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  Direct Mail Likely to Work for Your Small Business?

Direct marketing (mail, telemarketing, personal contact, etc) can be among the most effective marketing tools for a small business when properly utilized. On the other hand, poorly designed, poorly executed direct mail programs are frequently a waste of time and money.

There are some important differences between the large and small mail campaigns. Typical large company direct mail campaigns may mail as many as 20,000 - 200,000 pieces. Usually they are requesting a response involving a customer cost of less than $100.

In addition, the company may have some name recognition when the prospect receives the mail piece. Frequently, the small business has no name recognition, is selling a product priced over $100, and does not have a large marketing budget. The small business must do some things differently.

Some planning secrets are: The key to small business direct mail success is repeated mailings to a quality list to build name recognition among prospects who are likely to be interested in your product.

Response rates may be extremely low in the first mailing, but usually rise in the third mailing and can continue to rise for several more mailings to the same list. In addition, the campaign is more likely to succeed if the end objective is not a giant step for the prospect. For example if you are marketing services costing more than $1,000, the response rate to sign up for the service will probably be very low.

However, the response rate to attend a free seminar will likely be ten times higher. Then if you convert 25% of the seminar attendees, you come out ahead of trying to make the complete sale in the mail piece. If you are marketing a product costing between $100 and $500, you can try to make a get - acquainted sale, but you should include a discount or premium and a guarantee of some sort to reduce perceived risk.

Now, there are two secrets in using discounts or premiums. Establish an expiration date for the discount. Design the successive mail pieces so that the discounts or premiums are getting smaller. Limit the big incentives to the first three mailings. Then make them smaller. So, how do you decide if direct mail is likely to work for you? Compare the benefit with the cost to decide whether to try direct mail.

This comparison consists of pursuing the following:

  • Estimate the expected first sale, and the value of a new customer. For example, the benefit may be a first sale of $500, which will generate a $100 margin above cost (economic benefit) for the company, and your typical customer stays for three years for an average total revenue generation of $3000 at $1200 margin above cost.

  • Determine the budget you can spend on the entire direct mail campaign. Estimate the non-mail costs of the campaign. These may be as high as $600 to host a half day seminar, $1000 for a reasonable amount of mail piece design, etc. Then, subtract these non-mail costs from the budget to estimate the mail budget. Divide the mail budget by $5 to define the number of prospects you can mail to.

The response rate is likely to range between 0.5% and 5%, depending on how the offers are constructed. Estimate the number of customers resulting from the mail campaign and then multiply by the benefit from step 1. Alternately, divide the total cost (step 2) by the number of responses (step 4 multiplied by 1%) to estimate the total cost of finding a new customer. Compare the benefit to the cost to determine whether direct mail is promising for you.

In this analysis, you will see that the cost of each response is approximately $500 for a 1% total response rate. So, if we define the benefit of a new customer to be $100, then direct mail is not promising. If the benefit is $1000 per new customer, direct mail is marginal if the non mail costs are $1000 or higher.

If the benefit is $1200 per new customer, direct mail starts to look promising if we keep the non mail costs below $500. As the total budget and the benefit per new customer increase, mail direct mail becomes more cost effective.

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