No matter which medium you choose to market your product, the vendors you deal with are going to try to talk you into spending money on various gimmicks – all under the guise of generating a higher response from prospective customers.
Some of these gimmicks are worth it. Many aren’t. So how do you quantify them to see if they make financial sense?
If you’re marketing online, for example, your copywriter might feel that you need much longer copy to sell your product. But since you’re paying him for it, you need to know if the extra cost is worth the investment.
Likewise, if you’re sending a traditional direct-mail package, your printer might try to upsell you to use more color, upgraded stock, or a fancy envelope.
If you don’t quantify the impact of these costs, you risk throwing away money by overspending. Conversely, you risk getting a reduced response rate by not investing enough.
So today it’s time to learn how to take a few basic steps that will make you smarter as you develop the elements you use to sell your product or service. You’ll evaluate your copy, offers, etc. in a new light when you know exactly what you have to produce in response and sales based on the cost of your marketing effort.
How do you know how much you can spend on marketing? One way is to develop an "Allowable Marketing Cost" model. It’s not as difficult as it might sound.
I’m going to use direct mail as the selling channel in this example, but you can apply the same formula to the costs of e-mail, online, broadcast, magazines, or virtually any other medium. That said, here are the seven steps that will reveal your Allowable Marketing Cost:
Step 1. Begin with the average value of your sale. Let’s say your product or service sells for $100.
Step 2. Calculate every imaginable fixed and variable cost, such as cost of goods, fulfillment, premiums, order processing, and so on. (But don’t include the marketing cost. That comes in Step 6.) Let’s say these costs add up to $50.
Step 3. You need to include overhead as a cost. That includes rent, salaries, etc. You might allocate $10 of your average sale to overhead.
Step 4. Establish a profit objective. It might be, for example, 20 percent of net sales, or $8 per order. ($100 in sales minus $50 in costs minus $10 for overhead = $40. 20 percent of $40 = $8.)
Step 5. Now you can determine your Allowable Marketing Cost by subtracting your costs, overhead, and profit objective from your average sale. In this case, it comes to $32. ($100 minus $50 in costs minus $10 for overhead minus $8 for profit = $32.)
Step 6. Next, you calculate your marketing expenses on a cost per thousand (CPM) basis. Remember, I’m using direct mail as the medium for this example. And I’m figuring a cost of $400 per thousand mailed (40 cents each), inclusive of creative costs, printing, inserting, mailing list rental, and postage. If you are using another medium, use its CPM instead.
Step 7. Now we calculate the response rate required to support all these numbers. When you divide the marketing CPM ($400) by the Allowable Marketing Cost ($32), you learn you must generate 12.5 orders per thousand – a response rate of 1.25 percent – to meet your profit objective of 20 percent (or $8 per order).
A response rate of 1.25 percent means everyone gets paid and your profit objective is reached.
But what if someone suggests you make your letter longer, use more expensive paper, increase the use of color, use an unusual envelope, or take advantage of any one of dozens of ideas to spiff up your mailing and increase cost. And the cost of that idea is an extra $20 per thousand (or an increase to $420).
Using the above formula, you would divide $420 by $32 and discover that the more costly idea will have to deliver 13.125 orders per thousand – a response rate of 1.3125 percent. That doesn’t sound like much extra, does it? It’s just 5 percent. But as any seasoned direct marketer will tell you, getting a 5 percent lift in response isn’t as easy as it may appear.
I’ve learned after nearly 30 years in this business that more color, better paper, and unusual sizes or shapes do sometimes increase response. But my observation is that gimmicks are often used to try to overcome so-so creative ideas. Still, if you can combine an unusual twist on production value with top-notch copy and design, you can lift response more than enough to pay for the extra cost.
Consider these three examples from my personal experience:
* Litho vs. flexo outer-envelope printing
Litho printing is more expensive and needed for certain intricate designs. I have two clients – one in financial services, the other in food – where we’ve tested litho vs. flexo for an outer envelope. The extra cost was about $10 per thousand. And in both cases, the lift in response more than paid for the extra cost. Why? Because the envelopes were visually interesting with strong teaser copy – so I suspect more people opened them. If I can double the number of people who just open my envelope, I double my opportunity for response.
* Two-page vs. four-page letter
I don’t get to test this often, but I was amazed to learn in a test for an insurance marketer that the shorter, less costly, letter pulled better, saving $13 per thousand. A $13 per thousand savings doesn’t sound like much until you realize that we wound up mailing 6 million of these letters a year, saving $78,000 annually, all going to the bottom line.
On the other hand, for this same client, we tested two vs. four pages for a different product directed to a different market. Guess what? The four-page letter lifted response and paid for itself. Like the package mentioned above, we wound up mailing about 6 million of these a year, making the $78,000 additional investment worthwhile for this particular marketing effort.
* Membership cards using paper stock vs. plastic
For an auto club, we tested plastic member cards that were more expensive than cards printed on paper. The response to the plastic card was higher, but, to our disappointment, the paper stock had a more financially favorable acquisition cost per new member. This is an example where a more expensive idea, even with a higher response rate, didn’t equate into a better way to go.
The only way to resolve the question of cost for sure is to test. But doing the math will help you analyze every creative and production decision you have to make.
If you’re a marketer, you must know how to see through gimmicks and recognize break-away sales copy. A good way to learn how to distinguish top-notch copy from average copy is with AWAI’s copywriting programs. (AWAI programs aren’t just for copywriters – they’re for marketers, too.)
After you review your proposed sales copy, determine your Allowable Marketing Cost and use your own "test of reasonableness" to see if it looks like adding an upgraded element to the package will increase response and result in a more favorable cost per order. Do this every time, and you’ll make more profitable decisions.
[Ed. Note: Gary Hennerberg (hennerberg.com) is a regular contributor to AWAI's copywriting programs. He writes sales-generating copy that reaches nearly 40 million households annually. His book on marketing analytics, Direct Marketing Quantified: The Knowledge Is in the Numbers, is available from Target Marketing Publishing.]
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