Does Direct Mail Work?

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.