Data Driven: Planning for Profitability
Do you know what minimum response rate your direct marketing campaign needs to be profitable? What about the required net revenue? How does an email campaign metric differ from a print one?
This is the second in a series of columns regarding the critical metrics of running direct marketing campaigns. In January, I discussed the importance of new client acquisition cost analysis.
For each individual marketing campaign you manage, a breakeven analysis (B/E) should be performed prior to the campaign launch. The overall objective of this analysis is to identify the precise response rate a marketing campaign must generate at various average transactional values to generate a profit. The analysis should be performed ahead of a marketing campaign launch as a "sanity check"—does your plan make sense?
The B/E analysis is equally useful in measuring the overall goals of a campaign and in managing individual client segments that should be included/excluded in your campaign. This holds true for both current client and prospecting segments, as well as online and print campaigns.
The following chart (see mediaplayer at right) provides some clarity on how to run a B/E analysis. Three separate columns are provided. For this example, the analysis is based on a hypothetical print marketing campaign.
Based upon these calculations and depending upon your individual marketing goals, your revenue per piece forecast for a prospecting campaign should be at least $0.63, and $0.71 for a current client campaign.
0% B/E Example
The first column of the chart is used primarily with prospecting. The B/E includes all variable costs, but does not burden prospecting efforts with fixed costs or bottom-line profit targets (contribution of 0 percent). In this case:
- Net Revenue is calculated at 80 percent of the Average Transactional Value.
- Variable Costs are calculated as 20 percent of Net Revenue.
- Pre-Tax Profit Contribution adds Net Revenue (+) to Variable Costs (-).
- B/E Percentage is calculated by dividing Advertising Cost into Pre-Tax Profit Contribution. This represents the minimum response rate percentage needed to breakeven for Prospecting.
- B/E Net Revenue multiplies B/E Percentage by Net Revenue—This represents the minimum revenue per piece needed to breakeven at 0 percent contribution for prospecting efforts.
10% B/E Example
The second column is used for measuring individual existing client segments. It includes fixed costs in the B/E calculation (contribution + 10 percent fixed costs).