How to calculate the break-even point of my direct mail campaign is a crucial measurement that should be done before a marketer invests in this or any marketing medium. It’s important because direct mail isn’t guaranteed to sell your products and services profitably.
Often times, a small business marketer will attempt to test a variety of advertising initiatives to promote their business. They see other companies and competitors using direct mail and assume that if it’s working for some, it’ll work for others. And while it may bring customers to their store, it may not bring enough to justify the investment.
Breakeven shouldn’t be the end goal for profit driven companies. The goal of course is to invest in marketing, and develop a repeatable lead generation system that will allow you to repeat the campaign and achieve the same profitable return.
This all starts with first knowing exactly how effective your campaign needs to be in order to exactly how profitable the campaign really is in the first place.
To calculate the breakeven point of your direct mail campaign, you take the Total Cost of your direct mail campaign, divided by the Gross Profit of an Average Customer, and you essentially get your Breakeven Point. It’s the number of sales required to cover your cost of the campaign.
As an example, let’s say you’re marketing to consumers within your geographic footprint and the total cost for a postcard mailing is $5,000, and your gross profit is per new customer order is $100, then you need 50 new customers to breakeven. 50 new customers divided by 10,000 pieces equals .005 or ½ of 1 percent.
Average Customer Gross Profit
In a perfect world, you have one product and sell that one product for the same price to everyone. This makes breakeven and profitability fairly easy to measure. But often times, businesses have multiple products sold at multiple selling prices. So, the above measurement is immediately more complicated. The work around is to keep good record of your transactional data. So, the trick is to figure out your Average Customer Gross Profit. This averaging becomes more accurate as the number of customers measured increases.
Online vs Brick and Mortar
Some businesses are brick and mortar while others solely online. And then some are a combination of the two. In either case, it’s important to get a baseline understanding of the Average Profit for a new customer. You’ll have to take into consideration all the costs associated with both revenue channels.
Lifetime Value of a Customer
Still some businesses will invest in marketing that initially do not generate profitable business on their first order. They’ll instead consider the potential for repeat business of the customer and know that overtime, the profit of a particular customer will increase over time, thereby making direct mail campaigns wildly profitable.
As will all marketing channels, the goal is to fail fast. If you know exactly how a campaign is performing, you’ll be better equipped to stop a campaign before it becomes too costly. Those valuable marketing dollars saved from a faulty campaign can then be diverted to a new campaign or new marketing medium all together.