Creative Corner- Mail-order Math (810 words)
What you need to know before you get creative
By Lois Geller
When new clients come to our agency, they often will start a meeting by discussing creative possibilities: "What do you think the ads should look like?" "What do you recommend for direct mail pieces that really jump out and excite prospects?" "Should we test a direct response commercial?"
Usually, I suggest that before we discuss creative, we find the marketing allowable.
And usually they'll reply, "What do you mean?"
I explain that we have to know, at the beginning of the process, how much we can spend to acquire a customer. We call this our marketing allowable. As we've seen from many recent dot-com failures, sacrificing profitability in the name of customer acquisition is a formula for disaster.
So, I thought I'd use this column to review what I call mail-order math. You might want to get a pencil and walk through the steps of the following hypothetical example with me.
Let's say we sell gold-plated key chains and our selling price is $49.95. We charge an additional $4.95 for shipping and handling. So, our gross revenue per order is $54.90.
Now let's look at some costs …
Product cost: $9.50
Credit card processing fee: 3 percent with
80 percent of orders using credit cards
(80% of 3% of $54.90): $1.32
800 number: $2 per call with 80 percent
of orders coming via phone (80% of $2): $1.60
Bad debt: 2 percent of $54.90: $1.10
Returns: 5 percent of $54.90: $2.75
Shipping costs: $3.95
Total costs: $23.22
The "Breakeven" Allowable
Next, we'll calculate our breakeven allowable. Take the gross revenue per order and subtract the cost per order:
$54.90 - $23.22 = $31.68
Breakeven allowables are fine to work with, but you also want to work in your profit. Let's assume a profit of 30 percent on product costs: