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IF A LITTLE IS GOOD, THEN MORE IS BETTER, RIGHT? Well, no, not when it comes to catalogs, emails or other direct marketing campaigns. Believing that "more is always better" leads many marketing decision-makers to spend far more than they should. |
For example, if you send too few offers, you will not penetrate your market. This leaves "money on the table" that you might have put into your bank. On the other hand, you can send out too many offers. This happens when the cost of your campaign exceeds the revenue that it generates. So, how do we know if a campaign is costing us more than it makes?
It is actually not hard to know. Calculating the Breakeven Point for a campaign tells us how much response we must generate to recover the cost of the campaign -- or how much we must sell, on average, to start making a profit. The steps below show how simple it is to calculate this number. (These examples assume an annual basis for the calculations. If your business is highly seasonal, you may wish to make these calculations on a monthly basis instead.)
| AVERAGE ORDER AMOUNT: |
(Average
Order Amount) = (Total Sales) ÷ (Number of Orders) |
Next, calculate your Average Cost of Goods Sold ("ACOGS"). You can often get this number directly from your financial reports by dividing COGS by the Number of Orders as shown in the above box. However, you can make a generally useful estimate in the absence of financial reports. Do it this way:
| AVERAGE COST OF GOODS SOLD ("ACOGS"): |
(Average
Cost Of Goods Sold) = (Average Gross Margin) x (Average
Order Amount) |
Now, we need to know the Average Fulfillment Cost ("AFC"). The AFC is the fixed cost of making a sale. Broadly, it includes the costs of entering the order, processing the order and shipping the order. Use data from your financial system and calculate it this way:
| AVERAGE FULFILLMENT COST ("AFC"): |
(Average
Fulfillment Cost) = (Total Fulfillment Costs)
÷ (Number of Orders) |
One last piece of information is needed. We need to know the Average Contact Cost. This is just a bit tricky because the Average Contact Cost consists of both fixed costs (like design, creative and media purchase costs) and variable costs (like printing, telemarketing and mailing costs.) So, start with the assumption that you are going to send out a certain number of offers. If later you decide to change the number of offers that you send out, just come back to this point and adjust the numbers accordingly to update the final Breakeven Count.
| AVERAGE CONTACT COST: |
(Average
Contact Cost) = [(Fixed Campaign Costs) + (Variable Campaign
Costs)] ÷ (Number of Offers Sent) |
Now we can calculate the Breakeven Response Rate ("BRR"). This is the response rate we must attain to recover the costs of the campaign. When you calculate this number, ask yourself whether the BRR is reasonable. That is, is it consistent with the kinds of response rates you have gotten from previous campaigns? If the BRR is higher than your campaigns normally generate, you need to adjust your campaign strategy because you are probably losing money.
| BREAKEVEN RESPONSE RATE: |
(Breakeven
Resonse Rate) = (Average Contact Cost) ÷ [(Average
Order) - (Average Cost of Goods Sold) - (Average Fulfillment
Cost)] |
Finally, we can know the Breakeven Average Sale Amount ("BASA"). This is the minimum average sale amount that will recover the costs of the campaign. If your average sale to those receiving your offer is less than this amount, you are losing money on the campaign.
| BREAKEVEN AVERAGE SALE AMOUNT: |
(Breakeven
Average Sale Amountt) = (Average Order)
x (Breakeven
Response Rate) |
First, we need to know the optimum number of contacts to make. That is, how many names should be contacted to maximize profits. This is not difficult.
Third, we need to decide how many contacts to make. This number will be at least as many as the optimum number and certainly no more than the maximum number. Between these two limits, some other factors will guide our decision.
Questions? Just ask! [Back to How-to Resources] [Top] |