To Be Really Creative
Often when new clients come to our agency, they'll start by discussing creative possibilities: "What do you think the ads should look like?" "What do you recommend for direct mail pieces that really jump out and excite prospects?" "Should we test a direct response commercial?"
Usually, I suggest that before we get to creative, we find the marketing allowable.
And usually they’ll say, "What do you mean?"
I explain that we have to know, at the beginning of the process, how much we can spend to acquire a customer. We call this our "Marketing Allowable." As we've seen from many recent dot-com failures, sacrificing profitability in the name of customer acquisition is a formula for disaster.
So, I thought I'd use this column to review what I call "Mail Order Math." You might want to get a pencil and walk through the steps with me. The numbers are totally made up so don't worry about them.
Let's say we sell gold plated key chains and our selling price is $49.95 each. We charge an additional $4.95 for shipping and handling. So, our gross revenue per order is $54.90.
Now let's look at some costs.
Product cost ............................................$9.50 Credit card processing fee @3%
with 80% of orders using credit cards (80% of 3% of $54.90) .............................$1.32
800# @$2 per call with 80% of
orders coming via phone
(80% of $2):.............................................$1.60
Bad debt @ 2% of $54.90 ..........................$1.10
Returns @ 5% of $54.90 ............................$2.75
Fulfillment ................................................$3.00
Shipping costs ..........................................$3.95
COSTS:..................................................$23.22
The "Breakeven" Allowable
Take the gross revenue per order and subtract the cost per order: $54.90-23.22= $31.68
Breakeven allowables are okay to work with but you want to work in your profit. Let's assume a profit of 30% on product costs ($9.50) = $2.85. For our purposes let's treat that as a cost.
Then take your gross revenue per order and subtract the cost per order and the profit: $54.90-(23.22+2.85) = $28.83
What this means... In this hypothetical example, our breakeven allowable is $31.68 and our marketing allowable is $28.83. So, what does this tell us?
For one thing, we can figure out what kind of response we need. If we have a marketing budget of $100,000 we would need:
$100,000= 3,157 orders to breakeven $31.68
$100,000= 3,469 orders to hit our profit target $28.83
If you are mailing and history tells you to expect a 2% response rate, then you must mail:
3,157 x 100 = 157,850 pieces
Your cost per thousand (CPM):
$100,000 divided by 157.85 = $633 per thousand, which is do-able.
3,469 x 100 = 173,450 pieces
Your cost per thousand (CPM):
$100,000 divided by 173,45.85 = $576 per thousand, still do-able.
So, for this example, we know that to make a profit we'll need to get 3,469 orders. To get this number of orders, assuming a 2% response rate, we'll need to send 173,450 pieces. To stay within our budget of $100,000 we'll need to develop and send this direct mail program at a cost of less than $576 per thousand although you can amortize development and other "pipeline" costs over a few mailings.
Only once we know the allowable, can we develop creative strategies for a direct mail program.
The formula works in every medium. Of course, this is a "quick and dirty" analysis, to do it thoroughly is more complicated. You'll want to factor in multiple sales, repeat orders, referral orders, list rental of names, database costs, etc. But, doing this one simple exercise first will let you know what ballpark you're in.
I speak at many different conferences on "creative" because people love getting involved with the words and pictures. The real creativity though, happens when a clients gives us a budget and we figure out what we can afford to spend, and how we can get the most from this budget in direct mail, direct response ads, commercials or a web site.
So always remember, our business is still a numbers business. Advertising agencies can still spend money on image campaigns, but we in direct marketing are always accountable. We get our report card after the campaign is over. Good luck!
LOIS K. GELLER is President of Mason & Geller Direct Marketing
