The Four Key Metrics for Predicting Sales

Nov 07, 2005 8:09 PM  By

Response metrics are more than just a measure of how your most recent mailing performed. They are also your most powerful, predictive tools as a direct marketer.

Using four simple metrics, you can plan and predict each of your future mailings with remarkable accuracy. Roll up a year’s worth of individual mailing plans, and you have a strong prediction of whether you will hit your annual sales target.

First, let’s look at how to calculate the metrics.

Metric no. 1: response rate. Your response rate is your number of orders divided by your mail quantity. But for predictive purposes, you’ll want more than that. You’ll need to track this metric for each segment of your mailing. Each RFM (recency/frequency/monetary) segment of your house and prospecting file will perform at a different response rate. In addition, each of these segments will also respond differently by season.

Let’s say your top house RFM segment performed at a 5% response last January, a 3.5% response last March, and a 2.75% in April. You are reasonably safe to assume that this segment will respond in the same way for these same three months in the coming year. Yes, anomalies occur, but it’s a strong prediction.

Of course, better offers can improve response. If you have solid test results to back a higher projection, you can plug those numbers into a larger test or rollout. When you roll out a successful test, you will usually receive a response that’s about 10% lower than your original results. Take that into account for your projections.

Metric no. 2: average order value (AOV). To calculate your catalog’s overall AOV, divide your net sales by the number of net orders. As with all of these metrics, you will want to calculate this figure at the segment level. Your AOV metric by segment will often respond in a similar pattern to your response rate. Though this is not always the case, higher AOVs are typically associated with your stronger mailing seasons. Again, if your AOV last January was $75, you most likely will receive a similar AOV this January.

Improvements in merchandising can significantly bump your AOV. But if you haven’t made those improvements or don’t yet have a track record to see how they will perform, it is safest to project with your historical AOV for each segment by season.

Metric no. 3: dollars per book. Divide your gross sales by your total mail quantity. The result is your average dollars per book. Once again, calculate this metric at the segment level. Of all catalog metrics, this is one of the most commonly tracked but least frequently used.

Metric no. 4: contribution per order. To calculate your contribution per order, you first have to calculate your contribution per segment. Take your gross sales and subtract your advertising and merchandise costs. This is your contribution for that segment. It tells you whether that segment was profitable. Divide this figure by your number of orders for that segment, and you have your contribution per order.

Now what? When you plan your next mailing, use your response for that season’s mailing from the previous year. Calculate the four key metrics for each of the house file segments and prospect lists. You will need all four of these metrics. If you don’t have exact numbers for the calculations, such as cost of goods sold (COGS) by segment, use your historic averages.

For your house file segments, first look at your contribution per order. Select all the segments that showed a profit or broke even. It’s a fairly straightforward decision to mail those segments.

Next, look at the house file segments that lost money. These nonprofitable segments will usually be older names in terms of recency. Look at the contribution per order numbers. Do any of these segments have an acceptable reactivation cost?

Here’s how to calculate your acceptable reactivation cost. Take your 0-12 month, 2x buyer file’s average dollar per book. Subtract the cost of one promotional piece and the average percent of your cost of goods, as calculated in terms of your dollar-per-book figure. Then multiply this figure by the number of times you will mail the 0-12 month, 2x segment in the next 12 months. If the absolute value of the number that you calculate is more than the losing segment’s contribution per order, you are reactivating that segment at an acceptable cost.

Let’s say that you run this reactivation calculation and get $15. If the losing segment’s contribution per order is a loss of $15 or less, your reactivation will most likely pay back in 12 months. If your losing segment’s contribution per order exceeds a loss of $15, you likely won’t see a payback for that reactivation in 12 months. Either you should develop a new offer to test for that segment, or you should consider omitting it from your mail plan.

For your prospecting lists, repeat the evaluation process that you used for your house file segments that lost money. Use the same reactivation formula, but apply it to your 0-12 month, 1x buyers. You are now calculating your acceptable customer acquisition cost.

To wrap up your list selection process, add your test lists and plan to use your prospecting averages for response and AOV to calculate their sales.

Next, pull the new file quantities for each of the house and outside prospect segments for your mailing, and multiply them by the appropriate response rate. You’ve just projected your number of orders. Multiply the order projection by the previous year’s AOV, and you have projected your sales for those segments.

Now total your projected promotional expenses and sales. How close are you to your budget? If you are already spending your allocated budget and your sales projection meets your target, congratulations! You’ve just finished your basic mail plan.

Chances are, however, that the numbers won’t be in sync. If you’ve reached your budget expense but your projected sales are below your target, determine the answers to three questions:

1. How many additional pieces would you need to mail to hit your sales goal?

2. Based on your current mail quantity, what lift in response would you need to hit your sales goal?

3. Based on your current mail quantity, what lift in AOV would you need to hit your sales goal?

Begin your planning to determine which of these answers can best help you to meet your sales target. Perhaps you can increase your mail quantity to cover some of the shortfall. In addition, you can plan an upsell program to increase your AOV by a few dollars. Maybe you can add an e-mail sale campaign at the end of the season.

The point is that you’re not shooting in the dark. You know your likely shortfall before you mail and can proactively plan to make up the difference.

George Hague is senior marketing strategist at J. Schmid & Assoc. a consulting firm based in Mission, KS.