Direct Marketing 101 Workshop 4
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This document provides an overview of key concepts in direct marketing, including database marketing, analytics, and testing. Some key points covered include: - The importance of having customer and prospect data to achieve relevance in direct marketing. - Types of database marketing include conquest, up-sell/cross-sell, frequency and loyalty, and advocacy marketing. - Analytics involve measuring metrics like response and conversion rates to evaluate campaign performance. - Testing different creative elements, offers, packages and audiences is important to optimize direct marketing campaigns. Sample sizes need to be large enough to draw meaningful conclusions from tests.
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Direct Marketing 101 Workshop 4
- 1. Direct Marketing 101 Workshop 4 Direct Marketing Database, Analytics & Testing (651) 315-7588 Direct Marketing 101 - Database, Analytics & Testing
- 2. Database Marketing The key to direct marketing success is relevance. The key to achieving relevance is having information about your customers and prospects. (651) 315-7588 Direct Marketing 101 - Database, Analytics & Testing
- 6. What is a Marketing Database? A marketing database is a collection of information which helps you to spend your marketing budgets more efficiently. It allows you to focus your resource upon the superior opportunities and helps you to develop longer more profitable relationships with your customers. (651) 315-7588 Direct Marketing 101 - Database, Analytics & Testing
- 10. Examples of Consumer Data (651) 315-7588 Direct Marketing 101 - Database, Analytics & Testing Data Type Uses Where From? Name and address Addressing mailings, deduplication Responses from advertising, rented lists, directories Promotional responses – what sent, how responded Targeting and list selection Own response data, rented lists Enquiries – what about? Targeting and list selection, product development Own records, rented lists Purchasing behavior Segmentation, timing and targeting Own records, rented lists Complaints Selection of research groups, no mail – selection, product development Own records Demographic – household composition, etc. Targeting of campaigns, profiling existing customers Electoral roll, lifestyle databases, from Experian and others Lifestyle characteristics: hobbies, buying habits, etc. Targeting and profiling, development of offers and messages Experian and others Neighborhood characteristics: property types, rural/urban, etc. Geodemographics Targeting and profiling, development of offers and messages e.g., MOSAIC from Experian
- 11. Examples of Business Data (651) 315-7588 Direct Marketing 101 - Database, Analytics & Testing Data Type Uses Where From? Company name and address, parent company information as well Addressing mailings, deduplication, pricing and service decisions Advertising responses, directories, rented lists, Experian and others Name, title and function of individual Personalization of mailings, targeting of messages and offers Rented lists, Experian and others Buying characteristics: products, quantities, frequency, etc.; buying process, decision making groups Targeting of mailings and offers; segmentation of customers Own records, Experian and others Promotional responses; what sent, how responded? Targeting Own data, rented lists Enquiries – what about? Targeting, product development Own records, rented lists Area characteristics; business sectors (SIC Codes), geographical, urban/rural, density of potential business Targeting of campaigns, sitting of distribution points, sales force management, sales forecasting Own data, sales force feedback; Experian and others Competitor information Research, campaign planning Own research and sales force feedback Complaints Forming groups for customer research, product development Own records Turnover and financial data; year end data Risk prediction, sales predictions, targeting of messages, timing of offers, segmentation Companies, house, Experian and others Number of employees, sites, computers, vehicles, etc. Targeting and segmentation Lists, Experian and others
- 13. Analytics (651) 315-7588 Direct Marketing 101 - Database, Analytics & Testing
- 17. Economics That Affect the Bottom Line (651) 315-7588 Direct Marketing 101 - Database, Analytics & Testing Costs Advertising Income Fixed Costs Media Buys Sale Price “ Goods Sold” Mailing Lists Shipping Fees Incremental Costs Computer Services Units per Sale Fulfillment Costs Creative / Production Trade-ups Shipping Costs Printing / Mailing Conversion Credit + Returns Postage / Nixies List Rentals
- 20. The Basics Cost per Response (CPR) Promotional Cost ÷ Responses = Cost Per Response (651) 315-7588 Direct Marketing 101 - Database, Analytics & Testing
- 21. The Basic Promotional P&L Income – (Cost + Advertising) = Profit Or Allowable Margin (AM) Income – Cost = Advertising + Profit (651) 315-7588 Direct Marketing 101 - Database, Analytics & Testing
- 22. The Basic Breakeven Response Necessary To Achieve Income – Cost = Advertising Expense Or Orders to BE = Net Sales/M Net Order Contribution (651) 315-7588 Direct Marketing 101 - Database, Analytics & Testing
- 23. Direct Response Formulas (651) 315-7588 Direct Marketing 101 - Database, Analytics & Testing Marketing Income % = (( Margin $ ’ s per Order x Response Rate % - Adv $ ’ s per 1 , 000 ) / Response Rate %) / Average Order Value Or M . I .% = M x P – A / P . O . P Marketing Income per 1 , 000 ( m / M ) = M x P – A Marketing Income per Order ( m / O ) = M . I .% x P . O . = m / M P P = A ÷ ( M – ( M . I .% x P . O .))
- 24. Geometric Leverage: Effect of CPO on Profit (651) 315-7588 Direct Marketing 101 - Database, Analytics & Testing Example: $5 margin and $50,000 advertising budget CPO ($) Orders Margin Profit 6 8,333 41,665 (8,335) 5 10,000 50,000 0 4 12,500 62,500 12,500 3 16,666 83,330 33,330 2 25,000 125,000 75,000 1 50,000 250,000 200,000
- 25. Effect of Response on Profits (651) 315-7588 Direct Marketing 101 - Database, Analytics & Testing Plan + 20% sales + 20% sales +20% ad cost - 20 % sales S ales $80MM $ 96MM $ 96MM $ 64MM L ess Promo Cost 20 2 0 2 4 2 0 L ess Direct Expense 41 4 9 4 9 3 3 L ess Fixed Costs 12 1 2 1 2 1 2 T otal Costs $73MM $ 81MM $ 85MM $ 65MM Profit $7MM $15MM $11MM ($1MM) Profit Plan vs. Plan +$18MM +$4MM - $8MM Percent Over Plan +114% +57% - 114%
- 26. Cost of Acquisition One Step Direct Sale Space Ad (651) 315-7588 Direct Marketing 101 - Database, Analytics & Testing V ariable Costs E xample 1 E xample 2 E xample 3 T otal Circulation 1 ,000,000 1 ,000,000 1 ,000,000 R esponse Rate 0.1% 0 .05% 0 .05% T otal Responses 1 ,000 5 00 5 00 A verage Order Value $19.95 $ 19. 95 $19.95 G ross Sales $ 19,950 $ 9,975 $ 9,975 M argin Before Advertising 35% $ 6,983 $3,491 $6,991 S pace Ad Cost / 1,000 $ 10 $ 10,000 $ 10,000 $ 10,000 P rofit Contribution ( $3,01 7 ( $6,509) ( $3,009) P rofit Cost per Name ( $3.02) ( $ 13,02) ($ 6.02)
- 27. 2-Step Conversion (651) 315-7588 Direct Marketing 101 - Database, Analytics & Testing V ariable Costs E xample 1 E xample 2 E xample 3 S tep 1: Inquiry Ad T otal Circ 1 ,000,000 1 ,000,000 1 ,000,000 R esponse Rate 0.05% 0 .5% 1 % T otal Responses 500 5 ,0 00 1 0 ,000 A dv Cost per 1,000 $10 $ 10,000 $ 10,000 $ 10,000 L oss ($10,00 0 ) ( $10,000) ( $10,000) C ost per Name ( $20) ( $2) ( $1) Step 2: Mailing to Inquiries M ailing to requestors 5 00 5 ,000 1 0,000 Response Rate 1.6% 5% 7.5% Total Responses 8 250 750 Average Order Value $ 75 $75 $75 Gross Sales $600 $18,750 $56,250 Margin $ ’ s Before Adv Costs 35% $210 $6,563 $19,688 Advertising Cost per Mailing $0.50 $250 $2,500 $5,000 Advertising Cost (Inquiry Generation) $10,000 $10,000 $10,000 Profit Contribution ($10,040) ( $5,937) $4,688 Profit per Name ( $ 1,255) ($23. 75) $ 6. 25
- 28. Test vs. Rollout Costs (651) 315-7588 Direct Marketing 101 - Database, Analytics & Testing The only difference is the advertising costs per thousand circulation drops because the creative costs are amortized over the larger circulation; and depending on media the production and media cost may also decrease. Package Quantity CPM Response CPO Test Cost 10,0000 $600 4.2% $14.29 Rollout Cost 100,000 $270 4.2% $6.43
- 31. Typical Response Curve (651) 315-7588 Direct Marketing 101 - Database, Analytics & Testing
- 32. Typical Response Curve (651) 315-7588 Direct Marketing 101 - Database, Analytics & Testing
- 36. Testing “ Testing is the heart of direct response and it’s the element of the medium that makes it potentially the most effective, most productive, in the world.” - Joel Blattstein, Schein/Blattstein Advertising, Inc., 1979 (651) 315-7588 Direct Marketing 101 - Database, Analytics & Testing
- 40. Sample Test Matrix (651) 315-7588 Direct Marketing 101 - Database, Analytics & Testing List Control Group Creative Format 1 Creative Format 2 No Action Offer A Offer B Offer A Segment Group 1 5K -- -- -- Segment Group 2 -- 5K 5K 5K Segment Group 3 -- 5K -- -- Segment Group 4 -- -- 5K --
- 42. End of DM 101 Workshop 4 See Workshop 5 to Continue Our complete Direct Marketing 101 Workshop series can be conducted via webcast or in person depending on your preference. For more information about this workshop, others and our consulting services, contact DWS Associates today at (651) 315- 7588 or [email_address] ! (651) 315-7588 Direct Marketing 101 - Database, Analytics & Testing
Editor's Notes
- To be effective, a database marketing effort should include these components
- Having a database allows you to analyze the behavior of your customers and identify their key characteristics. This enables you to: Communicate more relevantly with your existing customers and make more profitable sales to them over time. Use your knowledge of the "profiles" of your existing customers to finesse your targeting of new prospects. Increase the productivity of your marketing budget through better targeting and less waste. Improve your forecasting and measurement making all your marketing activities more accountable. Provide accurate business reports. Improve the effectiveness of all contact with customers by giving access to data to employees who are interacting directly with customers. This improves customer service and helps keep customers loyal. Develop more relevant products and services through dialogue with your customers. A marketing database is a collection of information which helps you to spend your marketing budgets more efficiently. It allows you to focus your resource upon the superior opportunities and helps you to develop longer more profitable relationships with your customers. It can also play a big part in other functions such as sales management, branch planning, risk evaluation and customer care. A database is more than just a source of names for direct mail. There are real benefits to consolidating data and distributing it round the business.
- In direct marketing, the database helps you build your customer relationships…
- How do databases work? A database is like a sophisticated filing cabinet. It does not hold an individual file for each customer as you would with a normal filing cabinet. Each of the files (or "tables") contains a different type of information such as…see slide. The advantage of this structure is that any record in any file can be linked to any other relevant record in any other file. (This kind of structure is known as a "relational database" and is the most usual way of building databases. All of this information is tied together by giving each customer record a unique reference number (URN) which is held in every file
- Garbage in, is garbage out and accurately capturing and maintaining data is the biggest problem in direct marketing and using a database for marketing purposes. There is nothing worse than mailing a letter to a prospect with the wrong salutation or wrong name. Data also ages. To minimize these kinds of problems with data, you need to…see slide.
- Points to consider in measuring the effectiveness of a campaign. If the campaign was designed to sell then the key success criteria is likely to be profitability . To calculate this at a general level you simply subtract the total costs of the campaign from the revenue generated. But this is only part of the picture. It does not tell you who responded and why. The best way to achieve this information is to have coded the response device with a code relating to the list the respondent came from, or the pack or offer thy received - or even simply, which campaign they are responding to! This means that the performance of each campaign, list, pack or offer can be measured. Codes like this tell you things such as: The most productive list (not necessarily the most responsive!) Profiles of your ideal respondent so that you can find "look-alikes" next time Best offers for different segments of your audience.
- CPI (Cost Per Inquiry) CPL (Cost Per Lead)
- Name Value: is the value of a customer name based on future sales as part of the company’s customer list and / or the value it makes as a contributor to list rental income. Time Value: Not used very much, but it is the value of money tied up in advertising and premium investments that could be earning income if it were invested.
- CPR (Cost Per Response) CPI (Cost Per Inquiry) CPO (Cost Per Order) CPC (Cost Per Click) ROI (Return on Investment) ROAI (Return on Advertising Investment)
- CPR can refer to cost per lead, cost per member, cost per subscriber, cost per click-through or any variation that is relevant for a particular business. You’ll also see CPO, cost per order and CPL, cost per lead, but the basic formula is always the same.
- The Allowable Margin is a common short-cut used in direct-marketing. It’s shorthand for the figure that includes profit and advertising expense.
- Increasing or decreasing the response rate can affect the profitability of a program. It is important to be aware that the impact of increasing or decreasing response rates—and the inverse relationship on cost per response—produces a geometric impact, not a linear one, on the bottom line.
- Definitions %M.I. = Marketing Income (Gross Profit) Percent M = Margin Dollars per Order P = Response Rate or Pull A = Advertising Cost per Thousand Circulation = Labor + Components + Postage P.O = Payout = Average Order Value + Shipping & Handling Charge m/M = Marketing Income per Thousand Mailings m/O = Marketing Income per Order
- Example: $5 margin and $50,000 advertising expense. Notice how a modest change in the CPO makes a dramatic difference in profitability. This is why it pays to seek better response rates. The use of “margin” (allowable for advertising and profit, or sale price after deducting all expenses except advertising) simplifies marketing calculations. The geometric leverage of direct marketing has a simple explanation. As results improve, you not only get more profit per order but you get more orders. This is why it pays to test packages. An expensive one may actually do much better.
- The direct expense is 50% cost of goods plus 1,000, increasing or decreasing as a function of sales. In actual practice, the decrease in sales may also result in unsold inventory, not reflected in this example. Source: Direct Marketing by Edward Nash
- Chart shows the effect of changing response rates and average order values.
- The cost of acquiring a customer – two-step conversion.
- This curve would be similar for orders or leads from a direct mail campaign.
- Try to focus on the average unit sold, and break up all the revenue and cost components that comprise the unit. Once you get to a profit / unit, just multiply by units sold to a customer over the "lifetime," minus overhead and promotional costs, and you get LTV. Average price, cost of goods sold, gross margin...should be easy to find. To get customer service costs, look at how many units you move annually, and divide by annual customer service cost. Do the same thing for returns, and so on, until you know the costs / unit sold of all the elements going into a sale. Don't forget credit processing, after sale support, etc. For example: Net Profit per Unit Analysis: Average Sale Price $40.00 100% Cost of Goods Sold (36.00) (90%) Gross Margin 4.00 10% Credit Clearing (.80) (2%) Revenue Ship & Handle 6.00 15% Cost of Ship & Handle (4.00) (10%) Call Center (1 call every 5 sales) ( .80) (2%) Returns and Processing (5% of Sales) (2.00) (5%) Fraud / Merchandise Loss (1% of Sales) ( .40) (1%) Promotional Costs /Discounts / Ads ( .80) (2%) Net Profit per Unit $1.20 3% LTV Calculation and Customer Acquisition Cost Calculations: Say the average customer buys for 2 years, then stops for at least 1 year. Therefore, we define the Lifetime of a customer as 2 years. Over 2 years, the average customer makes 16 purchases. 16 x $1.20 Profit per Unit = $19.20 LTV of the average customer The average customer recruits 3 other customers. The maximum acquisition cost of a new customer should be 4 x $19.20 = $76.80 to breakeven.
- A discussion of the different cost factors and changes in cost that affect these campaigns.
- The Top 10 Test Ideas in Direct Mail What are the top 10 test ideas to use in direct mail for better response? Well, it would all depend on your objective, past testing, your offers and any marketing problems you’ve had. That’s according to Pat Friesen – a direct response creative strategist. Here are some of her tried-and-true ideas. 1) Add the word “FREE” to your outer envelope teaser copy or to the subject line of your email sales message. 2) Studies show that ad headlines draw 28 percent more attention when placed in quotation marks. Why? Because it appears more important. 3) Test a phone follow-up to non-respondents (especially within your customer base). 4) Offer a free sample to overcome the “I don’t believe it” objection (i.e. soft as cashmere, look and feel of genuine leather, washable wool that doesn’t shrink). 5) Say “thank you” to gift-buyers with no-strings-attached gift certificate for them to use. 6) Use the unexpected: Transform the flap side of an envelope into the addressing side, print your message on the back of an 8” x 10” photograph, run extra copies of the jacket of a book you’re selling and print your sales letter on the back side, etc. 7) Put your deadline on the outside of your envelope or in the subject of your email – especially when writing to customers. 8) Change the color of the outer envelope of your control mail package (leave everything else the same). 9) Include a deadline in your offer (along with a believable explanation for it). 10) Product photos with a human or human element in them attract more attention and generate more response than those without. ---- Pat Friesen is president of Leawood, Kan.-based Pat Friesen & Company. She has more than 25 years of direct marketing experience.