I’m often asked questions like, “What’s a good response rate for direct mail?” or “What kind of open rate should I expect when doing email marketing?”.
The expectation is that I’ll give a numerical answer. Something like, “expect a 2% response rate from direct mail” or “expect a 20% open rate for email”.
Usually, these kinds of questions come from well-meaning business owners who are yet to build their marketing infrastructure.
My answer is always the same – it depends. Sometimes a 50% response rate is a disaster and sometimes a 0.01% response rate is a massive success.
Response rates will vary dramatically depending on factors such as how relevant the message is to the target market, how compelling the offer is and how you came about the list you’re marketing to.
Instead of asking what a good response rate is, which is a nonsense question, they’re really asking, “How do I measure the success of my marketing campaign?”.
HOW TO MEASURE MARKETING SUCCESS
How do you measure the success of a marketing campaign?
For the impatient here’s the short answer: did the marketing campaign make you more money than it cost you? Another way of putting it is, what was the return on investment (ROI) on the marketing campaign?
If it cost you more than you made (or will ever make) on this campaign then it’s a failure. If it cost you less than the profits you made as result of the campaign then it’s a success.
Of course, some people will argue with me and say that even a campaign that lost money was valuable because it “got your name out there” or was some sort of “branding” exercise.
Unless you’re a megabrand like Nike, Apple, Coca-Cola or similar then it’s likely you can’t afford to burn tens of millions of dollars on fuzzy marketing like “branding” or “getting your name out there”.
If you’re a small or medium-sized business you need to get a return on your marketing spend. Putting your comparatively tiny marketing budget into fuzzy marketing would have the same effect as a kid peeing in the ocean.
The only way to win the game of mass marketing / branding / getting your name out there type of marketing is with more firepower (ie money).
If you’re a small to medium business that’s not a game you’re equipped to play. That being the case we need to look at the numbers carefully.
MEASURING MARKETING ROI
Let’s run through an example with some numbers to illustrate. I’ll keep the numbers small and round for the sake of clarity.
You do a direct mail campaign and send out one hundred letters.
The cost of printing and mailing the one hundred letters is $300.
Out of one hundred letters, ten people respond (10% response rate).
Out of the ten people who responded, two people end up buying from you (20% closure rate).
From this we can work out one of the most important numbers in marketing – cost of customer acquisition. In this example, you acquired two customers and the campaign cost you a total of $300. So your cost of customer acquisition is $150.
Now if the product or service you sell these customers makes you a profit of only $100 per sale, then this was a losing campaign. You lost $50 for every customer acquired in this campaign (negative ROI).
However let’s say the product or service you sell makes you a profit of $600 per sale, then this is a winning campaign. You made $450 for every customer acquired (positive ROI).
Now obviously this is a simplistic example but it illustrates how irrelevant statistics like response rates and conversion rates are. Our primary concern is return on investment, which varies based on cost of customer acquisition and how much profit a marketing campaign yields.
LIFETIME VALUE OF A CUSTOMER
With the above example, we determined that if we made only $100 of profit per sale then we had a losing campaign. However, in that example we didn’t take into account one of the other very important numbers used in measuring marketing, customer lifetime value.
If for example we make $100 directly as a result of the campaign but then the customer continues to buy from us down the track, that completely changes the economics of the campaign. A campaign that looked like a loser can, in fact, become a winner when we take into account their lifetime value as a customer.
We now need to take into account how much we’ll likely make on a customer over their entire tenure with us. For example, you might sell printers that require refills or a car that requires servicing or some other service that a customer buys repeatedly e.g. haircuts, massage, insurance, internet access etc.
The money we make upfront on a campaign is known as “the front end”. The money we make on subsequent purchases is known as “the back end”. Together these figures make up the lifetime value of a customer.
Lifetime value and cost of acquisition are the two numbers you need to know to measure marketing effectiveness. The other statistics like response rates and conversion rates in themselves are useless. We just use them to determine these two figures, which give us a true picture of how our marketing is performing.
If you don’t know what these numbers are in your business, then now’s the time to start measuring and making your marketing accountable. Constantly testing, measuring and improving these numbers is how you build a high growth business.