Response Rates Are For Losers

The 1to1 Blog recently admonished marketers to “stop the marketing waste!”:

“One percent isn’t a ‘success’ rate,” author Ernan Roman stated emphatically when we talked about marketing strategies last week. “Ninety-nine percent of direct marketing recipients basically saying, ‘No thanks,’ isn’t OK.” According to Roman, today’s wasteful marketing practices are a statement of marketers’ lack of social responsibility and respect for customers. “A 99% waste factor is unsustainable,” he said.

My take: Afraid I have to disagree with Mr. Roman. A 99% “waste factor” is not only sustainable, it could be profitable. Very profitable.

Here are two direct marketing campaign scenarios:

                         Scenario 1.0       Scenario 2.0
Sample size:                   10,000          1,000,000
Cost/message:            $       0.50      $        0.10
Revenue/response:        $         25      $         250
Response rate:                     50%                 1%
Total revenue:           $    125,000      $   2,500,000
Total cost:              $      5,000      $     100,000
Profit:                  $    120,000      $   2,400,000
ROI:                            2,400%             2,400%

 

If it makes you feel better to know that you’re not contributing to “waste” in the marketing world, then feel free to run your business on the 50% response rate scenario. I’ll take scenario 2.0 with its $2.4 million profit any day of the week.

There’s another reason why the 1:1 post rubbed me so wrong. 1:1 magazine is a division of the Peppers & Rogers Group. The two principals wrote the book — literally — on return on customer. Nobody understands taking a customer-centric view of marketing better than those two. And I can’t believe either one of them would buy into this notion that a 1% response represents “waste.”

Here’s why: Let’s take our scenarios one step further. In scenario 1.1 and 2.1, let’s roll the clock forward 12 months, and make some assumptions about the loyalty of these new acquired customers.

                         Scenario 1.1       Scenario 2.1
Customer base:                  5,000             10,000
Marketing cost/customer: $         50      $         100
Service cost/customer:   $         50      $         100
Annual revenue/customer: $         50      $       1,000
Total revenue:           $  1,250,000      $  10,000,000
Total cost:              $    500,000      $   2,000,000
Profit:                  $    750,000      $   8,000,000
ROI:                              150%               400%

 

If the customers acquired with a 1% response rate campaign do more business with your firm in the future than the customers acquired in the 50% response campaign, then —  despite higher marketing and service costs — the customers from the 1% could be more profitable customers. Is that “waste”?

Here’s another marketing myth blown to bits with this example: You know all that hoo-ha about how it costs 6 (or whatever) times more to acquire a customer than retain one?

Not only is that rubbish, but as the scenarios demonstrate, it can be more profitable overall to spend more to support and market to a segment of customers if the incremental business you get from them warrants it.

Bottom line: The notion that 1% represents 99% waste is simply misguided. Furthermore, the view that just because only 1% responded to an offer ignores other potential impacts from the campaign (this is similar logic to what I was arguing for in the Don’t Ignore My Tweets post).

A direct mail campaign in which a well-done, tasteful, high-quality piece is sent might not produce an immediate offer, but it might create brand affinity. By the logic spelled out in the 1:1 post, 99.99% of TV, radio, and print advertising is “wasted” if someone doesn’t jump up from their couch and pick up the phone to order or run out to the store.

Even worse, by this logic, 99.9999999% of social media efforts are wasted, since blog posts and Facebook updates rarely produce an immediate offer. The only reason someone might not consider this “waste” is that the incremental cost of the message is so close to zero, that it doesn’t warrant calculating.

Have you ever worked in Sales? Many of the sales organizations I’ve seen in the firms I’ve worked for have had (rightly or wrongly) targets for the number of calls they were supposed to make. The 99 rejections weren’t considered “waste” — simply one more step closer to a sale.

WWTES? (What would Thomas Edison say?) He’d say that we learned what offer 99 out of 100 people don’t want, and apply those learnings to future offers. He wouldn’t think the effort was “wasted.”

The real issue isn’t whether a 1% response rate equates to 99% waste, but how do we justify marketing expenses in such a complicated marketing environment.

p.s. I don’t really believe that only “losers” measure response rate. I just needed a sufficiently incendiary title to match the mood of this post.

Ron ShevlinRon Shevlin is Director of Research at Cornerstone Advisors. Check out more of his ideas and research on Cornerstone's Insight Vault. And don't forget to follow him on Twitter at @rshevlin.

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Comments

  1. Ron, this is why you are in marketing and not finance. Your first example only makes sense if we change revenue/response to profit/response. Because COGS is not zero, no matter what business you are in, even a service business.

    As long as we make that one change to the chart, then the whole rest of your post makes sense, and I can even be in agreement. Which is eye-opening to the potential upside of a 1% response rate.

  2. MP: Not sure I’m following you here (which, of course, might just prove you right). What I did in Scenarios 1.0 and 2.0 was calculate the profitability of the marketing campaign. If I had added in a COGS component, the ROI of the two campaigns would decline, but the extent of the decline would be completely dependent on the product mix. If the COGS was proportionate in the two scenarios, then the ROI would decline by a similar percentage. If the COGS for the product mix sold in scenario 2.0 was higher than the product mix sold in scenario 1.0 then the ROI in 2.0 would decline by a greater amount that in 1.0. BUT — depending on how the numbers worked, even if the ROI was lower, the absolute level of profit might still blow 1.0 out of the water.

  3. Needed post Ron.

    The easiest way to overcome response rate worship without looking at the whole picture is to translate the calculation to a constant that no one can argue with. We call that the CPS or Cost Per Sale.

    State your sales or response requirement in those terms. This takes in all costs including profit requirements, the break even, the list cost, the package cost. It also works for all media including broadcast, online as well as direct mail.

    Of course, in a multichannel world, the allocation by medium continues to baffle many companies. But even then, add all promotion costs and you can compute the CPS for multichannel.

    Look at the CPS rather than just the response rate and all will be well.

  4. Thanks for your comment, Ted.

    While CPS is a step up from response rate, it’s still just a ratio. And any ratio that is used in too narrow a context misses at least two things: 1) How big the whole thing is — ie., a 50% response rate is better than a 10% response rate, but a 50% rate on a sample of 1,000 still doesn’t yield as many customers as the 10% response on a sample of 100,000. The same logic holds for CPS. 2) How scalable is it — i.e., one campaign might produce a CPS of $10 while another produces a CPS of $20. $10 is better than $15, no? Of course, but again, going back to sample size, if the sample size on the $15 campaign is 10 times larger than the $10 campaign, the $10 is only better if you can replicate that campaign 10 times without producing an increase in CPS (or at least keeping it under $15).

    This is the problem w/ email to a certain extent, and social media to a definite extent. Scalability issues.

  5. Ted Grigg says:

    While what you say is certainly true, the type of CPS I write into my objectives is the allowable CPS.

    Said simply, this is how much I can afford to spend per order on this product or service.

    So if your CPS is $50 and your test CPS is $30, then your hard work has just begun.

    You need to expend the circulation and channel expansion to the maximum until you have achieved your allowable average of $50. This means some channels will get $70 and others $30. But you have sold greater volumes and achieved your average allowable of $50.

    In other words, an allowable CPS is the benchmark that overcomes the variables that were mentioned in your post and previous comments.

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