The mathematics of direct marketing primarily rests on three key elements:

Sales
Marketing Costs
Now there is no clear-cut balance for these elements as any direct marketing activity needs to be tailored and fine tuned according to each business. This is why I will never state off-the-cuff a direct marketing response rate for any business or industry type as there are significant variables involved such as the product itself, the demand for it, market preference and the nature of the offer.

Another point to highlight is that the mathematics used is underpinned by the belief that the future will be similar to the past. Hence if any variable within the equation changes significantly (e.g. magazine circulation significantly declines), then you have to expect a different response rate.

So to dive straight into it, I’ve listed below a few essential calculations which every small business should use:

Calculating the Allowable Using Your DM Budget

This equation lets you calculate the amount of money you need in order to make one sale. This is really important to know!

Revenue Selling Price: \$1000

Minus Costs Production: \$500

Postage & Handling: \$50

The Breakeven allowance is \$300 (the money you are allowed to spend to acquire a customer).

Using the Allowable to calculate your DM budget

So using our allowable recruitment spend per customer x target No. of Sales = \$200 x 100

Marketing Budget = \$20,000

What happens if you don’t make the sales required?

It is essential to test the market first using a small quantity before rolling out the entire campaign. Typically your allowable is based on what resources are required to acquire a customer already, plus I would expect some form of marketing research carried out in order to understand the size of your potential market. It is also important to include contingencies within your marketing activities if you don’t make the required sales. I always save 10% of my budget if something goes wrong. Or better still, if a potential list I’m targeting returns a huge ROI, then I have a bit left over to chase the money and market these top prospects again.

Measuring Costs, Responses and Sales

Here are a few very simple, yet essential equations to help measure costs, response and sales:

Cost per Unit:

Total cost / Total Quantity = Unit Cost

e.g. \$20,000 / 4,000 = \$5

Response Rate:

(Total Responses / Total Mailed) x 100% = % Response

e.g. (200 / 1,000) x 100% = 20%

This equation is exactly the same as measuring the Conversion Rate which would be Converted Leads / Total Leads Contacted

Cost per Sale:

Total Cost / Total Sales = Cost per Sale

e.g. 20,000 / 500 = \$40

Example: Let’s say you were a travel insurance broker wanting to advertise in the local newspaper to sell premium travel insurance for \$500 per person. I’ve listed some assumed sales and marketing costs to acquire a customer:

Newspaper Circulation: 150,000

Promotional Cost: \$5 per lead (e.g. Call centre costs)

Revenue per sale: \$500

Total Marketing Cost for 100 leads is therefore: \$8,300

The Cost per Inquiry or Sale will vary depending on the response rate, which you won’t know until you advertise. But the main focus on advertising is to achieve a required level of profitability in order to justify the expense. I like to refer to it as measuring the Profit Index. (This is exactly the same as using your allowable to calculate the number of sales you require in order to justify any marketing spend).

Profit Index (%) = Total Marketing Cost / Total Revenue

Profit Index (%) = 8,300 / 10,500

In this instance the Travel Insurance company requires 20% profit from print advertising. If my profit Index falls below 20%, then the advertising is deemed unprofitable. I’m so harsh!

Hence, 21 travel insurance premiums need to be sold to meet a profit index of 21%.

In other words, the allowable DM Budget would be set at \$8,300 for advertising in the Local Newspaper.

There are a couple of examples which the above calculations can be applied to in order to gain some further perspective for your next lead generation campaign.

1. Generally the more time you have to qualify an enquiry, the more it costs to generate. For example, if your telesales representative took 15 minutes to convert a prospect, while others may take only 5 minutes, then this will drive your overall costs to acquire a customer, and must be factored into your overheads or marketing costs.

2. Lead generation lists (Prospect Lists) can also support repeat conversion contacts, but you’ll always get a reduced response rate with each effort. For example, if you mailed 1,000 prospects, it may generate 250 leads. The second time you mail the list (minus the 250 leads you generated the first time round), you might get another 100 leads. This means you have generated a total of 350 leads from the prospect list. But we wary that if you use the list too many times then it will get to the point of being unprofitable.

As a general rule of thumb, you should change a portion of the DM piece the next time you mail (e.g. The offer, or a larger discount), as customers may respond to varying aspects of your direct marketing campaign, which is why it is always important to test.

You may hear direct marketing consultants talking about list building, and how much of their time is dedicated to developing a database of qualified prospects and customers. These lists are in fact a key ingredient which differentiate direct marketing from traditional marketing.

But I will say that typically, a list of present customers will respond much better or at a higher rate to a new product compared to non-qualified, or “cold” prospects.

It is also important to point out that while companies always depreciate their expenses over time such as equipment, machinery and inventory, they almost never capitalise what could be their most important asset, their customer. Therefore, small business owners should view their customers as investments and be able to measure and monitor customer data, and capitalise on it for the future.

Just remember that the maths of direct marketing sets it apart from all other marketing disciplines!

Craig Pethebridge is Director of Bright Owl Marketing. You can visit the website to find more articles on direct marketing.

Contact one of our friendly marketing consultants today to request a FREE, no obligation assessment of your specific direct marketing requirements.

Craig Pethebridge is a results driven marketer who builds value and success through driving end-to end marketing strategies and developing new revenue opportunities across various business and consumer industries. Craig is accredited with the Australian Marketing Institute as a Certified Practicing Marketer (CPM), which is the peak professional benchmark for marketers.

Bright Owl Marketing provide affordable marketing services that boost leads, sales and profits for small businesses. Think of us as your outsourced marketing department, freeing you to concentrate on running your business without worrying about where your next enquiry or sale will come from.
ucatv
aftral
cosmoprof-asia
msn
statta
regionalposts
nbrm
globalhealth5050
boursorama-banque
ethanolproducer
cebnet
youngjump
baker
tesri
abseil
cellagon
flsouthern
infinum
reverb
kul
companionanimalpsychology
parrotsec
nofollow
iso50
airtame
miracle-webtech
plex
sfkoutori
aurahealth
council
microspot
baberuthleague
autoscout24
gotw
anamounto
fact
gdzz
flatcast
creativecommons
the-daily-record
wholelottanothing
opera-lyon
smallchops
simonelectric
xhzsale
onlinewahn
inclusion-europe
tronche
diroofseamers
un-ilibrary
vevida
telphin
fayanbbw
byflash
cantienica
pacouncil
persiantools
trainpetdog
yoyo
bestday
realestateone
playattack
bcl
ecocult
healthyagingpoll
ciw-online
realbrazilianhair
newartdealers
farsiblog
martinique
ocokd
research
s-housing
neimagazine
zena-in
great-site
americanotels
sakhalin
easydus
singita
planetecsca
uni28
icab
freestylesolutions
intl-outdoor
fullgoal
yourfirstfunnelchallenge
ensto
findlocalweather
firt
eurobyte
volkswagen-werbung
wsw-online
szwghl
credomobile
655038
ideawebtreviso
hyperweb
creativetechpark
ukcp
peoriaaz
robomongo
lilith
univ-aix
grenier
rockwerchter
easycars
minpolj
shotspotter
nexd
guomao-hotel
1t
ninjakiwi