A Deep Dive into the Cost Drivers of a Direct Mail Program – Part 1

While some may believe that direct mail programs have gone out of style similar to print advertising, industry trends indicate quite the opposite. According to the Direct Marketing Association (DMA) Statistical Fact Book, the spend associated with direct mail has been increasing over the past few years from approximately $44.3B in 2012 to $44.8B in 2013, and a decent leap to $46.0B in 2014 – and for good reason. The average response rate for a campaign targeting recurring customers was 3.4 percent for direct mail, compared to 0.12 percent with email. In addition, the average cost per lead for a campaign targeting new customers was $51.40 for direct mail; whereas email was $55.24, meaning that the cost to generate a qualified sales lead or order was about $4 less with direct mail than email.

Overall, there is evidence that direct mail is still holding strong as a marketing tactic and this is reflected in companies’ marketing strategies. However, before you begin executing a direct mail campaign, it is important to understand the components and factors that influence this marketing strategy’s cost.

There are four main cost drivers to any direct mail program:

1. Mail lists (who and where the mailer is being sent to),
2. Creative and design (the messaging and layout),
3. Print and lettershop (producing the mailer), and
4. Postage (mailing the mailer).

While the costs of creative/design, print, and lettershop can be managed through a standard sourcing process, mail lists and postage are a bit more complex. While mails lists and postage are commonly overlooked when it comes to identifying cost saving opportunities, there are options available for navigating the cost drivers of these two components. In this first post of a two-part series, we will cover some basics on mail lists – the importance, types, cost components, and strategies for managing these costs.

The costs associated with the data for a campaign are a large portion of the spend for direct mail. The DMA has reported that marketers spent approximately $9.1B on data alone for direct mail campaigns in 2014 with that number projected to increase to $9.3B in 2015.

When it comes to a direct mail campaign, who you send the mailers to is just as, if not more, important than what you are sending them. Prior to sending the mailers, you need to establish your target audience. One of the first steps is deciding if the campaign is geared towards former, current or new customers (retention versus acquisition). In addition, you need to further define the target audience, keeping in mind geographics, demographics, psychographics and additional criteria. With today’s analytics, marketers have access to more precise data than ever before, and they have the capability to get specific information on each consumer, such as how often you go food shopping and what you are likely to buy.

A campaign targeting previous or recurring customers will use internal databases and historical sales data as the basis for creating a mail list. With the right analytics and reporting software, marketers are able to easily determine which of their existing customers should be campaign targets. Campaigns targeting new customers, or acquisition campaigns, are a bit more complicated because these require data you do not already have and need to obtain through another source.

There are two types of purchased lists: compiled and direct response lists. A compiled list comes from published sources such as DMV records, magazine subscriptions, phone books, etc. A direct response list is based on people who have previously responded to direct marketing campaigns. Although they may be referred to as “purchased lists”, mail lists are typically ‘rented’ rather than bought. Lists are priced per name or per thousand names. By renting a list you are able to include those names in your campaign one time. You become the owner of any names that respond to your campaign.

There are two primary ways of gaining access to mail lists: using the Standard Rate & Data Service (SRDS) or through a list broker. The SRDS provides marketers with access to nearly all available published mail lists. A list broker is someone who specializes in finding mail lists that meet specific criteria for clients, for example homeowners in the Philadelphia area. A broker’s role is to identify mail lists for clients to choose from and then help to negotiate the rental of those lists.

Now on to the exciting part – how to manage the costs of mail lists.

If you have resources with the time and expertise to find and negotiate the cost of mail lists, then SRDS may be the best route for you. Using a list broker specializing in this type of work is one way to reduce the cost of a mail list. Brokers search through the abundance of lists available and find the right matches for your campaign needs. Brokers also have experience working with list managers/owners and have established best practices in negotiating down rental costs.

While it’s not an upfront cost reduction, there are ways of being reimbursed for bad data within your list, such as bad names or duplicates. It is inevitable that there will be some bad information within the list (people who have moved, errors in the address, duplicate entries) that will cause mail to bounce back. When negotiating the cost of renting your list, you should establish a standard for how much of the list should be good data and how you would be reimbursed for bad data. In general, about 95% or more of your list should be useable data, and anything beyond that should be reimbursed.

Finally, work with your broker to negotiate a net name arrangement with the list owner/manager as a way of paying associated rental fees. A net name arrangement is an agreement between the list owner and the renter where the renter pays a percentage of all the names on the list or only pays for the names that are used. For example, if you negotiate a net name arrangement of 85%, then you would only pay for 85% of the names on the list. So if you rent a list of 75,000 names, you would only pay for 63,750.

While it is important to try to reduce the costs of your list, you do not want to sacrifice the quality of your mail list for cost. Without the right list, your campaign is working at a disadvantage before it even launches. There are options for managing the cost of a mail list, such as using a broker, cleansing lists, and negotiating a net name arrangement. In the second part of this series, we’ll be discussing postage for direct mail campaigns and the options that marketers have to better manage those expenses.