Response Rates Are For Losers

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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.

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