If this is the case, and it is clear your company is not going to invest in a new computer system, then take a flight of customers, for example 1,000, and track their sales activity manually. Yes, manually. Better: Go back one year and randomly select 1,000 customers and retrace their buying habits. It may not take as long as you think, and you will at least have information you can extrapolate for future planning. (Note: Those 1,000 customers need to be first time buyers, not 1,000 who are still customers today.)

 

Determining a Customer’s Long-Term Value

One of the strengths of large companies is the ability to offer several product lines to their customers. That strength, however, can also be a curse for the individual trying to measure the long term value of a customer. To properly determine a customer’s long term value, sales from related products, including those from different divisions or product groups in the company, should be calculated. In some organizations, this is a hornet’s nest. Managers from one product group in a company don’t usually fork over a part of a marketing budget or sales to another group. While evaluating long term value doesn’t necessarily mean forking over sales to another product group, there can be that perception.

 

Four Key Steps For Measurement

Do you know your required response levels, by individual media and media source, to meet your profit objectives? Do you evaluate response based on the first purchase or long time value?

 

The best way to determine these factors is by “backing-in” to the numbers. It takes time and research, but it is the best way to know what results you must have to either break-even or make your profit objectives. Here are four key steps:

1. Research long term sales value as discussed in the paragraphs previously. You should account for returns or cancellations in this equation so you know net sales.
   
2. Calculate every imaginable fixed and variable cost associated with selling your product. This should include cost of goods sold, in- bound 800 number costs, business reply mail postage, fulfillment, premiums, bad debt, returns processing, commissions and overhead (assuming you want to continue receiving a paycheck and have an office from which to conduct business). Now, subtract costs from your sales value. This is your contribution to profit and marketing cost.
   
3. Establish your profit objective. If, for example, it is 20% of net sales, then subtract that number from your contribution.
   
4. The number remaining is your allowable marketing cost (or cost to acquire a customer). With your allowable marketing cost and your media cost per thousand, divide the allowable marketing cost into your cost per thousand and you’ll find out how many orders per thousand (which you can translate into a response percentage) you’ll need to meet your objectives.

 

You don’t like the allowable marketing cost and response percentage you see? Then go back and refine the numbers. Are you padding your costs too much? Is your profit percentage realistic? Only after these numbers are tight (understanding that some of the numbers may be your best assumption), will you know how your marketing efforts have to perform.

 

All of these numbers can be put on a spreadsheet which you can manipulate on a personal computer. Usually, your models using a spreadsheet program are best if customized for your particular operation. Once you’ve set up your program, you can see how easy it is to make new assumptions and see the profiles or required results by simply changing one number. Since the computer automatically recalculates your numbers, it’s math made easy. You’ll evaluate your creative, offers, and other elements in a new light when you know exactly what those elements have to produce in response and sales.