Increase ROI While Maintaining Top-Line Growth

Oct 13, 2008 10:13 PM  By

A common theme we are all hearing today in direct marketing is “mail smarter.” While we are all aware of traditional cost reduction methods such as co-mailing and catalog trim size reduction, a few clients are taking a closer look at their data to increase their return on investment.

The questions below were asked by one of our clients:

  • If I reduced my book size, cutting my breakeven in half, what would it do to my sales?
  • When looking at prospecting results, could we cut the number of times we mail these lists and still acquire new customers? Would they find us through others in their hobby?

The client asking these questions is in a niche marketplace. Their customers are best identified as hobbyists, and due to the characteristics of their hobby, many work and meet together in their hobby. Thus, word-of-mouth is a powerful tool for this business. The hobby is also extremely specialized, so traditional catalog prospecting methods are very challenging.

In light of the unique business model and the challenges they face, three tests were created to gauge the difference in performance between a big and small book, as well as the incremental difference between mailing and not mailing a book.

Test 1: Book Size – For those segments that performed at or close to breakeven, A/B split the names with a big book/small book strategy.

Test 2: Mail/No Mail – For segments performing slightly lower than breakeven, A/B split the names and hold out the test group.

Test 3: Prospect Holdout Panel – A/B split the prospect segments to analyze incremental breakeven.

Tests were set up based on historical performance. To reduce the risk of a major negative impact on sales, the highest performing segments were not tested.

In the first test, we took marginal segments that have performed at or close to breakeven. These segments could still receive a catalog by breakeven metrics, but they do not offer up significant ROI. If we were able to mail a smaller catalog, breakeven would essentially be cut in half. While the smaller book’s dollars/book was about 6% lower than the larger catalog, mailing a less expensive catalog increased bottom line profit. Furthermore, average order size did not decrease.

In the second test, we selected segments that performed significantly below the big book breakeven but above the small book breakeven, and created a holdout panel test. We knew historically that if we mailed a big book, we would lose money due to the lack of performance. We also knew that if we did not mail the smaller book, we would not mail into this segment at all. We noticed something interesting when we looked at the results. While the smaller book came in above breakeven, people who were not mailed a catalog performed almost the same as those who did receive a catalog.

Similar to the second test, a holdout panel was selected on the prospect lists to measure the incremental gains made by mailing their outside lists. Keep in mind that the client prospects to the same sources several times a year. Again, the results show that the names mailed performed only slightly better than the names that did not receive a catalog. Even though we did have some significantly larger orders in the holdout panel, we would not have met the incremental breakeven without the larger orders from new customers.

Further testing of the big/small book strategy is still in place for validation purposes. Based on recent results, the consensus has been to:

  • Mail a smaller catalog to the lower performing segments that are at or near big book breakeven, thus increasing the bottom line ROI.
  • Begin testing the big/small book strategy even to the 0-12 month (higher performing) buyers to see if newer records perform with a smaller mail piece, as well.
  • Cut circulation to the lowest performing segments, even if they are slightly above small book breakeven.
  • Reduce the frequency of prospecting circulation to core seasons only.

We recognize that a small book option is not for every business. The client in this example has a 90/10 business with their product mix—10% of the products do 90% of the business. This client is also well-established in their niche. Proper testing and validation are critically important before major changes to your marketing strategy are implemented.

Jim Whitford is senior marketing manager with Lenser.