Make your direct-response campaign more cost effective

Tags: News
Everyone is accountable. Even in advertising and marketing. It is not surprising that companies are pruning budgets for marketing and advertising and demanding better return on investment for every rupee to be spent at the budgeting time. In this scenario, a true understanding of direct-response advertising and the skills it requires will be essential.

How could a tool associated only with direct mail be so critical to present scenario? Direct-response advertising is much more than direct mail; it is separate from general advertising and can be used in all media. Understanding when and how to use it is the key. Direct-response advertising is an overall approach to marketing, where the goal is immediate action. Information about the action is tracked, recorded, and analysed, hopefully in a database, to improve relevance to customers. Looking at this definition, we can see that many of the campaigns are actually direct-response efforts: TV, newspaper or magazine campaigns drive calls to a specific number or address.

Benefits of direct-response advertising include accountable marketing expenditures through tracking that can determine exactly how your funds should be spent. Direct response allows you to maximise your results by focusing on the products, markets, media, and offers that deliver the strongest return. We are all familiar with general or image advertising. Image advertising should be used when our primary objectives are building awareness, introducing something, creating an image, building a brand, or establishing a positioning. Direct-response advertising should be used when our primary objectives include generating leads or sales. Because image advertising and direct-response advertising are used to accomplish different objectives, they should be used differently.

Image advertising strives for attitude change and should generate name recognition and incorporate strong branding elements, emotion, fantasy, imagery, and repetition. Direct-response advertising seeks behaviour change and should generate immediate action by using a specific offer, product information and reason. The objectives are quantifiable and might include sales, new accounts, or new customers.

Number of calls, depth of information requests, or number of leads is not the bottom-line objective in a direct-response campaign. You could have fabulous store traffic, mail out thousands of information packets, and generate a flood of phone calls and still have a highly ineffective programme if these never turn into new accounts or closed sales. Budgets for direct-response advertising also start with objectives, then work backward to determine how many households or companies must be reached.

For example, for a lead generation programme, we might set a campaign objective of 20,000 sales, determine the average close ratio (leads to sales) to be 25 per cent, and determine the number of qualified leads needed to generate 20,000 sales (80,000 responses). Then determine how much it will cost to bring in 80,000 qualified leads. That equals the budget. If past response is 5 per cent, then 1,600,000 pieces need to be mailed to yield 80,000 qualified leads. For print, if past response is 2 per cent, then a reach of 4 million is needed to yield 80,000 qualified leads. We then price a 1,600,000-piece direct mail campaign or a print campaign that reaches 4 million readers. If we can’t run a campaign that mails these many pieces or reaches this many readers due to budget constraints, then our objectives need to be modified. It is critical to run these numbers before a campaign begins to ensure that management understands the economics of the promotion.

Marketing expenses revolve around gross margin per sale. Usually, the maximum we can afford to spend equals the expected gross profit the product or customer account will generate. This assumes we are willing to bring in customers or generate sales to break even, with the hope we can cross-sell additional revenue-generating products or services, or begin to earn revenue on the account after the first sale. If we have to do better than break even, then the maximum we can afford to spend is less than the gross profit per sale. To compute the complete expected profit picture per customer, two pieces of information are needed: gross profit per product, or account, per year, and average length of time each type of account or customer stays with us. These two measures allow us to compute the lifetime values of accounts. It may be worth bringing in customers at the break-even point or at a loss, if, over time, the profit potential is good.

Once we know the maximum amount we can spend to bring in new sales or customers, we can use cost benchmarks in planning a direct-response campaign. If we know we have brought in new sales or customers at Rs xx per sale, then the cost-effectiveness of every promotional vehicle can be measured against that benchmark.

If backing into our budget based on the objectives, cost benchmarks, gross profit, average time as customer and lifetime value measures are not essential components of our marketing plans now, they should be. zz

(The writer is CEO and MD

of CustomerLab)


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