With direct mail, you can break even and still claim success. The reason for this can be understood only when determining the lifetime value of each customer brought in and the likelihood of those customers responding to subsequent offers. Here is a concrete example to illustrate my point.
Joe's Civil War Shop
Joe owns a Civil War souvenir shop. Yes, believe it or not there is a rather large market of Civil War nuts who collect anything from old bullets, to swords, to manuscripts written by confederate generals. Joe's sales have been slowing since he is located in Virginia, the capital of Civil War memorabilia because this market has saturated itself from having close local stores to buy collections from.
So, Joe decides he wants to sell nationwide through direct mail. He goes out and gets the best Civil War nut list he can find (no offence Civil War lovers...), hires the best copywriter he can afford and sets out on a little campaign of his own?a direct mail campaign.
His sales letter sizzles. Orders come in at a respectable rate, but after he tallies the results he discovers the cost of the mailing just about breaks even with the orders that came in.
My question to you is this:
Should Joe abandon this project or continue?
This is a big decision he has to make. What would you do?
Continue If Your Existing Customers Will Buy More From You
The correct answer is really very simple if you understand the lifetime value that each customer on average brings you.
Let's say, on average, Joe's customers pay around $65 for each order they make. But Joe knows Civil War nuts normally can't stop at just one item. Once Joe establishes a strong trust with his customers by shipping promptly, providing products that match expectations and satisfies the desires of his customers, then on average those customers are likely to buy 2, 3 or more times per year from Joe. So lets say on average a customer buys 3 times a year from Joe. This comes to about $200 a year.
Now after Joe "breaks even" a few times, he will have accumulated a good set of loyal customers provided he shipped on time, provided a great product, offered strong guarantees and gave prompt assistance whenever questions came up.
Now Dig The Gold From Your Loyal Paying Customers
Now, lets go back and see what happens when Joe sends a sales letter to ONLY his core customers that actually bought his products. What do you think his response and order rate will be? His customers already have shown to be hungry for his products. He has more to offer. If he throws in a special offer to his "best customers", his response rates could be 30% or more.
So by "breaking even" Joe has built a strong customer base loyal to him. Now I ask...did Joe really break even? Of course not, he will make more money later on reselling to the customers he captured on the break-even mailings. At this point he would be stupid to stop after the first mailing.
Does Your Customer Base Fit This Profile?
If you want to use direct mail to expand your customer base, keep this in mind and ask yourself:
"What can I afford to spend to bring in customers who will continue to respond and buy my products at a rate that more than justifies the cost of the mailings and brings a worthwhile profit. Each business will have different ways of calculating this?in Joes case I'll step you through it.
Let's Crunch The Numbers To See How To Profit
We'll use a starting 1000 mailing list as a base. Lets say it costs $800 for the mailing. $200 for copywriting, $100 for the list and $.50 for postage and cost of shipping. The total cost is $800 ($100 + $200 + ($0.50*1000)). Now to break even Joe would need to sell 12 products at $65. $12x$65 is approximately $800. That would be at a 1.2% response rate.
So Joe just broke even...now lets see what happens if Joe sends 3 mailings to those 12 customers at a 30% response rate...
30% is about 4 customers. If each order is $65 then 4 x 65 = $260. Now this time sending mail costs only $6. So this time Joe made $254 dollars mailing to only 12 customers!
Let's Try It On 10,000 Mailings
Once we use 1000 customers to find our winning sales letter that gets just a 1.2% response (of course a better response will mean more money), lets see what happens when we roll this out to a real list of 10,000.
With 10,000 mailings and 1.2% response, sales = $120*$65 = $7800. The sales letter has already been written, so no charge. Therfore, $7800 (sales) - $5000 ($.50 for each letter -- 10,000 letters) = $2800 in sales.
30% response on future mailings to 120 customers is 40, so 40*$65 = $2600 in sales! Subtract out the cost of the mailings of $60, then the final sales is $2540 from just 120 people! Now do this 3 times a year and you'll likely make $7620 or more extra per year!
Test, Decide, Profit
With a few test mailings to 500 ot 1000 people in your market, you can determine what your profits will be when you roll it out to 10,000. In this case, if you market is made up of 100,000 people, you stand to make $76,200 per year with this campaign. And let's say the average product is $130 dollars...you can make $152,400 per year!
I hope you can see the power of careful testing followed by controlled follow-up with your customers. Use the simple calculations I showed you in this example and see if they may work with your own products. Remember, test your first mailing on a small list of 500 or 1000. Do this until you get a response rate that justifies rolling it out to more people. Also, know your market. Calculate how much the average customer is likely to buy over the course of a year. If it all adds up?go for it!
Next article I'll show you another way to leverage your existing customer base to make even more money. Stay tuned.
(Disclaimer: The information contained herein is meant for educational purposes only. The reader is solely responsible for any actions made based on the information contained in this article. Many factors affect success such as product, mailing list, offer, sales letter, etc.)
? Copyright 2004-2005 JM Marketing, All Rights Reserved
Jay McKee is a freelance copywriter and marketing consultant located in San Jose, CA. Jay specializes in all forms of direct response marketing. He also provides marketing advice to small businesses located in San Jose. To improve your direct response ads or to learn more about how you can use direct marketing to get more customers, sell more of your product, and boost profits without spending more on advertising go to: http://www.jaymckeemarketing.com