How To Budget For Your Direct Mail Campaign

Mike Gunderson
How To Budget For Your Direct Mail Campaign

Key Takeaways:

  • Common direct mail myths debunked
  • How to calculate campaign costs
  • How to estimate response and conversion rates
  • How to measure overall program ROI
  • Using a break-even analysis

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The biggest complaint we get from growth marketers is the cost of launching a direct mail pilot program. Marketing budgets are tight, and the idea of blowing a wad on direct mail can be a tough sell to managers more familiar with a digital test-and-learn marketing spend. However, with our tools, you can model a direct mail program’s profitability and return on investment (ROI). Using our tools will allow you to approach the channel from the perspective of profit potential, rather than strictly a cost perspective, making it easier to allocate funds and recommend a test budget.

The rest of this post will walk you through our proprietary Direct Mail ROI Calculator that you can use to see if direct mail can help drive more qualified leads for your business—before you spend.

In a hurry? Don’t need any guidance. Ok, here’s a link to our Direct Mail Calculator if you are ready to get started now. 

Before we dive in, let’s debunk some direct mail myths. 

Direct Mail Is Too Expensive:

FALSE! The generally higher response rates and stronger conversion rates of direct mail over other channels compensate for the out-of-pocket costs needed to ramp up a direct mail pilot, leading to a higher ROI overall. And, mail is the only direct channel that scales efficiently. The prospect CPM actually goes down as your program grows due to production efficiencies (you’ll see that in our calculator as you model with larger programs).

Let’s be clear. Not every product is appropriate for the mail channel. If you are selling a one-time widget for $25, direct mail likely won’t pencil out. But, if you are selling a more expensive product, or can calculate a customer lifetime value (LTV) in the hundreds of dollars thanks to repeat/add-on sales or ongoing subscription revenues, direct mail can have a very impressive ROI. Spoiler alert: not sure if your product can afford a direct mail program? We’ve got a break-even calculator to provide insight into the potential for your situation.

Nobody Reads Direct Mail:

FALSE! In fact, according to a recent USPS survey, the response rate of direct mail was 0.5–4.0% for 2018 prospect lists, and 76% of consumers trust direct mail when they want to make a purchase decision, far greater than digital channels. A more recent USPS survey in 2020 reported that 80% of people look forward to seeing what’s in their mailbox every day, and they spend an average of 8 minutes a day reviewing mail they’ve received.

Digital fatigue affects all age groups, and—in many cases—prospects are paying less attention to online marketing efforts. That’s not the case with direct mail—60% of millennials and 54% of Gen Xers viewed mail as more important to them in 2020 than they did three years ago. Direct mail gets read and drives response!

Direct Mail Programs Are Too Hard To Implement:

FALSE! Like most marketing initiatives, you’ll need to take a number of steps to launch a successful direct mail campaign, but it doesn’t need to be difficult to get your feet wet. You can do it yourself by working with a printer and a list partner for smaller tests that are limited in scope. For more significant initiatives that require testing and analysis, you can hire a full-service agency like Gunderson Direct to do the heavy lifting.

A direct mail agency can guide you every step of the way, lowering your financial exposure and risk. In fact, working with an agency can often help you save time and money by leveraging supply chain networks and large volume pricing.

Will Direct Mail Work For Your Business?

Direct mail can be an effective channel in today’s marketing environment, and clear paths for testing are available. But you still have one more very important question to answer: Will it work for the economics of your business?

Our Direct Mail ROI Calculator considers many data points, including campaign costs, campaign metrics, financials (such as revenue and LTV), and finally, the minimum break-even to cover your spend.

The rest of this article breaks down each of the four sections of our calculator to give you a better understanding of how to determine a program customer acquisition cost (CAC) and ROI. Our calculator lets you experiment with scenarios and assumptions to estimate the return of a direct mail campaign even before you launch!

Step 1) Campaign Costs

So how big of a program will you test, and what will it cost? As reported above, scale is your friend in direct mail. As you increase your mail quantity for your pilot, you also increase efficiency, lowering the cost per piece (CPP). Our calculator provides an average CPP based on the quantity selected.

CPP can vary greatly based on the complexity of your direct mail package. Our example includes a realistic average CPP to print a standard direct mail #10 letter package (envelope, letter, and insert) like the one appearing below, plus the cost of renting a mailing list of compiled consumer data and presorted standard rate postage.

Cost per Piece
The cost per piece (CPP) is just what it sounds like, the cost of each individual piece mailed. In our example: (Total Mailing Cost) $220,000 ÷ (Number of Pieces Mailed) 500,000 = $.44 CPP

Cost per Thousand
When purchasing media, the cost is often communicated in terms of cost per thousand (CPM) target impressions. In direct mail, that’s calculated similarly: (Total Mailing Cost) $220,000 ÷ (Quantity Mailed in Thousands) 500 = $440 CPM

Obviously, the size of a pilot program for direct mail can vary. We’ve already mentioned the benefits of scale on cost efficiency. The other benefit of testing larger quantities is that you’ll see more responses, which translates into more readable test results and the ability to make better-informed decisions on campaign performance overall, as well as by test segments.

Step 2) Campaign Metrics

The next step is estimating response and conversion rates. For our exercise, a responder is anyone who takes an action based on receiving your mailing. They may call or visit your landing page. You will also want to at least partially attribute response to mail prospects who go directly to your home page or Google your site—there is strong evidence that mailings drive these actions, too.

Mail response rates are typically the highest of any push marketing channel. As an industry average, we see direct mail response rates in the .5–1% range. That’s for prospects who have little or no affinity with the brand, product, or service. Response rates can vary greatly depending on your ability to target the prospects most likely to be interested in your product or service. We also know that adding an offer can increase response and help with attributing responses back to the direct mail. And if you are mailing your internal lead or customer files, response rates can be much higher.

When it comes to conversion, actually closing the sale, we recommend that you reference how your other acquisition channels perform and plan for a prospect-to-conversion rate that is at least 10% greater to start. A strength of direct mail is that it’s more engaging than other channels, so we consistently see higher quality prospects who convert at a greater rate than what we see in our clients’ other efforts such as PPC, social, radio, and tv. If you are unsure of your conversion rate, start with 20% for initial planning purposes.

Here are some examples of response-to-conversion events to consider as you plan direct mail attribution and tracking:

  1. DM →  Lead form → Signup
  2. DM →  Ecommerce site visit → Product purchase
  3. DM →  QR code → App download
  4. DM →  Call center → Qualified lead
  5. DM →  Store visit → Coupon at checkout

Based on your inputs, you can start to see how effectively direct mail can drive top-of-funnel leads at different response and conversion rates.

Cost per Lead
Cost per lead (CPL) is calculated by taking your total direct mail spend and dividing it by the number of responders. In our example, we are estimating a response rate of .75%. At that rate, a 500,000 quantity mailing will generate 3,750 leads: (Total Mailing Cost) $220,000 ÷ (Total DM Leads) 3,750 leads = $59 CPL

Cost per Acquisition or Customer Acquisition Cost
Cost per acquisition (CPA) or customer acquisition cost (CAC) is a measure of the cost of each new customer. It is calculated by taking your total direct mail spend and dividing it by the number of prospects who convert to a sale. In our example, we are estimating a 20% conversion rate among our 3,750 leads for a total of 750 new customers: (Total Mailing Cost) $220,000 ÷ (New Customers) 750 = $293 CPA/CAC

The net response rate (.15% in our example) is simply the response rate times the conversion rate .75% x 20% = .15%

We believe that distinguishing between your CPL and CAC metrics is important. Direct mail can do a great job driving awareness, responses, and even intent. But closing the sale is most determined by your internal sales process and/or sales team. By analyzing these two metrics separately, you are able to isolate the effectiveness of the direct mail to deliver prospects as you also optimize performance through the sales funnel.

Step 3) Direct Mail Financials 

For most marketers, CAC is the holy grail of performance metrics. CAC allows marketers to allocate spend to the best overall performing channel in terms of actual sales. But, because direct mail can drive higher conversion and, in many cases, more profitable customers, overall program ROI can be an even more valuable measure.

ROI considers the entire marketing-fulfillment-incentive cost structure. The “true” cost of a new customer goes beyond the marketing expenditure and needs to be subtracted from whatever revenue measure you use.

The “R” in ROI can be revenue, net profit, or LTV. We prefer LTV because most customer relationships don’t end with a single transaction. Many of our clients increase customer value and loyalty by offering additional products and services over the customer lifetime. Banks are good at this. They know there is a lot of opportunity to grow the relationship and LTV of a checking deposit customer with scenarios such as the one below:

  • 0 months: Customer received a direct mail piece and opened a checking account
  • 3 months: Customer applies for and receives credit card
  • 24 months: Customer gets married and purchases a home, receives mortgage
  • 48 months: Customer refinances mortgage and takes out line of credit to help with home remodel expenses

When Chase Bank offers a customer $500 to open a new checking account, they know that a rich offer will be worth it to their ROI in the long run. 

To calculate ROI, we first need to know the net profit per customer—the total profit made on each new customer.

Net Profit per Customer:
In our example, we have determined the LTV is $3,500 for each new customer. That’s the revenue part of the net profit per customer equation. We also need a total cost calculation. In addition to our CAC, we want to account for all other costs related to the sale. These are characterized as “fulfillment” costs and include all expenses related to closing the sale plus the cost of any incentive or offer in the mailing—let’s say $500 in our example. That makes our calculation: (LTV) $3,500) – (Fulfillment Costs) $500 – (CAC) $293 = $2,707 Net Profit per Customer. We are providing an example based on a service product with attributable product cost per transaction. In the case of a physical product, the cost to produce would need to be included in this calculation.

Program ROI:
The ROI calculation is a percentage derived by dividing total program profit by the cost of the program: (Net Profit per Customer) $2,707 x (Total Customers Acquired) (750) = (Total Program Profit) $2,030,000 ÷ (Mailing Cost) $220,000 = 923% ROI. Put another way, our example is returning a profit of $9.23 for every dollar spent on direct mail—proof that, if you can master the DM channel, the payoff is big-time profits.

Step 4) Break Even

Break even calculations are especially helpful if you are new to direct mail. 

If you have a concern that your product doesn’t have the built-in profitability to support DM, or if you don’t have past data to use in calculating a profitability estimate, a break-even analysis is a great starting point. This calculates the minimum campaign performance needed to cover the cost of your direct mail program.

As you can see above, even though we are estimating a .75% response rate in our example, given our cost and profit structure, we only need to realize a .07% response rate to break even. If you don’t have any baseline or are new to direct mail, this can provide some peace of mind for planning and defining test budgets based on different levels of revenue and profitability.

Bottom line: you may not need a huge response to test into the channel and cover your costs. Showing a break-even analysis to your CMO is one way to convince them to allocate a budget for a direct mail pilot.

Wrap Up

We test because we can’t know for sure until we do. Calculators are no substitute for being in-market. But, our calculators do give you a pretty good way to model your potential success in the channel for your situation.

By taking the time to model your direct mail spend and performance, you realize the unknowns and build confidence when planning your direct mail campaign and budgets. We hope you found this blog helpful. Happy testing and happy planning with the Gunderson Direct, Direct Mail Calculator

Interested in trying out direct mail and adding it to your marketing mix? Then drop us a line. We’re standing by to answer any questions you might have, and most importantly, to help you get your mail opened.

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Mike Gunderson

Mike is the founder and president of Gundir, the award-winning direct marketing agency. Since 2003, Gundir has helped businesses drive new leads and close more sales through traditional offline channels, especially direct mail.

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