You can you make money with a response rate of 1% -- or less. Many direct marketers do. But you have to have a clear understanding of the economics of direct mail. You must calculate your potential profit based on all of these factors:

1. Your cost of goods.
2. Your cost per piece mailed. This is explained below.
3. Your cost for creative development. This is explained below.
4. Your packing, handling and shipping costs
5. Your cost to handle returns

     Your first strategic decision will be whether you must make money on the front end. Some highly profitable direct marketers actually lose money on every piece they mail to prospects. But they make enough money on repeat sales to their customer list to wipe out the front end losses and end up with a profit.

     Other direct marketers are able to make money on the front end. You�ll have to run the numbers and make a strategic decision about whether your goal is profit on the front end, or a loss on the front end but profit from back end sales to customers.

Figuring Out Cost Per Piece Mailed

     Let�s look at some of the solicitation costs (cost per piece mailed) involved in direct marketing.

     Your cost per piece mailed includes postage, mailing lists, printing, and assembling the packages in a lettershop.

     If you mail using bulk rate, your postage cost will be between 17� and 24� per piece mailed. Why the wide range? Because these rates are determined by how much sorting you do. And that is partly determined by how many pieces you mail. The larger your mailing, the more you can sort.

     Printing a direct mail package will cost anywhere between 20� and $1 or more per piece, with a typical package coming in around 40� when you print 25,000 pieces. If you print smaller quantities, your cost per piece goes way up.

     Mailing lists will cost anywhere from 8� to 25� per name. These are lists of people with specialized interests. The best lists are subscribers to specialized magazines or newsletters, as well as people who have bought merchandise by mail. These people are called "direct mail responsive," since we know they are willing to buy products sold through the mail.

     Not everyone is direct mail responsive, which is why lists of people who are not proven direct mail buyers usually don�t work as well.

     You do not buy these mailing lists. You rent the names for one-time use, and the list owner has the right to rent the list to other marketers. Most list owners will not rent less than 5,000 names at a time.

Making Sure You Can Get Lists

     You must make sure that there are lists available for the marketplace you want to target, and that they contain enough names (the universe) so you can meet your sales goals.

     For example, if you�re selling widgets to left-handed cartoonists, and you need to sell 1000 of them to make your direct marketing campaign profitable, and you expect a 1% response rate, you need a universe of at least 100,000 names. If you can only find lists for 35,000 left-handed cartoonists, you won�t be able to meet your sales goals.

     You find and rent mailing lists using a list broker. Several good list brokers are listed in our list of Resources for Direct Marketers.

     Once you�ve found the lists you need, you must find out if the owner is willing to rent them to you. You�ll need to have a list broker approach the list owners and get clearance for your planned promotion.

Your Total Solicitation Costs

     Finally, the lettershop inserts the pieces of your mailing into the envelope, addresses it, seals, and stamps it. The lettershop then sorts all the pieces, prepares bag labels, and delivers the bags of mail to the Post Office. Lettershops charge between 2� and 3� per piece for these services.

     Total that all up, and you have a range of roughly 46� to $1.02 per piece mailed for solicitation costs.

     What this means is that a very small test of 5,000 pieces will cost you between $2500 and $5000 in solicitation costs. Why not test fewer pieces? Because you won�t be able to project the results with any confidence. In fact, 10,000 pieces is a much safer test, and many direct marketers test 25,000 and even 100,000 pieces to make sure their results can be projected.

     Why is this so important? Because after you have a package that tests well, you are going to roll it out to every list you can get your hands on. Many direct marketers do this in stages, to minimize risk. But since your printing cost per piece mailed drops dramatically as you increase roll out size, you�ll want to make your first stage roll out at least 50,000 pieces, and preferably 100,000 pieces.

     If your test is too small, you won�t be able to project your returns for your roll out with any confidence. You don�t want to mail quantities of 50,000, 100,000 or more unless you are sure you can project results.

Fees for Creative Development

     In addition to solicitation costs, there are fixed costs that are amortized over the life of a direct mail package. Your biggest fixed cost is for creative development, which will include three factors.

     You have to pay a copywriter to develop a concept for your package and write the copy. Then you have to pay a graphic designer to design the package and turn it into computer files that your printer can work with. Finally, you have to pay for photographs and illustrations if they are used in your package.

     You must make sure that your copywriter and designer understand direct marketing, and have experience getting bottom-line results. Unlike image advertising, or editorial copy, direct marketing involves heavy sales skills. Top direct marketing creative people have learned these skills by trial and error. You don�t want a copywriter or designer to be learning at your expense.

     Seasoned direct marketing copywriters charge an up-front fee of $3000 to $15,000 for a direct mail package, with the average package costing $4000 to $6000, in addition to any mailing fees. Designers� fees are in the same range as copywriters�. Why the wide range? Some packages are more complex than others. And some types of packages, like sweepstakes, take more work to create.

     Based on these figures, the fixed cost for a direct marketing test ranges between $6000 to $20,000, with the average around $10,000. Top copywriters and designers may charge even more than this.

Your Total Cost for a Direct Mail Test

     Add the solicitation cost to the fixed cost, and your average 5,000 to 10,000 piece direct marketing test costs about $15,000 to $20,000 plus overhead.

     With that kind of money riding on the results, you want to make sure you have the right creative team. Here are some questions you can ask copywriters and designers to help you make the right decision:

Questions to Ask Copywriters and Designers

1. How many direct mail packages have you written? It takes practice to learn how to sell the goods by direct mail. A copywriter who has written fewer than 25 packages is probably still learning the basics.
   


2. What are your three most successful packages? The writer�s description of results should be based on response rates and profits. A seasoned direct marketing copywriter won�t stop at three. Watch for enthusiasm. A strong direct marketing writer is enthusiastic by nature.
   
   He or she should be able to tell you about packages that have become new controls and rolled out several times. A fancy package is nice, but unless it got results, appearances don�t mean a thing.
   


3. What is good design? There�s only one correct answer here: Good design sells the goods. Good direct mail design is often ugly. White space in a direct mail package may not be good. Packages that get results are often crammed with copy.
   
   Winning packages often use graphics that are not attractive, like rubber stamps, handwriting, and highlighting. But the design and the copy work together to make benefits pop out and grab the prospect. If a writer or designer describes good design this way, you are on the right track.
   
   
4. What tools do you use to sell the goods? Strong direct mail copy plays on two basic emotions: fear and greed. If a copywriter mentions these emotions, ask how he or she works them into the copy. Find out how the copywriter grabs the prospects� attention, answers objections, and closes the deal. A direct marketing copywriter must be a sales person, and must be familiar with sales tools.
   

If You Need a Consultant to Get Started

     If all of this sounds like Sanskrit or Latin to you, you may need a consultant to help you get started. David R. Yale, Direct Marketer can help you develop an action plan for direct marketing � even if you have no marketing experience. I�m available on an hourly consulting basis, with no large retainers required. Call me or click here to contact me, and I�ll be happy to discuss your direct marketing needs.

Frequently Asked Questions

• Can you predict response rates?
• What�s in a typical direct mail package?
• What�s a front end?
• What�s a back end?
• What is clearance from a list owner?
• What is a control?
• What is a concept?
• What is a lettershop?
• What is a list broker?
• What is a roll out?

     Can you predict response rates? No. Even though seasoned direct marketers develop a good sense of what will work, there are always surprises. Concepts that work in one marketplace may not work in others.

     Packages that look like winners sometimes fail. And packages that everyone is sure won�t do well, sometimes become champion performers.

     There�s only one way to determine if a package will work: test it. Testing is the one of the most important ways to insure direct marketing success.

     What�s in a typical direct mail package? Unless it�s a self-mailer, every direct mail package has an outer envelope and a letter. The letter is the chief selling tool, which is why packages without letters almost never work.

     Even if you have a toll-free number, the package should have an order card. Some people will not respond by phone. Tests by AT&T showed that an order card boosts package response.

     There should also be a reply envelope to return the order card. This is especially important if you�re asking for credit card numbers. Most people won�t fill in these numbers on an order card unless it mails in an envelope.

     Direct mail packages can also have brochures, buckslips, lift notes, and other sales material. Don�t minimize these! A single 3" x 7" lift note has been known to double response. Many marketers find that additional inserts in their packages boost response significantly.

     What�s a front end? A front end is a direct mail package sent to a prospect, as opposed to a customer. Some direct marketers lose money on front ends, but make money on back ends.

     What�s a back end? Once you have converted prospects to customers, you send them more promotions, called back ends. Since customers are far more likely to buy from you than prospects, back ends can be very profitable. Before you start a direct marketing campaign, you should have back end products ready.

     What is clearance from a list owner? Mailing lists are valuable property, bringing in thousands of dollars in rental fees yearly. List owners want to make sure that your offer is legitimate and that it won�t compete with them. So most of them ask for a copy of your promotion before they�ll agree to rent to you.

     What if you don�t have a promotion yet? An experienced direct marketing copywriter can write a brief summary that usually gets list clearance, and can help guide you through the clearance procedure.

     What is a control? A control is a successful direct marketing package that is making a profit and that has not been beaten by a test package. Many controls wear out in 6 months to a year, and must be replaced. But some masterpieces have been controls for five, ten and even 20 years.

     What is a concept? The concept is the creative idea behind a direct mail package. It�s the framework on which the sales process is built, and it determines the copy, the design and the offer.

     What is a lettershop? A lettershop puts your mailing together from the printed pieces. They address your package, insert the pieces in the envelope, and seal it. Then they apply the postage with a meter or stamps, unless you have a pre-printed postal indicia on your envelope. Next, they sort the mail by 9 digit zipcode, and sometimes by carrier route. Finally, they bag the mail and deliver it to the Post Office. Several good lettershops are listed in Resources for Direct Marketers.

     What is a list broker? A list broker specializes in renting mailing lists. A good broker knows about what lists are available, who owns them, and how they have performed. A broker with experience can help you choose the best lists, get clearances, place orders, and avoid pitfalls that new direct marketers might not be aware of. Several good brokers are listed in Resources for Direct Marketers.

     What is a roll out? Once a package has met financial targets in a test, it is rolled out to as many names as you can find. Savvy direct marketers usually don�t roll out to all the names available at the same time. They do it in stages, with each stage larger than the one before it.