How to calculate direct mail ROI (with a worked example)

Direct mail ROI (return on investment) is the profit your mailing produced, minus what the mailing cost, divided by what it cost. Written as a formula: ROI = (profit from new customers − total cost) ÷ total cost. An ROI of 100% means you earned back your cost and the same amount again. An ROI of 0% means you broke even. To get there you need six smaller numbers first, and each one tells you something useful on its own.

What numbers do I need before I start?

You need five inputs. Write them down for every mailing, so you can compare one mailing with the next.

• Pieces mailed. The number of cards that actually went out.
• Total cost. Everything you paid to make the mailing happen: printing, postage, the list, design, and any software or service fees. Include a share of monthly fees if you pay them.
• Responses. The number of people who called, scanned the code, filled in a form or walked in because of the card. These are your leads.
• New customers. The number of those leads who bought.
• Profit per customer. What one new customer is worth to you after your own costs of serving them. This is not the sale price.

What are the formulas?

Rates are usually shown as percentages, so multiply the result by 100. A response rate of 0.02 is 2%.

Can you show a worked example?

A pool service company mails 500 postcards. Printing and postage come to $1.10 a card, which is $550. The owner adds $200 for the list, the design and the software for that month. Total cost: $750. Over the next six weeks, 10 people respond and 2 of them sign up. The owner works out that a new customer brings in $900 of profit in the first year.

1. Cost per piece: $750 ÷ 500 = $1.50.
2. Response rate: 10 ÷ 500 = 0.02, or 2%.
3. Conversion rate: 2 ÷ 10 = 0.20, or 20%.
4. Cost per lead: $750 ÷ 10 = $75.
5. Cost per customer: $750 ÷ 2 = $375.
6. Profit from new customers: 2 × $900 = $1,800.
7. ROI: ($1,800 − $750) ÷ $750 = $1,050 ÷ $750 = 1.4, or 140%.

So in this invented case, each dollar spent came back with $1.40 of profit on top. Notice that the cost per piece is $1.50, not $1.10. The extra 40 cents is the list, the design and the software, spread across 500 cards. Leaving those out is the most common way to overstate ROI.

What is a break-even response rate?

It is the response rate at which the mailing pays for itself and no more. It is useful before you mail, because it tells you whether your target is realistic.

Using the same invented inputs: $750 ÷ (500 × 0.20 × $900) = $750 ÷ $90,000 = 0.0083, or about 0.83%. On 500 cards that is 4.17 responses. You cannot get a fraction of a response, so the company needs 5 responses, at its 20% conversion rate, to produce the 1 customer that covers the $750 cost.

You can check this another way. Break-even customers = total cost ÷ profit per customer = $750 ÷ $900 = 0.83. One customer is enough. If one in five leads becomes a customer, one customer takes five leads.

What is a good response rate for direct mail?

There is no single trustworthy number, and we are not going to quote one. Response depends on the list, the offer, the card, the season and what you count as a response. A figure from another industry, or from a mailing to existing customers, tells you little about a mailing to strangers.

Two comparisons are more useful than any outside benchmark. First, compare your response rate with your own break-even response rate. Second, compare each mailing with your last one, and change one thing at a time so you know what made the difference.

What mistakes make ROI look better than it is?

• Using revenue instead of profit. A $2,000 job with $1,400 of labor and materials is worth $600, not $2,000.
• Leaving out costs. Count the list, design, software and your own time, not just printing and postage.
• Counting scans as leads. A QR scan shows interest. It is a lead only when the person gives you a way to follow up or contacts you.
• Judging too early. Cards arrive over several days and people act over several weeks. Pick a window, such as 60 days, before you mail and stick to it.
• Crediting the mailing for customers who would have come anyway. Ask every new customer how they heard about you, and use a phone number, web address or QR code that appears only on the card.
• Reading too much into a small mailing. Two customers from 500 cards could easily have been one or three. Look at several mailings together before you decide.

How do I track which responses came from the mailing?

Give the card its own way to respond. A QR code or web address used nowhere else counts online responses. A dedicated phone number counts calls. A code the customer mentions counts walk-ins. If every card has its own QR code, you can also see which recipients scanned, not just how many.

Postage is one of your inputs and it changes. USPS publishes current prices in its price list, Notice 123. If you use a service with a flat price per card, use that price instead. PostalNest charges $1.10 per postcard with printing and First-Class postage included, and gives each card its own QR code so a scan is tied to one recipient.