Why ROI Is More Important Than Your Up-front Response
“What’s a good response rate?” This question gets asked a good deal in the direct marketing industry. The response rate to a direct marketing campaign is the initial campaign indicator—or the “up-front” results. When response starts coming in, it’s the first measure of results. It’s easy to jump to conclusions about the success of a campaign or test based on this initial measure, but it’s only the tip of the iceberg when evaluating your direct marketing profitability.
Some offers draw a great percent response. Offer something for free, and you’re pretty much guaranteed to get strong up-front results, but you may not sell much of your product or service. Your responders may just take the freebie and run. If you offer a deep discount, you still may get a great response and likely sell more of your product or service, but you need to consider the impact this strategy could have on future sales. Will your customers begin to expect a low-price offer? On the other hand, if your goal is to generate leads for a sales team, then a high up-front response may be just what you’re looking for if you’re confident your sales team can convert these leads to sales.
Are you looking beyond your percent response to profitability?
Calculating your return on investment (ROI) is the ultimate measure of performance. An ROI analysis looks at the back-end results of your campaign and tells you how much money, or profit, you’re actually making. Companies use ROI to measure the success of their business, and you can use it to measure the results of a campaign, an offer, a list, new creative or any aspect of your marketing or product. ROI takes into account both how much money you’re making and the percent return; it’s a mini-P&L of campaign performance.
Using ROI analysis, you can test products, promotions, offers and lists to see which ones generate the most sales, have the highest costs and give you the highest profit margin. Making good decisions based on your test results is the road map to achieving your business objectives. In some cases, the results will be clear and you’ll know which offer is better. At other times, you may get higher sales but a lower profit margin. You’ll need to decide which result will help you meet your goals.
Do you want to minimize your financial risk?
Of course you do! ROI can help you minimize financial risk, which is a big part of making good business decisions. Before finalizing your direct marketing plans, be sure to do a quick ROI analysis. The results may surprise you and save you a costly mistake.
When evaluating new marketing campaign ideas, an ROI projection can help you determine the odds of success for a new offer or promotion idea. If you’re considering an expensive, new direct mail package, the lift in response needed to produce a winner may be completely unrealistic. The low chance of success may not be worth the expense and time given the high risk.
Before raising your prices, use an ROI analysis to evaluate the potential impact on your bottom line based on best-case/worse-case scenarios for the impact on your response rate and back-end results. Good pricing decisions are critical to your success.
Do you have the time for this?
Yes, you can do it over lunch! An ROI analysis can be a simple calculation on a napkin or a complex computer model. Sophisticated marketers may factor in the cost of money and the lifetime value of a customer, but any direct marketer can use a basic calculation to make better decisions. A simple analysis can be better than a sophisticated model if it means you actually take the time to do it.
You pick the winner
Here is a simple comparison of three offers: a control, a free gift offer and a discount offer.
|Special Offer||Control||Free Gift||15% Discount|
|Product & Fulfillment Costs(2)||$8,000||$13,600||$10,880|
|Free Book Cost(4)||$1,488|
1. Return rate is higher on free book offer.
2. Product and fulfillment costs equal $32 per order.
3. Printing, mailing and lettershop costs equal $450/M.
4. Free book cost equals $3.50 per order.
5. Overhead allocation equals 10 percent of sales.
6. ROI equals net sales less total expenses divided by total expenses.
Which offer would you say is the winner in this example?
The control offer, without a special incentive, has the lowest sales but the highest ROI.
The free gift offer generated the highest sales, but since this offer also has high returns and higher costs, it has the lowest ROI.
The 15 percent discount offer has a higher response rate than the control offer, but a slightly lower ROI. The biggest risk of this offer is that customers will begin to expect the discounted price.
You’ll need to decide the winner based on your overall business and marketing objectives. Everyone wants to increase sales and profits, but usually there is a trade-off. Higher sales may come at the price of a lower ROI, but that will help you grow your business. On the other hand, you may need to increase your profit percent, so you’ll be more interested in increasing your profit margin.
ROI can’t set your goals, but it can help you reach them.
Lisa Schmucki is chief marketing officer at MKTG Services, a provider of lists, data solutions and analytics services based in Newtown, Pa. She can be reached at email@example.com or (215) 867-4088.