P&G Heads for the Database Abyss
The Arithmetic of Direct Mail
Here’s a sample of direct mail arithmetic—a quick, down-’n’-dirty way to figure out what is needed to make a profit. Obviously, the numbers change based on the selling price and the cost of goods sold. For our purposes here, let’s say shipping revenue and cost of shipping is a wash.
|Revenue per order:||$40.00|
|Cost of goods sold:||$8.00|
|Reserve for returns (15%):||$6.00|
|General & Admin (15%):||$6.00|
(includes credit card processing)
|Allowable Cost Per Order:||$14.00|
If your mailing costs $450/M, then $450 ÷ 14 = 32. Thus you need a 3.2% response for breakeven.’’ Not ideal, but doable.
If you are doing an off-the-page space ad and paying $1,500, then $1,500 ÷ 14 = 107 orders needed to break even.
Okay, so Ms. Consumer buys a $6.00 container of Tide at the supermarket and uses her $1.00-off coupon she got in the mail from Elva Lewis at P&G.
Run the numbers.
Let’s say P&G normally would get $4.00 of that $6.00, but with the $1.00 savings coupon, P&G’s net is $3.00.
Insert $3.00 into the spot for revenue above and $.50 for cost of goods sold. Forget the reserve for returns, but include the 15% each for G&A and profit. Your allowable cost per order is $1.60.
The result: Breakeven is 281 containers of Tide or a 28.1% response.
According to the Friday Report on March 22, 1991, a great redemption percentage on direct-mailed coupons is 50 orders per thousand or 5% (which roughly is double that of a free-standing insert or FSI).
Multiply 50 orders by $3.00 per order revenue and the gross is $150 per thousand, which represents a loss of $300 for every thousand mailed.
This model simply cannot translate to anything near profitability—ever.
Add to this the expense of maintaining this household on a database and tracking the buying patterns on penny-ante items, and there is no way in the world for this system to work.