Does Direct Mail Work?

May 21, 2008 at 9:16 pm 7 comments

I was at a client’s site today, and one of the questions that was asked of me was, “Does direct mail work, and do you recommend it?” I said an emphatic no… but then I gave an explanation and issued a caveat. Here is my rationale:

Let’s assume that you are like my North Vancouver client and can spend about $1000 on getting one customer (this client figures the lifetime value of each client is about $5000, but over that same lifetime it takes about $4000 to service them). Consequently, if you spend more than this, you lose money on every sale. For every $100 you do not spend in customer acquisition, you have $100 that goes directly into your pocket.

Now his conversion rate was about 1 in 20 leads turn into a paying customer. In other words, $1000/20 =$50 per lead in acquisition costs that he is able to spend without losing money.

Now let’s reverse engineer a direct marketing program. If you have a standard postcard/letter campaign, I have always found that you will at a minimum spend about $1 per piece. This factors in the approximately $0.50 in postage, plus production costs. Of course, I have received some pretty elaborate direct marketing pieces over the years that blow this budget out of the water, but I digress and it is easier on my math if we just keep it at a $1 total.

Most direct mail campaigns have two underlying calls to action: visit this website and take a particular action, or phone this number. In retail, you may have a third option that encourages a person to take a coupon into a store to redeem a particular offer. While many direct marketers have “fish tales” about the campaign that netted a 40-50% response rate, and they frequently cite examples that have 5% response rates, I would bet that if you got a few drinks into them, they would probably admit that if you get a 2% response rate, it is an effective campaign.

So, let’s launch our campaign. You send out 1,000 postcards promoting your business (total cost $1000). Your call to action is to call a phone number. You get 20 phone calls at  a 2% response rate. Now, if you were the customer above, you better hope that every single one of these phone calls resulted in a lead, because given your lead conversion rate, you are going to need all 20 leads to get one sale.

But here is where it gets tricky. For many marketers who are now familiar with web environments and landing pages, a large number of direct marketing campaigns also have to factor in the conversion rate of your website. In the example above, if my call to action was “Visit http://www.mysite.com/special” [which is bad for so many reasons, but that is another post], and I get a 2% conversion rate on my direct marketing campaign, my $1000 spend has just driven 20 people to my website. So what is your website conversion rate. My guess is that you are not going to get all 20 of those website visitors to act. Assuming that once you get them to your site, you get 10% of them to take a further action and complete a form, attend a webinar, or call you, this means that you only get 2 leads into your sales funnel. And given your conversion rates, you will not make money. In fact, for the client above, he would have had to have spent $10,000 to get a single sale that would have netted him $1000… so he would have been down $9k.

Of course, proponents of direct marketing would say things like, “well you’ve got to get better at converting leads into sales” and “you’ve got to get your website converting at a higher rate” and these are all true points. But until you do, stay away from direct marketing.

In fact, before you do any sort of direct campaign (including a purchased email list from a so-called, opt-in list vendor), I would encourage you to run the same calculations. And if you are being solicited by someone selling you such services, an even better approach would be to feed them your conversion numbers and your cost of sale, and let them figure it out. Chances are, you will never hear from them again.

The Caveat

I mentioned in the opening paragraph that I also provided the client with a caveat. I do believe that there is a place for direct marketing as part of an overall brand building exercise to a highly targeted list and you have budget and plans to follow up with an immediate (as in within days) outbound phone campaign. In other words, direct marketing should be about branding, not lead generation. And why would you do this, with all the other low hanging fruit around.

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7 Comments Add your own

  • 1. John Schulte  |  May 22, 2008 at 7:28 am

    With all do respect, I disagree. In your example the direct mail is working. If your client gets 20 calls from a 1,000 mailing, those “are ” leads. If the message your direct mail carried is clear, then these 20 are prime prospects for the sales person to talk to. At this point your direct mail is working.

    If the sales person is not closing the sale on prime prospects, then something else is wrong. i.e. Sale salesperson is not working. The message in the Direct Mail piece was not clear or was exaggerated. Or any number of other things. But make no mistake, in this example, your direct mail did it’s job. The breakdown came after.

    Reply
  • 2. lyotier  |  May 22, 2008 at 5:34 pm

    Hi John,

    Thanks for your thoughts. I guess we have a difference of opinion of what “working” is then. In the above scenario, the client spent $1000 and did not make any money. Is there a problem with their conversion process … absolutely. However, the point is track the formula right through the lifetime value of the customer. If they were converting at 1 in 10 and the rest of the variables were the same, then go for it.

    The other lesson I had hoped to share was that if you are driving people back to your website, it should not be classified as a lead until you know who the person is and you have a channel of communication open. And this is but one reason why a phone response is better than a web call to action
    in such a campaign.

    Reply
  • 3. Derek  |  June 30, 2009 at 7:29 am

    What if the marketing is directed to a group of people that hits on their culture? I am thinking of submitting a irect mailer to chinese americans to get them or their kids to come to china to study chinese do you think this will work. They will get a letter and a big nice brochure about our company’s services with a call to action to our website as that has more information.

    Derek

    Reply
  • 4. Eric  |  July 1, 2009 at 2:23 pm

    Just wanted to make a few points.

    Obviously, as you know, it is very difficult to pin down any kind of answer when someone asks “does ____ work”

    Obviously it has to do with a lot with the type of business you are speaking to. The economics of the area you are projecting, the demographics you are targeting, etc etc etc.

    1-2% is the basis of what I offer to all my clients as a successful program. The difference is I tell them that up front. If you cannot make the numbers work at a bare minimum of 1-2% then it isn’t your best option. We take everything into account including the PROFIT of a customer (as you know, just cause they spend $100 with the customer, it might only be $20 they are putting in their pocket).

    Direct mail for us in standard postcard size runs about 50 cents a piece out the door making it much easier to make the numbers work.

    There are many contributing factors to the success of a program – timing, frequency, the offer, the imediate “splash” and what the mailer hopes to achieve, etc etc.

    Also, as far as a mailer having a website, it is not at all difficult to set up a tracking url to use only in promotions to help show more accurate numbers – in fact most of your legit direct mail companies will offer this in programs a little or no cost.

    The only thing I can offer to business owners is to keep an open mind and know your ideal customer. If things are not going well, don’t take the easy excuse blaming the economy. Sure it doesn’t help, but there are deeper reasons and things you can do to overcome them with enough effort.

    Word of mouth can sustain a less then mediocre business in good times, but those that rely on word of mouth and don’t advertise tend to be the ones complaining the most about the economy. Not that any one company should rely on advertising for its business, but being open to ideas of getting your name out there and taking advantage of programs and offers that makes it a no-brainer have to be considered!

    Just like in time managment, its very easy to say you are too busy to plan your day (to make it more efficient) yet if you don’t have time, YOU NEED TO PLAN! In advertising, it is very easy to say you don’t have money for it, but thats the very reason that you need it. If business is bad, there is a reason – are you losing them because of your customer service? When people need your service are you hard to find? Do you have a service trade but drive around in a truck without your business name on it?

    Branding and image is the most absolute important portion of any business, yet often times the most over-looked. To speak to that, how many business’ do you call that answer the phone with just a Hello or even have GENERIC answering machines (a computer saying you are not available to take the call is not sufficient when a customer is looking for a PROFESSIONAL!).

    Well, seems I went off on a little bit of a tangent, I will let you get back to it.

    Thanks,
    Eric

    Reply
  • 5. Diego Sosto  |  January 21, 2010 at 9:57 pm

    What you are saying it is absolutely wrong. My family has been on the restaurant business for more than 10 years and for $1 We get to design, print and mail more than 3 brochures. We mail on a 3-5 mile radius and the response has been fantastic over the past few years. Our 5 Restaurants were doing very bad and since we started doing Direct Mailing this change dramatically. This has helped us to open 7 more restaurants in the last 4 years.
    Maybe for the restaurant business works. Just hire a killer designer, print in good quality and find a cheap Direct Mail Company.

    Reply
  • 6. andrew cotton  |  February 22, 2010 at 6:27 am

    I’m just setting out on business and commencing a direct mail campaign to 15000 homes in Nottingham UK. I provide telephone lines and calls with great promotions suchas free line installation saving £125 and free line rental for 3 months saving £51.Calls cost 1.5p at all times to landlines.

    I really hope it works as I’ve just spent £2000 on advertising in the local paper for one month and recieved 3 !!!!! telephone calls

    What do you think

    Reply
  • 7. International Delivery Service  |  August 4, 2010 at 5:54 am

    I don’t believe that you can say an emphatic No here.

    I fully support what you’ve said about this particular client, if they are breaking even or losing money on the estimated lifetime value of a client then yes, DM is not working for them. But there are plenty of companies out there that see good, solid results from Direct Marketing activities.

    Therefore I don’t think saying DM simply does not work is sending the right message. Direct Marketing is a wild beast to tame but if it suits your industry and you have the time to manage and optimise it properly, it can become a very valuable channel.

    Reply

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