Shop Talk: The Math Behind Mailing Catalogs Profitably
Q:"I'm experimenting with sending printed direct mail catalogs to my customer list, and would like to get some insight around conversion or response rates for this type of mailing. Anyone out there have some benchmarks or advice?"
— Howard Berg, online division marketing manager, Horizon Hobby, Inc.
A: Howard, that's a great question. However, there isn't a standard answer. It really depends on your company and its internal metrics. Right now, for example, I have clients who live very comfortably with less than two-tenths of a percent response, while others need closer to 1 percent. It all comes down to the break-even point and your product margin. What you must know is how much response you need in order to break even. Direct mail is built on knowing what your "allowable" cost per acquisition is, just like online marketing.
If you know your allowable cost per acquisition, you can work backwards from there. If you don't know your break-even point, it's actually very easy to calculate if you know your fixed and variable costs and just a few other things.
Start with your average order value (or your anticipated average order value) for your new catalog venture. Subtract by your average cancel/return rate to get to a net sales figure. Then subtract your cost of goods to determine gross margin.
Once you have your gross margin, you can subtract your costs for outbound shipping, telemarketing, average credit card expense and other variable operating expenses. What you're left with will be contribution to overhead, promotions and profits.
Now with that done, it's time to look at your catalog expenses. Add up your printing, postage lists, service bureau and other expenses (design and photography apply, but might be allocated across a number of catalogs).
To get your break-even point, divide your total catalog-in-the-mail costs by your contribution. The end result should be the amount of orders that you need to break even.
For the last step, divide the number of orders needed to break even by the total amount of catalogs mailed, expressed as a percent. This will give you the percent response you need to break even.
Keep in mind that this is a basic analysis. You can keep it simple (use gross margin to determine break-even point), or make it as elaborate as you need to fit your business conditions.
Regardless of how complicated or uncomplicated your analysis is, the most important part of the process is looking at your contribution (or gross margin) and comparing it with your break-even point to determine how much you should spend.
I never use response rate to determine the success or failure of a given mail campaign. Instead, I take the break-even point and do a list-by-list analysis for my mailings. From this, I know how many orders I need to break even on a particular list within the mailing. I look at revenue per catalog mailed, and compare my break-even point per catalog mailed by list to see the individual profit/loss for each list mailed.
Jim Gilbert has been creating direct marketing programs that drive superior ROI for almost 30 years. Fluent in consumer or B-to-B, creative, operations, and analytics, he marries the strategic and tactical sides of direct and social media marketing in a seamless fashion that gets results. He's CEO of a multidiscipline direct marketing agency, Gilbert Direct Marketing, Inc., which focuses on direct mail, catalogs, DRTV, telemarketing, print, alternative direct marketing media and social media marketing. Jim has been involved in start-ups, expansions and turnarounds, and is an expert in helping multichannel marketers get to the "next level." He's a former adjunct professor, teaching direct marketing at Miami International University, and is President of the Board of Directors of the Florida Direct Marketing Association. Jim loves to talk direct marketing, and has done many lectures on direct and social media marketing.