How to measure success.

• Author: Turner, Jim
• Position: Direct Mail Essentials

It's every advertiser's hope when a direct mail campaign goes public that it will either ring the telephone or line up customers at the door. But usually campaign results are subtler--sometimes deceivingly so.

Take the example of a poorly targeted home-equity mailing, perhaps sent to homeowners with too much debt to qualify. While the response in terms of applications received will be high, the closure rate or the percentage approved will be quite low. So a strong response rate could easily represent a bad investment in marketing.

How do you know whether your direct mail budget is a good investment? There are several yardsticks you can use. Here are a few basic measures to assess results:

Response Rate. This is the most basic measure, typically quoted as 0.5 percent or 1 percent or X percent of the total mailed. For example, if 100 homeowners apply as a result of a mailing sent to 20,000 households, the response rate is 0.5 percent. Response rate is easy to compute and provides consistency over all types of mailings. However, a key problem is that it doesn't account for respondents who don't qualify, among other shortcomings.

Cost Per Customer. This measure addresses the problem of nonqualified customers because it identifies the promotional cost (printing, postage, list, and so forth) of acquiring a single customer. But it is only part of the picture.

Profitability Per Customer. This measure is harder to compute, but worth the effort because it's much more meaningful. For example, assume a home-equity customer yields $600 a year in profits (estimated by multiplying your bank's net interest margin times the average outstanding loan balance, then adjusting for promotional expenses). This reveals much more than the above measures. It tells you the bottom line: how much money you're making.

Lifetime Value Per Customer. This is derived from the profitability test above. If the average home-equity customer keeps his loan with you for, say three years, his value is $600 times three or $1,800 (excluding an adjustment recognizing that the promotional acquisition cost of the first year does not occur in the second or third year). You can make it even more meaningful by identifying other services the customer will add. For example, the home-equity customer might later add a money market account, certificate of deposit or checking account with you, and that will improve the profitability even more.

Knowing a customer will contribute, say $2,000, to...