Direct Marketing Essentials – Simple Ways to Calculate and Measure Your Marketing

The mathematics of direct marketing primarily rests on three key elements:

  • Sales
  • Marketing Costs
  • Contribution Costs (e.g. Overheads)

Now there is no clear-cut balance for these elements as any direct marketing activity needs to be tailored and fine tuned according to each business. This is why I will never state off-the-cuff a direct marketing response rate for any business or industry type as there are significant variables involved such as the product itself, the demand for it, market preference and the nature of the offer.

Another point to highlight is that the mathematics used is underpinned by the belief that the future will be similar to the past. Hence if any variable within the equation changes significantly (e.g. magazine circulation significantly declines), then you have to expect a different response rate.

So to dive straight into it, I’ve listed below a few essential calculations which every small business should use:

Calculating the Allowable Using Your DM Budget

This equation lets you calculate the amount of money you need in order to make one sale. This is really important to know!

Revenue Selling Price: $1000

Minus Costs Production: $500

Overheads: $150

Postage & Handling: $50

The Breakeven allowance is $300 (the money you are allowed to spend to acquire a customer).

NOTE: If your business requires 10% profit, then your allowable would effectively be reduced to $200.

Using the Allowable to calculate your DM budget

So using our allowable recruitment spend per customer x target No. of Sales = $200 x 100

Marketing Budget = $20,000

What happens if you don’t make the sales required?

It is essential to test the market first using a small quantity before rolling out the entire campaign. Typically your allowable is based on what resources are required to acquire a customer already, plus I would expect some form of marketing research carried out in order to understand the size of your potential market. It is also important to include contingencies within your marketing activities if you don’t make the required sales. I always save 10% of my budget if something goes wrong. Or better still, if a potential list I’m targeting returns a huge ROI, then I have a bit left over to chase the money and market these top prospects again.

Measuring Costs, Responses and Sales

Here are a few very simple, yet essential equations to help measure costs, response and sales:

Cost per Unit:

Total cost / Total Quantity = Unit Cost

e.g. $20,000 / 4,000 = $5

Response Rate:

(Total Responses / Total Mailed) x 100% = % Response

e.g. (200 / 1,000) x 100% = 20%

This equation is exactly the same as measuring the Conversion Rate which would be Converted Leads / Total Leads Contacted

Cost per Sale:

Total Cost / Total Sales = Cost per Sale

e.g. 20,000 / 500 = $40

Example: Let’s say you were a travel insurance broker wanting to advertise in the local newspaper to sell premium travel insurance for $500 per person. I’ve listed some assumed sales and marketing costs to acquire a customer:

Advertising Cost: $7,800

Newspaper Circulation: 150,000

Promotional Cost: $5 per lead (e.g. Call centre costs)

Revenue per sale: $500

Total Marketing Cost for 100 leads is therefore: $8,300

The Cost per Inquiry or Sale will vary depending on the response rate, which you won’t know until you advertise. But the main focus on advertising is to achieve a required level of profitability in order to justify the expense. I like to refer to it as measuring the Profit Index. (This is exactly the same as using your allowable to calculate the number of sales you require in order to justify any marketing spend).

Profit Index (%) = Total Marketing Cost / Total Revenue

Profit Index (%) = 8,300 / 10,500

In this instance the Travel Insurance company requires 20% profit from print advertising. If my profit Index falls below 20%, then the advertising is deemed unprofitable. I’m so harsh!

Hence, 21 travel insurance premiums need to be sold to meet a profit index of 21%.

In other words, the allowable DM Budget would be set at $8,300 for advertising in the Local Newspaper.

Using Spreadsheets to Negotiate Spend

If you’ve seen the spreadsheet then you’ll wonder why I’ve highlighted the following cost fields – Ad Cost and Promotional Costs. Promotional Costs are harder to change in the short term, but negotiating advertising costs can be extremely effective. You’d be amazed to discover that by saving 10% of advertising you drive down your Profit Index, which means your advertising dollar doesn’t have to work as hard to acquire customers or sales. In the example used, you would only have to sell 19 Travel Premiums in order to meet the minimum profitability requirements. It also does hurt asking for a trial advertising rate to test the viability of a product in a publication. Some account managers will assist if it means you become a regular advertiser.

There are a couple of examples which the above calculations can be applied to in order to gain some further perspective for your next lead generation campaign.

Lead Generation Conversion Programs

1. Generally the more time you have to qualify an enquiry, the more it costs to generate. For example, if your telesales representative took 15 minutes to convert a prospect, while others may take only 5 minutes, then this will drive your overall costs to acquire a customer, and must be factored into your overheads or marketing costs.

2. Lead generation lists (Prospect Lists) can also support repeat conversion contacts, but you’ll always get a reduced response rate with each effort. For example, if you mailed 1,000 prospects, it may generate 250 leads. The second time you mail the list (minus the 250 leads you generated the first time round), you might get another 100 leads. This means you have generated a total of 350 leads from the prospect list. But we wary that if you use the list too many times then it will get to the point of being unprofitable.

As a general rule of thumb, you should change a portion of the DM piece the next time you mail (e.g. The offer, or a larger discount), as customers may respond to varying aspects of your direct marketing campaign, which is why it is always important to test.

You may hear direct marketing consultants talking about list building, and how much of their time is dedicated to developing a database of qualified prospects and customers. These lists are in fact a key ingredient which differentiate direct marketing from traditional marketing.

But I will say that typically, a list of present customers will respond much better or at a higher rate to a new product compared to non-qualified, or “cold” prospects.

It is also important to point out that while companies always depreciate their expenses over time such as equipment, machinery and inventory, they almost never capitalise what could be their most important asset, their customer. Therefore, small business owners should view their customers as investments and be able to measure and monitor customer data, and capitalise on it for the future.

Just remember that the maths of direct marketing sets it apart from all other marketing disciplines!

A Travel Guide to Africa

Your idea of a holiday destination is usually that of an urbanized place, serene environment, a luxury hotel, shopping, eating and a lot of relaxation. Africa has it all in its excellent Western style cities. Amazingly, Africa has some parts, which do not serve all this but still are a major attraction for people around the world.

However, before getting your Africa flights you have to take some precautionary measurements to get the maximum fun out of your holidays. Some of the basic precautionary measurements are given below.

First Aid and Medical facilities:

However, most of the parts of Africa that describe the real Africa are not much developed and this fact cannot be ignored. This is what makes it important to take safety and precautionary measures before and even during trip to Africa. In the first place, all vaccinations must be complete as there are bit chances of disease specially; aids, malaria, cholera and hepatitis. Unlike the usual first aid kit, the kit to Africa needs to have some things in addition. Among these things, contraceptives, and anti-biotic course, sterilizers and sanitizers are a must keep. Although limited, medical facilities are available throughout Africa, especially those in South Africa and Zimbabwe are excellent.

Tourist Guides:

Tourist guidance is not only widely available but at times also very important. At the safaris for instance, one is compelled to take a guide along but care must be taken. A survey must be done before a guide is booked. Very cheap deals are equally ridiculous in quality and very high priced deals are usually run to get a good amount of money from the tourists, as they are considered rich.

Theft and Security:

Due to poverty, theft is a common practice in Africa especially big cities and tourists are a big target. In order to avoid losing the belongings; money belts, neck purses and leg safes are advised. All precious belongings are to be kept along at all times especially during traveling and even during sleeping as accommodations in Africa are rarely locked. Walking alone in a city during night and hitching alone is not preferred. Getting oneself registered to home embassy can be very helpful in times of trouble.

Taking Care of You:

Last but not the least, travel insurance is highly suggested especially if one has to go for adventures as they can help a great deal in times of problem during adventures. In Africa, one gets to travel a lot and has to keep many things along already so light packing is suggested. A good sun block cream is suggested to be protected from African Sunshine.

Once all the precautionary measurements are taken, the trip to Africa makes up for an unforgettable experience. There, travelers find cultures and life styles affected by ignorance and poverty, but it should not to be taken negatively, that is the beauty of Africa. The customs of tribes inspired by animals, religious rituals that are totally jungle oriented, desert all around, hitchhiking and above all, the animals, is what makes Africa a land of beauty far beyond imagination. As tourists travel in Africa, the more they get attracted to it and the more curious they become about everything in it and eventually more they end up traveling.

How Would Santa Claus Measure His Performance?

Santa is one amazing character.

To avoid disappointing any of the estimated 380 odd million Christian children in the world on Christmas Eve, Santa Claus needs to be capable of some pretty spectacular performances:

  • Santa’s memory is so good, he can recall 380 million childrens’ Christmas wish lists.
  • Santa visits about 970 households per second.
  • To achieve this, his sleigh has to travel at over 1000 kilometres per second (3000 times the speed of sound).
  • The sleigh’s payload (that is, the sack of toys) is estimated at being about 500,000 tonnes.
  • Santa’s reindeer are each 40,000 times stronger and faster than the average ordinary reindeer.
  • Santa’s reindeer, due to air resistance created by the astronomical speeds they travel, each absorb up to 14,300,000,000,000,000,000 joules of energy every second.
  • Each time the sleigh takes off, Santa is subjected to 17,500 g of force (apparently the average human will black out at about 4 or 5 g)

This is an engineer’s perspective on Santa Claus, and it has been suggested that these calculations might be proof that Santa Claus doesn’t really exist. But that’s not the point. These trivial statistics illustrate a few interesting points about performance measures…

Measuring Capability

Measuring what your organisation or process or team is capable of (modelled from past performance) can help you anticipate how likely you are to meet changing stakeholder needs. As the Christian population in the world grows, how much faster will Santa have to travel, and how much more will the sleigh have to carry, and how much more energy will the reindeer have to absorb? How many more toys will the elves have to make?

What kinds of toys will most influence the children of tomorrow to be nice and not naughty?

Measuring Outputs

Santa’s outputs are the results of his activities, what he produces. And what he produces is gifts delivered to Christian children that have been nice and not naughty. Measures of his outputs might include: the % of nice children that did receive a gift, the % of children that received the gift they requested, the % of children that received a gift they loved, the safe return of Santa and the reindeer to the North Pole sometime on Christmas morning.

Outputs are produced over and over again by our business processes, but for the purpose of making some bigger, ultimate set of outcomes happen.

Measuring Outcomes

Measuring activities and outputs might be interesting and easy, but we need to measure the ultimate set of outcomes of our activities and products if we care at all about what we are doing. Santa doesn’t do the Christmas Eve thing because it’s a challenge. He actually really wants to encourage children to be nice and not naughty, and he rewards those children being nice with gifts on Christmas Eve.

Santa’s ultimate outcome measure might be the percentage of children that always behave nicely. He might analyse trends in this information – he has years and years of history, as he’s been at it for around 1600 years.

Santa might also benchmark this measure against the motivators for non-Christian children to be nice and not naughty, to see how well his gift strategy is working.

Linking Outcome Measures to Capability Measures

There is a logical connection among these three types of measures. The capability measures predict the quality of the outputs, and the quality of the outputs predict the quality of the outcomes. If Santa’s elves make the right kinds of toys, then more children will get the gift they want and thus, more children will be influenced by Santa’s message to be nice and not naughty.