When Testing --- Focus on the Opportunity, Not Immediate Profitability

Written By Ted Grigg
DMCG Results

View fullsize

Look at Direct Mail Advert1sing Costs As a Long Term Investment

Have you ever wondered why some great, new products and ideas never go anywhere? There are probably a multitude of reasons. But one may be that management focuses on immediate profitability instead of the opportunity.

When testing new offers, for example, actual results may be good, but insufficient to produce the required profitability.

The following example demonstrates this concept by showing the sales results for a hypothetical 50,000-package direct mail test.

The assumptions:

-50,000 direct mail packages cost $600 per thousand including printing, lettershop, postage and list rental

-Test 25,000 packages of offer #1 against a like amount for offer #2 for a total of 50,000

-The program also tests 10,000 rental names for each of five lists testing the offer and the lists simultaneously

-The product sells for $200

-Both offers cost the same to fulfill

-The profit for each product sold is $100 taking into account shipping, refurbishing and all associated product support costs

-The response rate for test offer #1 is .5%

-The response rate for offer #2 is .3%

-Though unlikely in real life, let's assume that all lists responded at the same rate

The test grid was set up as follows.

Here were the test profit results.

Notice that offer #1 lost $2,500 for 25,000 pieces dropped. And test offer #2 came in even more in the red with a $7,500 loss.

Conclusion: this is NOT the way to evaluate direct marketing tests. Why? The rollout of the tested lists comes to well over 1 million names. Based on the greater mail quantity and associated cost savings, the rollout of test #1 becomes profitable.

So here is another chart using the same assumptions and test results given above. But the ROLLOUT costs for a 1 million-piece run drops to $375 rather than $600 per thousand dramatically reducing the overall cost. What was a $2,500 loss for offer #1 becomes a $3,125 net profit when taking the rollout costs into account.

Here is the recommended way to analyze your test results.

The above tables were simplified to demonstrate why you should not require your testing to produce immediate profits. Don’t look at test results based on what you did, but on what would happen if you rolled it out to your target markets.

What you are looking for are not profits from the actual test, but a significant profit-making opportunity.

In what other ways do you look at campaign profitability?

Ted Grigg

Ted Grigg is a direct response strategist who helps growth-focused companies reduce risk by identifying weak assumptions before they become costly mistakes.

Over the course of his career, Ted has evaluated several hundred million dollars in direct response testing across direct mail, digital, print, television, telephone, and other channels. His work combines direct response strategy, acquisition economics, customer analysis, creative evaluation, offer development, and disciplined testing.

Ted has worked on both the client and agency sides of the business. That experience gives him a practical understanding of the pressures facing executives, marketing teams, agencies, and service providers—and of the problems that arise when activity, media volume, or creative preference replaces a clear economic objective.

His consulting work helps organizations examine such questions as:

  • Are acquisition goals economically realistic?

  • Is the allowable Cost Per Sale supported by customer value?

  • Are targeting, offers, creative, media, and response paths working together?

  • Are tests structured to produce reliable business decisions?

  • Are unproven assumptions being treated as facts?

  • Is the organization measuring sales outcomes rather than convenient proxies?

Ted’s experience includes the development of direct mail and multichannel acquisition programs for insurance, healthcare, financial services, technology, nonprofit, manufacturing, retail, transportation, communications, government, and business-to-business organizations.

For a national direct-to-consumer insurance company, he developed a direct mail format that defeated established controls and helped expand the productive use of compiled prospect lists from less than 10 percent to more than 30 percent of total direct mail circulation within one year. He also planned Medicare lead-generation programs for more than 60 regional and national HMO and PPO organizations, with some programs exceeding sales projections by as much as 60 percent.

Ted founded Wyse Direct, a direct marketing division of Wyse Advertising in Cleveland, where he developed acquisition programs and helped launch a new technology product for Seiko Instruments by generating a predictable flow of qualified sales leads for its national sales organization. As vice president of new business development for the Grizzard Agency, he helped broaden the agency’s strategic capabilities and pursue new commercial and fundraising opportunities.

He is the author of The HMO/PPO Marketing Plan—A Step-by-Step Guide, published by Executive Enterprises, and has written numerous articles and conducted webinars on direct response strategy, testing, creative development, and marketing economics.

Ted earned a Bachelor of Arts degree from Abilene Christian University and completed two years of graduate study at Texas Tech University. He is the founder of DMCG, LLC.

http://www.dmcgresults.com
Previous

Direct Marketing Sells by Disrupting
Next

Clients Don’t Really Want Performance Contracts