Direct Mail:
Formula for Success


by Tom Egelhoff

Just in case you didn't know, more money is spent on direct mail advertising than all other forms of advertising combined. Why? Because, when it's done correctly, it works.

How do you do it correctly, you ask? For direct mail to be effective, three things have to happen.

First, you need a good list to mail to. The mail must go to the people most likely to want your product or service. I probably wouldn't put McDonalds® coupons in a Weight Watchers mailing.

Second, there must be an offer that your customers will want to respond to. As one of my tips points out, "Buy One, Get One Free", works better than 50% Off. Also fear of loss is more powerful than expectation of gain. "Limited Time Offer", "Respond Now" or "Don't miss Out On Big Savings".

Third, you must take advantage of the postal rates the USPS (United States Postal Service) offers. You can dramatically cut mailing costs by designing your mailing piece to fit specific mailing regulations. Always check with the post office before designing any mailing piece. Also, don't assume your marketing or advertising agency knows the regulations. Most don't.

So, you may be considering using direct mail to promote your business. The question usually is, "Where do I start?" Let's start by knowing exactly what you want your mailing to accomplish.




I Want My Direct Mail To Produce A Certain Amount Of Revenue

We all want our adverting to produce income but at times you may want to achieve a specific amount of income.

If I was a farmer and wanted to harvest 100 bushels per acre, there is a minimum number of seeds I have to plant to have a chance of accomplishing this. I know not every seed I plant is going to germinate and grow.

Direct mail is no different. There are a certain number of mailing pieces that have to be sent to realize the revenue you want. In order for this formula to work, three things are needed.

First, the amount of revenue you want your mailing to achieve.

Second, your closing ratio. 100 customers see the product, 50 buy it, your closing ratio is 50%.

Third, you will need to estimate the response rate. Most successful direct mailing produce a 1% - 2% response. That's successful? 98% of the people don't respond to the mailing? Trust me, if you get 2% or better with your mailings and your closing ratio is 50%, you'll make a good living.

Here is your formula for computing number of direct mail pieces needed to produce a specific revenue amount.

To Achieve A Revenue Goal of $10,000 if the average sale is $50.00

Average sale = $50.00
x close ratio = 50%
x response rate = 1%
divided into Revenue Goal ($10,000)
= Number of Direct Mail Pieces Needed

Would be:

$50.00 x 50% x 1% = 0.25
divided into 10,000 = 40,000 pieces

Let's suppose you can improve your response rate just 2% with a better offer. If you can, you only need to mail 13,333 pieces.

If your mailing was a postcard at .13¢ per card you save $3,466.00 in postage to achieve the same $10,000 in revenue. That's the way to do direct mail right.

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I Want To Make A Specific Profit Amount With Direct Mail

Most of us are in business to make a profit. In most cases you think your profit is determined by the marketplace. With direct mail you can generate profit and it pays for itself.

In this formula, you need to add your profit margin to the mix. For this example we'll use a profit margin of 25%.

Let's adjust your above formula to the following:

To Achieve A Profit Goal of $10,000 if the average sale is $50.00

Average sale = $50.00
x profit margin = 25%
x close ratio = 50%
x response rate = 1%
divided into Profit Goal ($10,000)
= Number of Direct Mail Pieces Needed

Would be:

$50.00 x 25% x 50% x 1% = 0.0625
divided into 10,000 = 160,000 pieces

Let's again suppose you can improve your response rate just 2% with a better offer. If you can, you only need to mail 53,333 pieces.

If your mailing was a postcard at .21¢ postage per card you save $21,600.07.00 in postage to achieve the same $10,000 in profit if you can improve your response rate.

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How Can I Determine The Gross And Net Profit From A Direct Mailing?

The success of a direct mail campaign is very simple to determine. If it costs more than it produced, it's a failure. If the opposite is true it's a success.

Advertising should never cost a company money. It should always produce revenue.

Here are the formulas to compute gross and net profit on a mailing.

To Compute Gross Profit of Direct Mail Campaign

Average sale = $50.00
x close ratio = 50%
x profit margin = 25%
x number of mail pieces = 10,000
x response rate = 1%
= Gross Profit

Would be: $50.00 x 50% x 25% x 10,000 x 1% = $625.00 Gross Profit

To Compute Net Profit of Direct Mail Campaign

number of mailing pieces = 10,000
x average sale = $50.00
x close ratio = 50%
x response rate = 1%
x profit margin = 25%
minus cost of direct mail campaign
(I'll use $1000.00 - I did my own design and copying)
= Net Profit

Would be: 10,000 x 50 x 50% x 1% x 25% -$1,000 = $-375.00 Net Profit

What happened? This mailing campaign was a failure. It lost $375.00 more than it produced.

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The Last Word On Direct Mail Formulas

As you can see, losing money in direct mail advertising is possible and perhaps even probable if you don't follow the rules. The first two formulas may demonstrate that your business is not ready for direct mail. If it is, make sure you have a current mailing list and a good offer.

Once again, when it comes to direct mail, small towns have a definite advantage over large cities. First, the list is usually smaller.

For example, in a town of 25,000 your customer base may only be 10% (2,500 people).

Mailing postcards to 2,500 potential customers, even at full first class postage of.21¢, is a little more than $500.00.

If you mail to this group 4 times a year, you are looking at postage costs of $166.66 per month. This should be affordable for most small businesses. If addressed properly the post office will charge considerably less.

Direct mail is an excellent way to keep your name in front of customers. Use it consistently to keep in contact with your customers.

Each mailing may not produce immediate revenue but over the long haul, it will produce the most important product your business needs...customers.


Return to the "Direct Mail Advertising Checklist" Article


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