Tuesday, April 29, 2008

Using Profitability to Measure Direct Marketing Campaigns

As you know, we are huge proponents of measuring the effectiveness of each and every direct marketing campaign -- and looking specifically at the profitability of all DM efforts. If you don't do this, how can you improve your programs over time to ensure that your profits continue to grow? Further, how do you prove to your leadership team (or yourself) that the costs spent on marketing are well worth the effort?

Our friends at Acxiom have just written about this very topic in their latest newsletter, and they came up with a quick and easy template that you can use for your own direct marketing efforts. We like this simple chart because there are some key takeaways to hone in on no matter what the size of your marketing organization.

Take a look at this chart:

If you were just looking at the response rate to measure the effectiveness of these three tests, you'd think (and probably promote internally) that the campaign with the offer of the free gift was the most successful. I mean, come on, a 2.5% response rate? We'll take that all day long, right?

However, when you look at a slightly bigger picture -- the conversion rate, resulting sales less all other costs -- a whole new story unfolds. And, based upon profitability, you would make an entirely different decision about which campaign was the most effective -- and by far! And, by the way, the test with the free gift offer and the highest response rate is the least profitable of the three campaigns! This picture tells a different story, no?

Granted, you may have a few more categories than this to measure, but the point is that the process can be very straight forward. It doesn't take a team of analysts and as Acxiom's newsletter points out, you can do this over lunch on a napkin!

When you measure the ROI of each campaign, you are putting yourself on a path of continuous improvement. You learn from your mistakes and you take advantage of your brilliance. From our viewpoint, there is no reason not to do this.

So, as you're considering your next DM campaign, take a few extra moments to understand the profitability. When the end of the year rolls around and you begin to look at your P&L, you'll really be glad you did this. And as budgets are scrutinized, marketing will look like a profit-center, not a cost-center. I think we can all agree that this is the desired outcome!


Ted Grigg said...

Much needed post Nancy.

Another way to look at the results is to compute the Cost Per Sale or CPS.

The control comes in at $153.41, the Free Gift nets out at 164.18 and the discount at $99.26. So the clear winner is the lowest CPS or the discount at $99.26.

The only thing to consider in addition to the CPS is the long term impact of selling your product at a discount. This tends to lower the brand value. In this case, I would test other free gifts to see if I could come close to the discount offer.

Nancy Arter said...

Great comment, Ted. I think you're absolutely correct about testing other free gifts to see if they come close to the discounted offer.

And cost per sale is a metric that I've seen used in many profitability studies. We've seen that the wireless industry uses this metric very successfully.

Thanks for the comment!