Direct Mail ROI

In direct mail marketing, the response rate is the percentage of mail recipients that respond to a particular campaign.  Response rates can vary according to many variables such as the type of mailing, creative design and mailing frequency.

The Direct Marketing Association (DMA) in a study analyzed over 1,122 industry campaigns and discovered that the average response rate for direct mail is 2.61%.  While that may seem low, response rates can be as high as 20% when sending to existing customers with targeted offers or as low as 0-1% when the mail piece is not targeted and/or is poorly designed. The latter makes up the vast majority of direct mail. 

Most organizations have limited advertising budgets and direct mail marketing campaigns are no exception.  A savvy marketer will begin a direct mail campaign by establishing a budget and determining a break-even point, or the number of respondents that must buy to generate enough profit to pay for the cost of your direct mail marketing campaign.

After this point is met, you can generate a positive direct mail ROI. If the break-even response rate is too high, then the campaign may be restructured to lower the customer acquisition cost and therefore lower the break-even response rate. Direct mail ROI is all about investing initial funds in the correct way to maximize your return.

You can always start with smaller more conservative campaigns to test response rates. This keeps you from committing to an ineffective campaign. If your response rates are good, you should expand your number of targets.

It has been demonstrated that direct mail marketing is more effective when it is concentrated on a smaller number of targets repetitively instead of sending to a large list in a single campaign. An undesirable response rate in the initial campaign may simply indicate that you’ve got to go back at them a few times to achieve success. Repetition can be a key component of direct mail ROI.

Keep your expectations reasonable, better to be conservative and exceed your expectations than to forecast optimistically and be disappointed. We can help you estimate your investment in direct mail marketing and your expected return.

Let’s put this all into perspective with a few examples that calculate direct mail ROI:

EX #1 A Swimming Pool Company

Let’s say you are an established swimming pool design and installation company looking to drive off-season sales.  You want to provide a special offer to prospective customers with a pool starting at $50,000.  The objective is to send out to target 15,000 households chosen based on residences with children, high home values and high household incomes.  

Projected Response Rate:  0.5%

Typical close rate:  10%

Typical Profit Margin:  20%

Estimated Direct Mail Piece cost:  $0.55 

Revenue = 15,000 x 0.5% x 10% x $50,000 =  $375,000

Profit = 20% x $375,000 = $75,000

Cost of Acquisition = $0.55 x 15,000 = $8,250

ROI = 75,000/8,250 = $9.10 profit per $1.00 spent   

 A more effective campaign would be a personalized mail piece sent to smaller sample of recipients, for 3 consecutive months.  In this case you could expect a big increase in response rate, perhaps to 2.5%.  In this case you will send a total 15,000 pieces to 5000 targets.  

Projected Response Rate:  2.5%

Typical close rate:  10%

Typical Profit Margin:  20%

Estimated Direct Mail Piece cost:  $0.75 

Revenue = 5,000 x 2.5% x 10% x $50,000 = $625,000

Profit = 20% x $375,000 = $125,000

Cost of Acquisition = $0.75 x 15,000 = $11,250

ROI = 125,000/11,250 = $11.10 profit per $1.00 spent   

Although the second scenario is better, both are worth the cost.  Even at a 0.5-1% response rate, is it worth the investment.

EX #2 A Dental Practice

A new dental practice is eager to build its patient base. A typical new patient will generate $1000 in revenue the first year, but $10,000 average revenue over their lifetime. The practice has committed to a yearlong direct mail campaign to build its patient base.

Seeking to target the most receptive audience to establish a long term relationship, they have chosen to target 20,000 potential customers based on home ownership, length of residence and age of the recipient. They will mail to 5,000 customers per month, targeting each customer at least 4 times. In addition, they have decided to target new movers to the area each month, approximately 150 per month.

Projected Response Rate: 4.0%

Typical Acquisition Rate: 50%

Typical Profit Margin: varies, assume average of 35%

Estimated Direct Mail Piece cost: $0.40

Revenue = 21,800 x 4% x 50% x $1,000 = $436,000

Profit = 35% x $436,000 = $152,600

Cost of Acquisition = $0.40 x 5,150 x 12 = $24,720

First Year ROI = 152,000/11,250 = $6.17 profit per $1.00 spent

Lifetime ROI = 10 x $6.17 = $61.17 profit per $1.00 spent

Where else could you possibly make over 60x your initial investment? Direct mail marketing works.