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).
In this scenario, the 10% B/E is calculated identically to the 0 percent example, except Fixed Costs (represented as 10 percent of Net Revenue) is added in to the equation; Pre-Tax Profit Contribution adds Net Revenue (+) to Variable Costs (-) and Fixed Costs (-).
20% B/E Example
The final column of the B/E analysis chart includes any pre-tax profit contribution goals your company requires. In this case, an additional 10 percent profit goal is built into the equation (contribution + 10 percent fixed + 10 percent profit goal). This is quite effective when measuring an overall campaign strategy.
The 20% B/E example is also calculated the same as the 0 percent example, except Fixed Costs and a 10 percent profit hurdle are added in to the equation; Pre-Tax Profit Contribution adds Net Revenue (+) to Variable Costs (-), Fixed Costs (-) and Profit Target (-).
We now know what minimum response rates and revenue targets per advertising piece need to be to help us plan the contact strategy. The B/E analysis is also a perfect application for "what-if" observations; for example, what if the Average Transactional Value were $120 or $140?
Of course, there are nuances that can be applied to the B/E analysis. Building upon the last column's Lifetime Value analysis (LTV), if you are measuring an individual prospecting segment and have calculated that prospecting list's LTV, then you add the individual client's cumulative LTV to the Average Transactional Value. In the 0 percent column from the B/E chart, adding in a $20, 3-year cumulative LTV factor lowers the B/E percent needed to 0.65 percent.
The B/E analysis is equally adept at measuring online campaigns. The major difference is in the advertising cost. An email effort is more likely to be $0.05, rather than the $0.50 listed in the chart. Your B/E is therefore considerably lower (of course, so is your response rate and average transactional value), allowing you to communicate with potential clients for pennies.
By planning to be profitable and spending the time up front, your campaigns will produce higher ROI. Isn't this something we should all be doing? In my next column, we'll explore how to understand and apply online marketing metrics to a P&L statement.
Philippe Graner is director of marketing strategy at the Misson, Kan., direct marketing agency J. Schmid & Associates. He can be reached at email@example.com