Everything You Need to Know About Direct Response Success You Learned in Elementary School (Almost)

If I've proved anything in my three-plus decades in direct response marketing, it's this:

It ain't brain surgery.

In fact, if a high school dropout like me can help companies make millions – and make millions for myself in the process – I figure just about anybody can do it!

It all pretty much boils down to using the "3 Rs" – stuff you learned well before you graduated sixth grade:

  • Readin' … Read the great books on direct marketing and copywriting I've recommended in these pages so many times … read THE TOTAL PACKAGE, Bencivenga Bullets and other great e-zines offered free by top copywriters … learn the nuts and bolts – how direct response marketing works … how persuasion works … and study what your competitors are doing with their direct mail and Internet promotions right now.
  • Ritin' … Whether you're a business owner or marketing pro who writes your own ads or even if you hire and supervise copywriters who do it for you – and especially if you're a copywriter yourself – it pays to write every single day. Practice, practice, PRACTICE!
  • 'Rithmatic … Yep, you heard right. To make it in this industry, you gotta know your numbers. Nothing fancy, mind you – just a little addition, subtraction, multiplication and division will do the trick.

And since we've already given you a ton of valuable information on the "Readin'" and "Ritin'" part, I figure it's about time to spend some time looking at the Third "R:" Yep, the dreaded 'Rithmatic – the numbers that make this whole direct response marketing thing work.

YUK! Right? S' ok: I hate math too. But just take a deep breath – I'll try to make this as painless as possible.

For our purposes, we'll focus on a direct mail promotion sent to 250,000 prospects. Our goal is to turn as many of those prospects as possible into new customers. You guessed it: This is what direct response marketers call a "Customer Acquisition Mailing."

Our promotion offers a standard version of the product for $99 and the deluxe version for $179. And for our purposes, it requires that the customer pay cash – either by charging his credit card or by sending us a check – also known as a "Hard Offer."

Here are some of the numbers direct response marketers need to know … how each is used … and what they mean to you.

1. Mail Cost: This is simply the total cost of sending a promotion to prospects. It includes the cost of paper, printing, mail list rental, postage and lettershopping (inserting, collating, addressing, affixing postage, sorting mail to US Postal Service requirements and delivering it to the Post Office).

Postage, mail list rental and lettershop don't offer a lot of room for quibbling – although the U.S. Post Office will be happy to show you how you can get postage discounts by presorting … and of course, you can always arrange swaps with other list owners and discounts from list brokers to get your mail list costs down.

The big variable of course, is printing. Going with a big, gaudy, all-singing, all-dancing 24-page, full color, tabloid-sized self-mailer (the biggest, fattest, funnest, happiest floozy in the whole direct response biker bar) will almost guarantee you'll get your prospects' attention. It will also send your printing costs soaring.

And while settling for a stark two-color #10 carrier envelope containing an 8-page sales letter and order form will save you a bundle, you're just likely to get lost in the mailbox, sending your response rates crashing.

So for our purposes, let's take the middle path – with a sensible, 24-page standard-size (8 ½ x 11) self-mailer – and say this mailing to 250,000 prospects will cost us $125,000.

(NOTE: When calculating mail costs, marketers almost never include the cost of copywriters' advances and graphic design, as these costs will be spread out over many mailings.)

2. Mail Quantity (QTY): This is simply the number of copies of your sales promotion being mailed. If you've been paying attention, you already know we're talking about a mailing being sent to 250,000 prospects.

3. Cost Per Thousand (CPM): To figure your CPM on a mailing, just divide your Total Mail Cost by Mail Quantity and multiply times 1,000:

Total Mail Cost:

$125,000

Divided by Mail Quantity:

250,000

Equals a Cost per Piece Mailed of:

$0.50

Times

1,000

Equals a "Cost Per Thousand" of:

$500

If a marketer is mailing a promotion that costs him $500 per thousand pieces mailed, he just says his mail cost is "$500/M."

Mostly, marketers just use this number to gauge the cost of a particular promotion package/list combination against others.

Let's say you test two promotions. The first is the dirt-cheap #10 carrier envelope with an 8-page sales letter inside, and costs only $450/M to mail.

The second is a big, gaudy, full-color tabloid-sized 24-page self-mailer that costs $560/M (24.4% more) to send to prospects.

If the cheaper package generates a better Return on Investment (ROI) than the more expensive one, for example, a smart marketer might say, "Hmmm … I wonder what would happen if we put the stronger headline and sales message into the cheaper package format?"

Most of the packages I create cost my clients between $500 and $560 per thousand pieces they mail – but a cheap postcard sent to cheap names could cost as little as $320 per thousand.

4. Orders: This is just the number of prospects who said "YES!" to your offer and paid for a product. Pretty straightforward stuff, but vital to know in order to generate other numbers used to manage direct mail campaigns.

In this case, we'll say our promotion pulled 2,500 orders.

5. Response Rate: Another easy one – Response Rate is nothing more than Orders divided by Mail Quantity:

Orders:

Divided by Mail Quantity:

Equals a Response Rate of:

2,500

250,000

.01 or 1%

Comparing response rates is a great way to identify opportunities for beating a strong control and for boosting response and mailing size (and therefore royalties) in future promotions.

Let's say a new promotion you're testing for the first time produces a slightly lower ROI than their control. Many mailers would simply chalk it up to a failed test and move on.

Not me! I ask to see the Response Rate and Average Sale (see below) my mailing produced.

If the Response Rate is lower than the control, I figure that my headline and deck copy aren't doing a good enough job of grabbing the prospect's attention and converting that attention to readership. So, I go to work on the headline and intro copy.

If the Average Sale is lower than the control, I go to work on strengthening my two-year offer (if it's a newsletter promotion) or the larger purchase option if it's a supplement or other product.

And of course, if both are lower than the control, I work on both. You'd be surprised how many times you can turn losers into winners just by taking another swing at them!

6. Gross Revenues (GR): This is simply the total monetary value of the products your promotion sells. For our purposes, we're going to say we generated $412,500 in total sales. Our Gross Revenues are $412,500.

Again – we don't use this number much by itself. Instead, it is used to derive the more crucial numbers below that directly affect our mailing plans.

7. Average Sale (AS or AUS): Remember how I said that our promotion offers two choices? The prospect can either buy the standard version of our product for $99 or the deluxe version for $179.

So some customers will only spend $99 for the "Standard" version of our product, while others will spend $179 to get the "Deluxe" version. (Or, if it's a subscription to a newsletter, some will pay $99 for one year and others will pay $179 for two years.)

To calculate Average Sale, just divide Gross Revenues by Total Orders:

Gross Revenues:

Divided

Equals an Average Sale of:

$412,500

2,500

$165

This is an incredibly important number. For reasons we already explored, it's crucial to know how good a job your promotion did in bumping prospects up to the higher order. And the best way to do this is to compare the Average Sale each promotion generates.

8. Fulfillment Cost (FC): Now, you spent $125,000 on your mailing and got $412,500 back – a profit of $287,500, right?

Whoa – not so fast there, Sparky! There are costs associated with accepting all those orders.

For starters, there's a cost of, say, $5.00 per order for return postage, credit card processing fees and inbound telemarketing (the 800 number service that takes orders for you).

And don't forget: We have to actually fulfill those 2,500 orders. That's going to cost money, too.

Now, let's say it costs you $20 to manufacture and ship the $99 standard model and $30 for the deluxe $179 model.

And since you loaded up the offer for your Deluxe model, 2,062 of your 2,500 buyers (about 82.5%) went for it while only 438 (17.5%) paid $99 for the Standard model.

So …

The Number of Deluxe Buyers:

2,062

Times Fulfillment cost per Deluxe Order:

$30

Equals Fulfillment Cost for Deluxe Orders:

$61,860

The Number of Standard Buyers:

438

Times Fulfillment cost Per Standard Order:

$20

Equals Fulfillment Cost for Standard Orders:

$8,670

Then you just add it all up …

Fulfillment Cost for Deluxe Orders:

$61,860

Plus Fulfillment Cost for Standard Orders:

$8,670

Plus Order-Taking Costs:

$7,500

Equals a Total Fulfillment Cost of:

$78,030

Of course, this is just an example – and depending on your product and offer, you may have other costs associated with fulfilling your orders. If so, you add them in, too.

Plus, some direct marketers choose to omit certain costs from this calculation. In the newsletter publishing industry, for example, some publishers don't include the cost of publishing and mailing monthly issues to subscribers. They figure they'll get enough early renewals to more than cover that.

And really aggressive, growth-oriented publishers don't even include the cost of the free gifts (usually printed reports) they send to new subscribers – pretty much for the same reason.

By ignoring costs that are quickly offset in each new subscriber's first 30, 60 or 90 days onboard, newsletter publishers show higher Net ROIs (see below) on their best lists and are able to mail more names, therefore growing their subscriber files faster.

9. Fulfillment Cost Per Order (FC/O): Simple – this is just your Total Fulfillment Cost divided by Total Orders …

Total Fulfillment Cost:

Divided by Total Orders:

Equals Fulfillment Cost Per Order of:

$78,030

2,500

$31.21

Here's another opportunity to turn a losing promotion into a winner – or a winner into a bigger winner.

See, for many mailers, all that really matters is the Net Return on Investment (we're getting there). And there are only four ways to increase Net ROI:

  1. Cut mailing costs
  2. Boost response rate
  3. Boost average sale
  4. Cut fulfillment costs

We've pretty much covered "A," "B," and "C" above. But cutting – not just ignoring, but actually cutting – fulfillment costs can be an equally powerful tool.

Combining or eliminating premiums can often cut costs without affecting response rates, for example. A couple of months ago, I created a test panel for one of my controls in which we offered two fewer free gifts with each order … cut Fulfillment Costs Per Order by nearly $20 … and response, average sale and Net ROI all INCREASED!

10. Net Revenue (NR): NOW it's time to start counting your profits – by subtracting your Mail Cost and Fulfillment Cost from Gross Revenues:

Gross Revenues:

Minus Mail Cost:

Minus Fulfillment Cost:

Equals Net Revenue of:

$412,500

$125,000

$78,030

$209,470

This of course, is a very important number. If it's negative, you have a loser on your hands. Positive, and you're generating new customers at a profit.

And as we're about to see, if you're making too much or losing too much on your new customer acquisition mailings, you're messing up.

11. Net Revenue Per Order (NR/O): Just divide your Net Revenue by Total Orders:

Net Revenue:

Divided by Total Orders:

Equals Net Revenue Per Order of:

$209,470

2,500

$83.79

Frankly, I don't use this number much. But it's nice to know, I guess.

12. Gross Return on Investment (GROI): If you want to know how well your mailing did overall – without coloring the number with fulfillment costs – you want to know your Gross Return on Investment.

To find it, just divide Gross Revenues by Total Mailing Cost:

Gross Revenues:

Divided by Total Mailing Cost:

Equals Gross Return on Investment:

$412,500

$125,000

330%

13. Net Return on Investment (NROI): Divide Net Revenues by Total Mailing Cost:

Net Revenues:

Divided by Total Mailing Cost:

Equals Net Return on Investment:

$209,470

$125,000

168%

This is the primary number I use when gauging the effectiveness of my promotion and comparing it to other packages mailed against mine and to other controls my client has had.

It's also the key to optimum growth for business owners and marketing execs. When you're mailing every list you can get to come close to break-even and producing a Net Return on Investment of 100%, you're generating max numbers of new customers for free. You're getting all your money back plus new customers.

When Net ROI is above 100%, you're leaving customers on the table – a crime that will come back to bite you on the keester in coming years.

Why? Because every customer you could have gotten but didn't get is worth hundreds, perhaps thousands of dollars in additional sales each year.

On the other hand, when Net ROI is under 100%, you either have to 1) Boost response, 2) Boost average sale, 3) Cut mail costs, 4) Cut your fulfillment costs to the bone, 5) Eliminate marginal lists from your mail plan (and shrink mailing size) – or all of the above.

14. Cost Per Order (C/O): Also known as "New Customer Acquisition Cost" when used in mailings to non-customers, this number wraps everything up.

Since we made Net Revenues of $209,407, our "Mailing Loss" in the equation below is expressed as a negative number. So is our Cost Per Order:

Mailing Loss:

Divided by New Customers Generated:

Equals Cost/Order:

-$209,407

2,500

-$83.76

Again – ideally, your cost per order for new customer acquisition mailings (mailings sent to non-customers) should be $0. A negative cost per order (or a Net ROI) over 100% means you're simply not mailing enough names.

Adding less productive mailing lists to the mix will bring your Cost Per Order up to $0 and your Net ROI down to 100%.

Other Numbers You Need to Know

15. Creative Index: Creative indexing ranks the relative selling power of the direct mail packages you test and use.

Your Creative Index is derived by dividing the Net ROI that your new test promotion generates by the Net ROI being generated by your control – to the same lists in the same mailing.

Or …

New test promo Net ROI:

Divided by control package Net ROI:

Equals a test promo Creative Index of:

200%

100%

2 or 200%

You can also use creative indexing to gauge how quickly response to your control package is declining relative to every other control you've ever had.

Or if you want to get really fancy, you can average the Net ROI of all new packages produced for any given time – the last six or 12 months, for example, or even throughout your product's history or even your entire company history.

Using an index number to compare the selling power of each new package with your historical norms can give you a clearer perspective on just how strong your new control really is, and in some cases, give you a clearer picture of your chances for improvement.

16. List Index: Smart marketers know how every list they mail typically performs when compared to every other list they've tested – and they use something called "List Indexing" to manage this information.

Each mailer I work with does this slightly differently – here's how one of my favorite clients does it.

First, the client identified the 20 mailing lists that have worked best for him over the past five years, and then figured out the Gross ROI this group of lists has produced for him on his average mailing.

Then, he figured out the average Gross ROI every other list he's mailed has produced for him, and used these numbers to create an index number for every list.

Example:

Gross ROI for "A" Lists on an average mailing: 200%

Gross ROI for List "X" on an average mailing: 150%
Mail List "X" Index Number: .875 or 87.5%

Gross ROI for List "Y" on an average mailing: 100%
Mail List "Y" Index Number: .5 or 50%

Gross ROI for List "Z" on an average mailing: 50%
Mail List "Z" Index Number: .25 or 25%

Using these numbers, my client can now mail new test promotions only to his "A" lists, thus cutting his risk of loss on new sales copy.

If his "A" lists pull at their historical average – 200% Gross ROI – he knows that the same promotion mailed to …

 … Mail List "X" is likely to generate a Gross ROI of about 87.5% of that: About 175%.

 … Mail List "Y" is likely to generate a Gross ROI of about 50% of that: About 100%.

 … Mail List "Z" is likely to generate a Gross ROI of about 25% of that: About 50%.

In short, list indexing allows you to forecast how lists you haven't tested with a particular promotion package will perform … enlarge the size of your rollouts more quickly … mail to more prospects per year … generate more customers per year … and pocket greater profits each year.

17. Doubling Date: While list indexing can help you do bigger mailings, knowing your Doubling Date can help you do those bigger mailings more times each year.

A doubling date is simply the number of days after you receive your first response that you will have received 50% of the money you can expect the mailing to generate.

By doubling the numbers you've achieved by your doubling date, you can accurately predict what the final response will be for each creative test panel and mail list test panel in your mailing – WEEKS before you'll have the actual, final numbers.

This allows you to begin planning each subsequent mailing sooner, thus enabling you to execute more mailings per year … bring in more new customers … etc.

To calculate a doubling date, I use a spreadsheet like this (the column with " … " is where Day 4-Day 59 would go):

Here's how I use this sheet …

FIRST: To the right of the line labeled "Gross Revenue" in the first column, I list the amount of money that came in each day from Day 1 through Day 60.

SECOND: On the next line, marked "Cumulative Revenue," I add that day's revenue to the cumulative revenue from the day before to give me a new cumulative revenue number.

THIRD: On the next line, labeled "% of Total," I divide each day's cumulative revenue by the total revenue the promotion had generated by Day 60 – this gives me the percentage of total revenues that had been collected as of that day.

FOURTH: I add the same information for every mailing the client has done in the last 12 months.

FIFTH: On the last line, I simply add up all the "% of Total" entries above and divide by the number of mailings listed. This gives me the client's average "% of Total" number for each day in his promotion cycle.

SIXTH: I simply look across the bottom line until I find the day when "% of Total" is closest to 50%. That day will be our doubling date until this sheet is updated six months to a year from now.

IMPORTANT: 3 things …

Thing One: As you prepare this spreadsheet, pay attention to how your doubling dates change at different times of the year – particularly during major holidays like Christmas/New Years, during tax time and in the height of the vacation season in July.

It's a good idea to average these mailings separately, as doubling dates will be farther out when the mail is slow or when prospects are slow to read your promotion.

Thing Two: If you use a variety of formats, be sure to average your mailings again by format. See, some types of mailers have greater perceived value than others and prospects hang onto them longer.

While plain vanilla #10 packages are often round-filed immediately, self-mailers that look like magazines (magalogs) often get tossed onto a coffee table or next to the privy for later reference. When I first began using magalogs in the 1980s, for example, Doubling Dates jumped 33% – from an average of 14 days to 21 days!

So after you've established an overall Doubling Date, it's a good idea to group your promotions by format type and compare how the Doubling Dates vary.

Thing Three: If a major news event broke while one or more of your promotions was in the mail, it may have pushed your Doubling Date w-a-y out – or even killed response altogether.

When folks are obsessed with a current event – the OJ Simpson trial, 9/11, or the build-up and actual fighting of the Iraq War, for example, they're watching TV and NOT reading their mail.

So take that into consideration, too. What to do about it? In these days, when sensational news stories seem to be breaking almost weekly, probably not much. Just keep it in mind as you review your Doubling Dates.

18. Customer Lifetime Value: This is arguably the single most important number in your company. It tells you how much each new customer is worth to you – and how much you can comfortably spend to generate one.

See, Smart Companies don't do promotions to non-customers to make sales. They do them to make customers. And then they work their customer file (where you get by far the highest Response Rates and Average Sale at the lowest Cost Per Sale) like crazy.

To determine average customer value, you must first define what an "active" customer is. Usually, I begin by saying, "An active customer is someone who has made a purchase in the last 12 months."

Depending upon the type of product you sell – onesies and twosies … or subscription/membership offers … or continuity/negative option offers … or combinations of all of the above – you may want to define "active" in your own way.

Once you know what an active customer is, it's time to look at the history of every customer on your file and determine how long each one stayed "active." This is probably going to be too complex a task to do yourself; my guess is you'll have to get the IT guys involved.

Typically, they'll tell you that your average customer stayed active for some number of years after his or her first purchase. In my industry, the number usually turns out to be somewhere in the vicinity of six or seven years.

Next, you need to determine how much Net Revenue your average active customer generates for you during his lifetime. Again, this is a job for the IT guys, and the resulting number will be your Customer Lifetime Value.

You can also look at how much Net Revenue the average customer generates in each year of his life. This is a crucial benchmark that lets you gauge how good a job you're doing at increasing Customer Lifetime Value during your customers' lifetime.

And you especially need to know how much your average new customer brings you in his or her first 30, 60 and 90 days on your file. This number is your "New To File Net Revenues." It's important because if you want to put the pedal to the metal – trigger maximum growth – you may want to "borrow" part of this number to subsidize your new customer acquisition mailings.

Wrinkles? You BET There Are Wrinkles!

Entire books have been written on the 'Rithmatic of Direct Response so it would be foolish to attempt to put it all in a short article like this one.

For example, if you're doing soft offers ("bill me" promotions in which you ship your product prior to receiving payment), "Pay-Up Rates" are crucial.

The Gross and Net Revenue as well as the Gross and Net ROI generated by the promotion are driven to a large extent by the combination of the initial response rate PLUS the number of customers who ultimately pay their bills.

Pay-Up Rates can be treacherous because each promotion/list combination you mail may have markedly different pay-ups.

Then there are Lead Production/Multi-Step Campaigns. The marketer's first contact with a prospect is designed to generate an inquiry or lead. Leads are then followed up by mail, phone or in person. Again – a subject demanding its own book, let alone a separate issue.

And of course, there are hundreds, possibly thousands of little wrinkles to how you use the numbers I've talked about in this issue.

But frankly, my accounting aptitude is toast. I'm going to go do something creative – maybe muss Wendy's hair a little bit.

This article was republished with permission from Clayton Makepeace

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Published: December 10, 2014

1 Response to “Everything You Need to Know About Direct Response Success You Learned in Elementary School (Almost)”

  1. I know this is off topic but I'm looking into starting my own blog and was wondering what all is needed to get setup? I'm assuming having a blog like your woould cost pretty penny? I'm not very web savvy so I'm not 1000% sure. Any tips or advice would be greatly appreciated. Kudos

    You can check it out here: www dot cwholesale dot com

    Guest (Jason)January 17, 2017 at 1:17 pm


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