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Valuing Direct Mail

June 2004 Marketing

Using direct mail to prospect for new business presents a decision dilemma for salespeople and business marketers. On one hand, it is an attractive approach of quickly contacting potential customers to promote an offering. On the other hand, most businesses have a poor track record in driving actions with direct mail. The decision to use or not use direct mail is a quantitative issue.

Uncertainties

The decision dilemma derives from the uncertainties in using direct mail. Three performance driven questions when considering direct mail are: Will prospects open the letter? If they open it, will they read it? If they read it, will they take action?

In response to these questions, many executives believe that most direct mail is thrown away before it is opened; that if it is opened, prospects never reads it; and if they read it, executives never see a resulting action. With these experiences, executives dismiss direct mail as an effective communication vehicle.

Their decision to dismiss direct mail is not always correct. A portion of the recipients will open the letter, most will read at least a part of it, and a few of them may even take action. The issue is one of proportion.

Some businesses have had strong success. Consider that consumer marketers expect standard response rates in the 1% to 2% range when conducting direct mail. Elsewhere, business marketers have had response rates in the 60% range for highly targeted lists. The challenge is moving the success rate of direct mail from well below the 1% level into a value generating level. The solution is starting with a good list of prospects and following through with a strong message.

Lists

The direct mail contact list must have individuals that are within the target market and are in a position to take action on the information in the letter. Highly targeted lists in business markets can contain fewer than 20 businesses. Less targeted lists may have tens to hundreds of thousands. Executives can expect that less targeted lists will produce a smaller proportion of responses than highly targeted lists. The size of the target market from which a response is desired and can be expected limits the length of the list.

The contact list may be generated internally, purchased, or developed over the course of the business. Developing contact lists that have both a high proportion of contacts in the target audience and valid contact details determines a majority of the cost and time efficiency of direct mail.

One of the sources of value to direct mail and cold calling is that the sales and marketing team can usually ensure that a high proportion of the contacts are in the relevant audience by reviewing the lists prior to sending mail or placing phone calls. Reviewing the contact list requires examining each and every contact name and address to ensure that they are valid and appropriate. It is a laborious effort, but considering that each letter sent has an expense associated with it, and the investment in each contact will increase if the letter is to be followed-up by another action, reviewing the contact list prior to sending the first mailer is a wise investment of time and money.

Invalid contact details force a high proportion of returned mail. This drives up the cost without adding value to the activity. Lists contain invalid contact details because the information was never accurately captured to begin with or the information became dated. On average, 1% to 2% of any contact list becomes invalid each month as people change positions. This implies that a list that was generated in 2003 will contain between 10% and 20% of invalid contacts simply due to changes in employment. Rented and purchased lists from publication subscriptions and other sources often suffer from invalid contacts in the 20% range.

Message

Most people will read the first line of any letter prior to depositing it into the circular file. That is all the space sales and marketing teams have to capture the attention of their market. Stuck in the world of one liners, sales and marketing teams need to think in terms of headlines when drafting the letter. Headlines capture people’s attention. In drafting headlines, benefits and higher level values are more likely to entice recipients into reading the rest of letter than features or statements of welcome.

Tell people which problem you solve. Statements about corporate history, features, and interest in doing business with the recipient are unlikely to garner attention. Problems overcome and challenges addressed will capture their attention. People will not devote their time to read to the entire value proposition, but they will be willing to learn that the offering solves a problem.

Communicating with a challenge-solution message appropriately addresses this issue. The challenge-solution message takes the form of “For customers in THE CHOSEN TARGET MARKET who have THE CHOSEN CHALLENGE, OUR BUSINESS has the best SOLUTION VALUE OFFERING because of STATED DIFFERENTIATING OR MARKET CONCERN FACTOR.” The challenge-solution message has all the necessary elements for generating an appropriate response. It tells people that the letter was directed specifically at them if they are in the target market. It tells people that their goals can be met if they are facing the challenge selected. It states that your business will help them reach their goals. And, it gives them a reason to believe that your business’s solution can actually deliver the results they are seeking.

Value

Investing in direct mail as a communication vehicle requires that the response rates and resulting action produce sufficient sales to overcome the cost of the mailing. When this condition is satisfied, executives rationally expend monies to execute direct mail. Quantifying the value of any direct mail campaign depends greatly upon the number of responses created. The number of letters distributed to the target market and their response rate determines the number of responses.

Before sending the direct mail, the value of direct mail can be predicted based upon estimates:

Direct Mail Value =
(List size – Estimated Invalid Contact Details) X Percent in the Target Audience X
Percent Response from Target Market X Value of Generating a Response

The list size less estimated invalid contacts determines the size of the audience that will be reached with direct mail. The percent in the target audience is an estimate of the overlap of the direct mail list with the target market. In well designed direct mail lists, this may reach 100%. The percent response from the target audience can be estimated by either using the standard of 1% to 2% or based upon the track record that the salesperson or marketer has had with direct mail. As to estimating the value of generating a response, sales and marketing teams can consider the costs of using other means to generate a similar response and use that as a standard.

The costs of direct mail contain the cost of drafting the copy, formatting the letter, printing and letter head, and finally postage. Drafting and formatting are fixed costs in this equation while printing and postage are variable.

If the estimated value of direct mail is larger than the expected costs, investing in direct mail can be expected to deliver value. After conducting a direct mail campaign, the value of the campaign is easily determined by the product of the number of responses generated and the value of each response.

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For more on using direct mail, See Full Contact Sport of Creating Business Customers.



About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
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