Direct mail Test and Roll

Direct Mail A/B Test and Roll

This plan is an example of an A/B test strategy followed by a retest of the test winner and then a continuation. This series plan uses DM Multi.

Background and Assumptions

This direct marketer sells direct to consumer products a mix of products that they make and other commonly available products. They are introducing a new product and want to start with a price test to their house customer list.

The active customer house list is 400,000 circulation. The marketer has extensive history of the house list response rates and uses RFM segmentation. So, they can estimate response rates for this new product with reasonable accuracy. The two prices being tested are $125 for the high price at a 1.75% response rate and $100 for the low price at a 2.0% response rate. The response rates are assumptions based on RFM history.

The product, operational, and transaction costs are the same for both prices. The conversion rate is the same at 100% as all order payments are by credit card. Return costs and percentage returns assumptions are the same for both prices.

Response Flow In Days are 15, which is the midpoint of the expected full range of 30 days for all responses. Convert to Sale Days are zero as all orders are approved in the credit card process. Pack & Ship Process Days are 2.

The advertising data costs are based on valid printing estimates from sources. The fixed cost of $5,000 advertising creative splits equally between each test side.

Part 1 Setting Up DM Multi Plan Descriptions

This section input gives general descriptions and the number of plans in the Multi. All the contents in lower table are calculated, not inputs.

table 1

Part 2 – Setting Up DM Multi Plan Details and Calculated Results

This section has data input above the horizontal bold line and calculations below.

Based on the MPP calculations, the high sell price test is the winner. It produces more sales and less Income loss. If this was the actual test results, there is no question the higher price at $125 is the winner. Therefore, this is the price the plan takes forward to a retest at that price only and continuation 1.

The Income on the retest and continuation improves from several factors:

  • The product cost became less because production quantities increased. The marketer could have used the lower product cost in the test, but the first production run actually had higher cost and ultimate cost was not sure.
  • Print and mail costs are lower now that circulations are higher.
  • The advertising creative fixed costs are no longer applicable.

Both the retest and continuation assume the response rate will remain at 1.75%. This is possible because the marketers active list is 400,000 circulation and they are skilled at RFM segmentation. At some point in launching additional continuations, response will decrease.

table 2

Part 3 – DM Mult Plan Calculated Combined Income Statement

This is the Income Statement of all plans combined.

There are no inputs to this section. Everything is calculated from previous inputs.

table 3

The Secret to Advertising Profit Control

The Secret to Advertising Profit Control

 

1. Early Advertising Accountability

The famous quote by John Wanamaker, “Half the money I spend on advertising is wasted; the trouble is I don’t know which half,” emphasizes the challenge of accurately attributing advertising expense to sales and income (profit). John understood the importance of advertising. It brought in sales. But, in John’s time of the Nineteenth Century, measuring the results of advertising was difficult to impossible. Wanamaker’s was a department store with walk in customers not an internet marketer. Advertising could not be precisely targeted at select groups.

Today, marketers  can target and measure sales and advertising in precise detail. And attribute a sale to an advertisement, keyword, or collection of customer contact points. Arguably the most important factor in internet advertising is accurately tracking orders back to specific ads and segments. When you track ads it enables using profit and loss measures to guide advertising decisions.

2. What is Advertising to Sales Ratio (A to S)?

The Advertising to Sales Ratio (“A to S”) is the measurement of the advertising expense a company spends to generate sales. Companies can compare themselves to peers in their industry by measuring A to S ratios. But very few companies report A to S clearly and publicly because competitors can use this key information.

The math to calculate A to S is simple. Divide Advertising Expense by Sales. The calculation is expressed or written as “A to S” or “A/S” or A/S %.

A different measurement in use is “cost per order” which is the advertising in dollars to create a single sale. In the widely known NBC show Shark Tank the sharks use a similar expression “What is your customer acquisition cost?” They measure that number against the customer sale or the lifetime value of all sales. This is useful as a quick, easy indicator. But it is surprising how many shark pitchers do not know it.

A different example of using advertising to control profit comes from public companies that periodically reduce advertising expense to improve weak quarterly earnings. They cut advertising and count on the momentum of sales not going down temporarily to report better profitability.

This post is not about accounting maneuvers. This post is to show you how you can use A to S as an everyday marketing tool to control sales and Income (profit).

3. Calculating Sales and Advertising

To accurately calculate the A to S ratio, it is important that you use the correct basis of Sales. Sales means Net Sales after deducting returns or refunds from Gross Sales.

When products sell as a series, like monthly shipment programs, over time, there is attrition caused by subscriber cancellations. It is important to always use Net Sales after cancellations. Moreover, if you include future sales projections of series subscriptions, it is critical to use a model that includes attrition. This is an important topic we will talk about in a future post.

How you categorize advertising expenses is also important. Expenses that are one-time, such as a logo design or new creative material that you will use multiple times, are fixed expenses. You should amortize fixed expenses across the higher sales of multiple campaigns combined. This is why in Marketing Profit Plans (MPP) you see “Advertising Fixed Costs” as a separate key driver expense. And why MPP profit analytics has two sections. One with and one without including fixed costs in the calculations.

Advertising expenses that are only used on a single ad or campaign, should be charged to that ad or campaign.

It is worth noting that direct mail campaigns can sometimes increase the overall expense or advertising but actually lower the A to S. This comes about when increasing the advertising distribution results in lower cost per thousand (cpm). A lower A to S can also lower the breakeven response rate. However, the total advertising expense will increase. The net effect can be a win-win of higher sales and income from a lower A to S percentage and a higher income percentage.

4. The Secret to Advertising Profit Control. The A to S Ratio

When you calculate all expenses except advertising and view advertising and income separately, you will see they have an inverse direct relationship. As one goes up, the other goes down by the exact same percentage. In other words, when advertising expense goes down from 40% to 25%, income will increase 15%.

To see the total of both together, you can use a new P&L palnning category called “Allowable for Advertising and Profit.”

This chart compares two scenarios to illustrate this critical point of A to S and Income.

Scenario OneScenario Two
Low ResponseHigh Response
Product Sale Price $ 100100% $ 100100%
Product Cost - All Expenses Except Advertising $ 3030% $ 3030%
Orders20003000
Net Sales $ 200,000100% $ 300,000100%
All Costs Except Advertising $ 60,00030% $ 90,00030%
Allowable for Advertising & Profit $ 140,00070% $ 210,00070%
Advertising Cost $ 80,00040% $ 80,00027%
Income (Profit) $ 60,00030% $ 130,00043%

In both these scenarios the product price and all costs are the same. Price is $100. All costs are for each sale is $30. The advertising spend is the same for both campaigns at $80,000. The number of orders in Scenario One is 2,000 and in Scenario Two it  goes up to 3,000.

Scenario One

A direct mail campaign to 50,000 circulation with a response rate of 4% and $200,000 in sales. If product and all operating expenses are 30% of sales that is equal to $60,000. Advertising expense is $80,000. The income is then $60,000 or 30% of sales. The A to S is 40%, When you add Advertising and Income percents together, they equal 70%.

Scenario Two

Now, assume the same campaign has a higher response rate of 6% and $300,000 in sales. All product and operating expenses are 30% of sales, or $90,000. Advertising expenses are $80,000. But the Income now becomes $130,000. The A to S lowers to 27% and the Income rises to 43% . Again, the total of both is 70%. This increase in income in the second scenario is solely due to the lower A to S from the higher response rate.

So, the secret to controlling advertising profit is to control response and conversions rates that drive the A to S. It is that simple. Both A to S and Income Percentages are inverses. As one goes up, the other goes down by the same amount. The translation of the percentages to dollars is simply multiply the percentage times Net Sales.

Marketing Profit Plans Income Statement reports always show absolute amounts and percentages for both advertising expense and income.

5. How to Use A to S to Control Profits

When you manage marketing planning with both numbers, the A to S and Income, new opportunities become available.

You can set different A to S and Income targets for different target groups. For example, prospecting for new customers usually requires higher advertising expense than selling to existing customers. Repeat sales from existing customers usually generate sales at lower A to S and higher income percentage.

You may decide new customer campaigns can accept higher A to S rates (and less Income) by lowering the required response rate. Or with a PPC campaign increase the bid amount and pay more for new customers. Using A to S together, you see the bottom-line impact of the bid amounts. You may even choose to acquire new customers at breakeven. Or to go even further and not include general & administrative expense in your calculations. You can justify this if G&A does not change with slight changes in sales volume.

Within customer direct mail or email campaigns, you may choose to increase income and lower A to S by limiting mail to customer segments that respond at higher rates.

By managing marketing with a view on A to S and Income, you can create a blended income level from new customer acquisition and profitable current customers that gives you a “win-win” situation of new customer growth and overall profitability.

6. Customer Direct Mail and Email Profit Control

Email and direct mail to customers provide special opportunities to control A to S and income.

This comes from scoring customers and ranking them based on Recency, Frequency, and Monetary (RFM) values from previous sales. After scoring, you can segment customers into groups by response rates (likelihood to order) A to S ratios and resulting Net Sales and Income.

This is why Marketing Profit Plans have A to S and Income percentages built into all reports.

7. Conclusion

Advertising to Sales ratios and Income ratios are important tools to achieve effective marketing results. By understanding and using these ratios, businesses can make informed decisions regarding advertising expenditures, maximizing marketing results, and work towards controlling profitability and driving sales.

We designed Marketing-Profit-Plans templates specifically to accomplish this at levels from overall business planning to campaign planning to individual segment key codes.