Today, I’d like to talk about how to better understand how your direct marketing budget is working for you by evaluating your cost per lead, cost per sale, and determining your allowable cost per sale.
The first priority in evaluating the effectiveness of your direct marketing campaign is to define your customers’ decision steps. This is important because there is a huge difference between a lead and a customer, and learning where that line is drawn will assist you in better allocating funds.
Define the Customer Journey to Separate Leads from Customers
Let’s first define the customer journey. As a prospect moves up the inquiry chain, they become a high-quality lead—but they are all considered leads. The ultimate response is the actual sale. If that sale is the customer’s first purchase, then they are considered a new customer acquisition.
Here’s an example: a health insurance offer is made to your target audience of prospects. Your prospect first needs to know about your product and then contact your company for more information. By responding with a request for more information, your prospect now becomes a lead.
This individual lead then receives an application from your company and completes it, sending it in for approval. This is still a lead, but the lead is more qualified and has greater value than responders who did not fill out the application. Once the application is approved, the applicant sends in the payment for the insurance coverage. Only then would marketers call this individual a customer.
Determine Your Cost Per Leads and Cost Per Sales
Direct marketers evaluate direct marketing campaigns based on the cost per lead or CPL (sometimes known as a cost per application), and cost per sale or CPS (also known as cost per contract). The ultimate key performance indicator (KPI) is the cost per sale, as that’s when a customer is truly gained.
Let’s assume your 10,000-piece mailing costs an average of $500 per thousand in the mail for a total of $5,000. If you generate a 1% lead response rate in applications for a total of 100 applications, then your cost per lead is $50 or $5,000/100. That’s good information, but what you really want to know is what your cost per sale is, since that’s your primary KPI.
In this example, you convert 50% of those 100 applications into paying customers and your cost per sale is $100 for each contract. The results of your campaign are $50 cost per lead with a sales conversion rate of 50% for a cost per sale of $100.
Let’s further stipulate that you have determined that you can afford to pay $150 per sale (now called an allowable cost per sale) and that your business plan calls for a net enrollment of 10,000 new policyholders in the next 12 months. Your calculated total budget needs to be $1,500,000 or 10,000X$150. (Of course, your $100 cost per sale would be based on a campaign with 1 million or more mailings rather than the small 10,000 piece mailing example used to simplify the calculations.)
Using Your Cost Per Sale to Determine Future Mail Quantities
You need the highest approved allowable cost of $150 per sale in spite of your achievable allowable on the quantity you mailed yielding $100 per contract. You will probably determine that you do not have the necessary mailing list quantities or other cost-effective circulation to achieve the 10,000 new policyholder goal. You must increase your circulation substantially to win 10,000 contracts.
Fortunately, you can now expand your circulation to include less qualified prospects until your average cost per sale increases from an average of $100 to $150 for each sale. As a cardinal rule: When you expand your circulation or increase your mail frequency to your core list, the cost per sale will increase as you increase market penetration.
The bottom line is that some of your channels and efforts will bring in new customers below your allowable cost per sale, and other efforts will exceed your allowable. The trick is to end up with an average KPI of $150 cost per sale at the end of your campaign. These numbers will become further refined as the campaign continues, allowing you to adjust as necessary in order to meet your objectives.
As the numbers grow, you’ll notice the math becoming more complex and the insights can become more difficult to ascertain. That’s why I would highly recommend partnering with a data, analytics, and strategy provider who can muddle through the numbers for you and determine the best course of action. If you’re interested in such a partnership, feel free to contact me today.
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