How to Calculate the Risks and Rewards of a Direct Mail Campaign

If you're looking for a simplistic method to calculate the risks and rewards of a direct mail campaign, follow these steps to arrive at pre-mailing analysis and projections. The same formulas can be applied whether you're in the business-to-business arena, business-to-consumer, or if you're a fundraiser. 

By the time you've finished this exercise, you'll be able to:

- Project response rates needed to break-even

Project the number of new customers needed to break even 

Project response rates needed to generate income Project the number of new customers needed to generate income 

Let's begin by assuming you're a business-to-business marketer and you have a product or service to offer. Your goals are simple - to acquire new leads for your sales force and to generate $500,000 income.

Your product prices and margins will vary from my example, but all you have to do is swap your numbers with mine to arrive at a solution that is accurate for you.

Our example will use the following sales information 

Average first-time sale of your product is $1,000

Cost to produce your product is $600, therefore your net income on each sale is $400 (40 percent of the total income.) 

Your history with newly acquired customers has shown that they remain as buyers for 3-5 purchases over a 2-year period, thereby making the total income of a newly acquired customer somewhere between $3,000 - $5,000. The net income then falls between 1,200 -- 2,000 per newly acquired customer.

Since your product falls into a high-value category, your typical sales approach has been to offer value and to instill confidence in your product. To insure that your direct mail gets noticed, you want a campaign that stands out among the mediocre. We're also assuming that you've done your homework on list acquisition. If that's true, it's pretty easy to determine that the creative approach is the remaining area that will propel your campaign and get it noticed.

For our example, we're going to mail the same 10,000 names and addresses three times. The repetition helps recipients notice your mailer and familiarizes them with your presence in the market.

Step 1 - Calculate the costs of the mailing 
- Expense categories for your mailer: 
- Creative - design and writing - $7,500 
- List - $1,750
- Printing -- 30,000 each:
9 x 12 outer envelope
Large full color, 6-panel brochure sized at 8-1/2 x 11" when folded Letterhead, Reply card, $15,000 

- Letter shop/Mailing -- merge list with personalized layered letter, insert, seal and meter - $9,000l

- Postage -- Standard rate @. 32 each, total $9,600

Total cost for the 3 mailings of 10,000 pieces = $42,850

Step 2 - Calculate your income
We've stated above that a newly acquired customer will make a first-time purchase of your product at $1,000 and that newly acquired customers usually buy up to 5 times within a 2-year period. To be conservative, we'll assume 3 total purchases, totaling $3,000.

Your cost to produce the $3,000 product is $1,800 ($600 for each $1,000 purchase) Net income per new customer acquired is $3,000 - $1,800 = $1,200

Step 3 - Project the number of new customers needed to break even
Divide the Total cost of the mailing ($42,850) by the Net Income ($1,200) = 35.7

With our example you need 35.7 new customers to break even over a 2-year period. The breakeven covers the cost of the product and all costs related to the mailing. Here are a few calculations that prove the numbers to be accurate:

Total Income 35.7 new customers buy $3,000 worth of your product 35.7 x $3,000 = $107,125

Net Income Calculated as 40 percent of Total Income $107,100 x 40 percent = $42,850

The cost of the mailing is equal to the net income, therefore at 35.7 new customers, you break even, but who wants to break even? Especially if it takes 2 years!

Step 4 - Project the number of new customers needed to generate 500,000 incomes
This is the easy part. Once you've acquired 35.7 customers, you've covered your expenses. Looking forward, for each additional customer gained, using our formula and your sales history, your income will be $3,000.

To reach the $500,000 goal, you'll need a total of 166 new customers, calculated as follows: $500,000 divided by $3,000 = 166.6

Response Rates Of course everyone who responds to your mailing won't become a customer. If you can turn half of the responders of your mailing into buyers, you'll need 333 responses. That calculates to a 3.33 percent response rate: 333 (responders) divided by 10,000 (total number of people mailed) = 3.33 percent

For this example I used conservative numbers. I also used somewhat high expenses for the development, printing and mailing costs. Of course your actual numbers will be different, but it's relatively easy to swap your actual costs, product prices with mine to get more accurate results.