How to Calculate Breakeven on Direct Mail Campaigns
Calculating direct mail breakeven is critical because it’s a key metric when planning the circulation of a successful direct mail campaign.
Start by using estimated costs to determine your initial campaign breakeven. Then create a preliminary circulation plan based on the projected revenue of each list segment.
An increase in print quantity has the potential to lower your campaign breakeven. On the flip side, a substantial decrease in your print quantity could result in a significantly higher breakeven.
Breakeven numbers are fluid and changes to direct mail campaign quantities or direct mail formats can cause your breakeven to fluctuate.
As a direct mail consultant, I calculate catalog breakeven all the time. I’m typically evaluating various direct mail format options ranging from postcards to trifolds to catalogs, while simultaneously running what-if scenarios on print quantities, to determine the optimal combination to achieve a client’s direct mail goals.
Sometimes we start off with a wish list. The client wants to increase page count or use a more expensive paper. After the quotes come back, we run the numbers to see whether it’s feasible with our overall objectives. Can we afford to add another $0.09 per piece to our print costs this year? Will the sales from the added pages of merchandise offset the cost increase? Calculating breakeven can help you make those decisions.
In other situations, we start with a maximum cost in the mail because we have precise goals and a fixed budget. The client wants to create a smaller-page prospecting catalog and break even on the mailing. We take the projected revenue per book for the prospect lists and work backwards to calculate a print cost goal. Then we take that number and explore a couple of different page counts and print quantities to see which option works best for the client.
Calculate your catalog breakeven point
To calculate direct mail breakeven, use the following formula:
((Print cost per piece) + (Postage per piece))/(1-(Cost of goods sold % + Operating expense %)) = Breakeven per piece
For example, let’s assume it costs $0.24 to print your direct mail piece, postage costs $0.28 per piece, CGS is 55% and your operating expense is 5%.
(($0.24) + ($0.28))/(1-(0.55+0.05))
$0.52/0.40 = $1.30
You need to generate at least $1.30 per book to break even.
If you have other expenses, such as list rental, just add them (expressed as per piece) to your print and postage expenses.
For example, if we are mailing co-op prospects that cost an average of $0.06 to order, then breakeven increases from $1.30 to $1.45
($0.52+$0.06)/0.40 = $1.45
Adding $0.06 in prospecting expenses resulted in an additional $0.15 added to your campaign breakeven.
If your direct mail campaign includes customers and prospect lists, then you have two sets of breakevens to manage. Your customers can sustain $1.30 per book while prospects (list rentals) require $1.45 per book. This assumes you want your prospects to break even, which leads us to…
Determine which results matter to your brand
Identify what your goals are for the campaign. Do you need to create awareness for your brand? Is your goal to increase sales? Or do you want to acquire new customers?
Your answers to these questions will help you figure out how to use your breakeven number to plan and finalize your direct mail campaign circulation.
Here is a simplified example of a potential direct mail campaign plan:
>> Mail above breakeven and generate profitable revenue from the active buyer segment.
>> Mail at, or slightly below, breakeven to the inactive buyers with the goal of reactivating them.
>> Mail below breakeven to your prospect lists based on a pre-determined cost per acquisition goal. (You know that you can profitably acquire new customers at a cost of up to $9 each based on re-purchase rates and other key metrics.)
If you calculate lifetime value (you run this, right?) and you know what % of your newly acquired customers remain active with your brand (this is different than your overall retention rate), you can develop customer acquisition goals and use this in your direct mail campaigns.
Use our catalog breakeven calculator if you’d like to run some quick breakeven scenarios based on estimated costs.
The next few blog posts will take a deeper dive into catalog breakeven and provide insights into why you should create two sets of breakeven – one for prospecting and a much higher one for customers based on direct mail attribution.
We’ll discuss how to attribute sales to catalogs or direct mail campaigns and why you should consider using a different breakeven calculation based on organic sales.
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