Direct mail is often referred to as the most measurable marketing medium. This is both a blessing and a curse. A blessing in that it IS measurable, making return on investment (ROI) for direct mail fairly easy to calculate and, with the proper history, easy to project results. However, it’s also a curse because its ability to be measured ensures it is often held to a higher standard than other marketing channels. For example, where else do we expect to see an 80%+ open rate? Plus, its users don’t make claims about direct mail “awareness,” “impressions,” or “engagement,” though we probably should.
Direct mail has been tested and successfully used in just about every industry one can think of. If done correctly, it can produce consistent, positive ROI superior to digital channels. When direct mail is combined with digital channels, reaching the same prospect via multiple channels, we often see even better results.
Determine Costs Before Determining ROI
How is direct mail ROI measured? It helps to have an understanding of direct mail’s cost components, which at a high level consist of production, postage, and data (the list). Marketing costs, such as creative and strategy, may also be included. Production costs include paper, package components, printing, data handling/personalization, insertion/assembly, and sorting. Postage costs depend on the mail piece type (postcard, self-mailer, or letter), shape, weight, and whether it is being sent at a First-Class, Marketing Mail (formerly Standard Mail), or non-profit rate. Savvy marketers can reduce postal costs through postal presort, use of Intelligent Mail barcodes (IMb), commingling mail with other marketers’ mail, and trucking the mail to a postal facility near the point of delivery. Data — the list being targeted — can vary widely in cost, depending on how specialized it is, or whether analytics were used to determine those most likely to respond.
Another cost factor is mail volume: the more you mail, the greater the cost, though typically, the more you mail, the lower the unit cost of each component. The mailing costs will vary depending on what is mailed and at what quantity (see a simple ROI calculation in the example below). Response and conversion rates, as well as cost per acquisition (CPA), will vary based on past performance or industry benchmarks. In some cases, conversion is the same as response — immediate response is what matters. Some argue that it is the mailing’s purpose to deliver targeted leads, and what happens afterward online or in a call center should not factor into direct mail performance. In some instances, gross margin is not available, and calculations are based on gross sales. Metrics will vary depending on the industry.
Total Mailing Quantity
Sample unit cost of printing and mailing 500,000 letters at Marketing Mail rate with data
Estimated response rate
Number of responders (0.50% x 500,000)
Cost per lead (CPL) – (Total cost/# leads)
Number of conversions (response x 0.50%)
Cost per acquisition (Total cost/conversions)
Average gross margin per sale (if available)
Total revenue from mailing (1,250 x $275)
ROI - Return on Investment (Revenue-cost, as % of cost)
Depending on the business and industry, other metrics may come into play.
Robust Testing Helps to Measure and Improve ROI
How can you maximize ROI? We recommend a test and learn approach to direct mail, and find that with continual creative, data, and frequency testing, and increasingly refined analytics, response rates and ROI continue to improve while CPA continues to decline.
The opportunities for creative testing are endless. Marketers can test various sizes, unique feels and paper stock, outer envelope appearance (official, branded, use of windows), interactive devices, letter layout, offers, messaging, and personalization. We find that “bolder” testing, such as changing package format, leads to greater lifts in response vs. smaller iterative changes, such as changing a headline. Creative “audits” are good for identifying opportunities for improvement. Remember to consider the costs of various formats, which should play into your decision-making.
The list is even more important than creative because it allows you to reach the right people. List recommendations should be based on the industry, available client data, and previous results. Your data can be analyzed to provide insights into performance and make use of predictive analytics to predict likely responders. If response data does not exist, it may first be necessary to build a more simple demographic “profile model” based on existing customers for the next mailing, and then once response data has been gathered, rebuild the model to be a more sophisticated predictor of direct mail response. In some cases, you could test specialty lists. As testing lifts response, ROI improves. When data testing, as in creative testing, one should never “rest upon one’s laurels,” and instead should always be testing. In direct mail, doing too much of anything for too long leads to the false conclusion, “direct mail doesn’t work for us.”
Understanding frequency is also important. How many times should you contact a prospect? Is once enough? In marketing, success is sometimes just about the right timing. Sometimes you need to reinforce the message with follow-up campaigns. Frequency testing can tell you what works. For example, the same group of prospects can be split into three test groups for testing over three months. Group A receives one piece of mail over three months. Group B receives mail in Month 1 and Month 3. Group C receives mail monthly for three months. Proper testing can determine the highest ROI.
In some initial cases, the immediate ROI may not be positive, but with a longer-term testing approach, your campaigns can become profitable. When we speak with marketers who tell us “direct mail didn’t work for us,” we inevitably find that there was no prior organized testing strategy. In all three of the testing types covered above, testing is a balance of response vs. cost. We can add package components, new lists or additional mailings that drive incremental response, but they may add enough cost that it negatively impacts ROI. The aim is to make improvements that keep costs steady or reduce them.
It's also important to keep customer lifetime value in mind. Depending on the business and industry, you may acquire a customer at a loss, but they may well become a profitable customer as additional purchases are made over the life of the relationship. Always think beyond the immediate campaign. Taking a long-term test and learn approach to direct mail always pays off, enabling you to achieve an ever-improving ROI.
While direct mail’s measurability can be both a blessing and a curse, following these recommendations will allow you to maximize the blessings and see great improvements in your direct marketing efforts.
Alan Sherman is VP-Marketing Strategy at IWCO Direct. He can be reached at email@example.com.
This article originally appeared in the July/August, 2020 issue of Mailing Systems Technology.