Direct Marketing, Mail Order, and E-commerce News from the National Mail Order Association
Buying Customers, Buying Media by Jerry Mamola,
and Managing Partner of AmityDirect, Inc.
Why be in a Direct Mail Business Anyway?
“I hear response rates get lower—each year. Postage and paper keep getting more expensive. Everybody’s back buying ad space on the Internet now; why stay in the direct mail business?”
It’s true. Read the mailing trade publications and you’ll see that everyone DOES say, “Response rates are down, costs are up, and direct marketing no longer works—like it used to.” That’s the key phrase. “Like it used to”.
You see Direct Marketing used to work. The Columbia House Record Club made millions selling vinyl records for a penny; and people like Lillian Vernon succeeded from their kitchen tables. Mail order companies used to make money. The formula was simple… “You spend money to make money”.
But Everyone STILL Says Response Rates are Down.
For “EVERYONE’ they are. It is true. There IS tremendous competition for your buyers’ attention. But, why follow the crowd that says nothing works?
As I said earlier, direct marketing used to work. Then came the 1990’s and the Internet. Everything changed. It was the Pre-Bubble mentality. “Spend money to create customers, without fully understanding what these customers might actually spend. Since all customers are created equal—it shouldn’t really matter.”
And, by the way—the web is an important part of making the formula work.
What Value a Customer?
Successful direct mail pioneers viewed their customers like any other asset. They bought what they understood. They bought customers that they KNEW would retain value.
You may find this of interest. In May 2005, one of the largest direct marketers of music, agreed to acquire another giant direct marketer of media in its own right, as reported by the Wall Street Journal Europe.
The main reason for the acquisition was based on the value of the DVD business. The purchase of this business was reportedly valued around $400 Million for the 8 Million Active Members, or about $50 a customer.
I'm sure that they also got product inventory, systems and buildings. Not to mention, incredibly smart employees, a product line with intellectual property, licenses and whopping 20 million + “inactive” customer file. In my opinion, this appears to be a steal.
If (as a group) the DVD club members spend a minimum of $70 on average, and the cost to acquire each was $50, then that leaves $20 for product. Since existing inventory would certainly be part of the deal, and the company acquired all past customers and licenses, the acquirer not only bought a great company, they acquired 8 million active customers.
With one brilliant move, they killed their only competition and will likely recover $160 Million of the purchase price by the end of the first year. (I personally feel that the real value is in the 20 Million+ “old” members, but it remains to be seen how much the acquirer values those names).
Now, you should know that the club business model is much more involved that this example. There are costs to maintain contact, attrition factors, and customer reactivation costs; but the point is that the buyers were able to put a value on the present and future value of these customers. You should too.
Please note, buying your biggest competitor is possibly the only way you’ll ever acquire 8 Million customers for $50 apiece (certainly in one day).
What If I Can’t Find a $400 Million Company to Buy?
Ok, if you’re like most companies, your competition is unlikely to sell you all of it’s customers for only $50 bucks a piece. Whatever the scale of your business, and whatever your margins, it’s very likely that you’ll need to find some other ways to find new customers. How could you do it?
Simple, bribe your prospects to try your company. Make a believable offer with a believable guarantee. Then deliver it to the right people, in the right media, at the right cost. Then find a way to TRACK ALL dollars in and out. Recover your costs of goods, recover your cost to acquire, and then recover your cost to maintain the relationship with each new customer.
Sounds easy? If so, then you really don’t understand your problem. Yes, direct marketing is STILL the best way too sell CERTAIN products in North America, but it’s complicated.
All customers are not created equal. Some like expensive products and some like discounts. Some buy through the mail. Some prefer a phone call, some web, yet others don’t buy so well, at all, no matter what you do.
You should buy your customer file as if it were an investment in your retirement account. Then sell customers in the channel that THEY prefer (not the one you prefer).
OK, Customers Have a Value….Which Customers Should I Buy?
You should know that different media create customers of varying values. You should also know that you need to test and retest your offers, your price points, and your payment options against (and in combination) with a variety of mailing lists, list selections, DR magazines ads, package enclosures, and the many Internet options available today.
Know your expense to acquire each type of customer, then weight your advertising dollar according to the customers’ value in recovering that cost. Hopefully, you’ll recover your costs within 12 months, so that, you can plow new profits into building the business year after year.
How do you know which customer to buy?
“The Computer Model Knows Best!”
An excellent circulation man once wrote these words about using databases. And, many mailers followed this logic. It was a way to make mailing list and media buying easy. Those that followed similar logic of letting the computer make marketing decisions all seem to be saying in unison….“DIRECT MARKETING NO LONGER WORKS--LIKE IT USE TO”.
I feel that circ man’s point was that cooperative database or Good Customer Match (Look-a-Like) models can be effective tools—a new way to reach new customers and new prospects.
I whole-heartedly disagree, if he meant to put all your eggs in one proverbial marketing basket. To use one media source, or to put your response analysis on AUTO-PILOT. Letting the computer do all your work, this is a simple recipe for disaster.
Just like a good financial planner, a good airline pilot, or a good list broker, a computer modeler is a PERSON. The model is only as good as the person modeling the data. The data is only good as long as it remains consistent. Your flight is only as safe as the person flying the plane.
Why Do Some Airliners Fly Into Mountaintops?
There have been tragic events over the years caused by poor weather, mostly. And, people have died.
Don’t put your marketing investments on auto-pilot. Keep an open eye to what is going on around you. Don’t depend on some THING to think for you. Only YOU can see the ground getting closer. You need to be smart enough to keep you hands on the controls, and be nimble enough to react before it’s too late.
Ok, I Get The Auto-Pilot Thing, So You’re Saying Direct Response Is Like Investing?
Yes, and your investment advisor or list broker should be able to explain what you are investing in. Don’t buy Derivatives if you can’t understand them. And, don’t rely SOLELY in Stepwise Regression, CHAID Analysis, Gains Tables, and the like.
Most marketers are not statisticians. And, most statisticians are not marketers.
So use Cooperative databases but don’t try to make these your “end all” resource. I have had tremendous success reaching into “duo-deciles” or tiers 1 and 2, but beyond that, most models eventually become less effective. Modeling--what sounds safe is actually risky. I cannot stress this enough. If your PERSON leaves the modeling company, OR a major contributor file gets PULLED (or changes), exactly where might your ROI end up in subsequent mailings? Who knows?
Don’t Put All Your Investments in the EASY Basket
Use models, use mailing lists, use alternative media. Do your homework. Make offers that bring in customers; and bring in customers that return profits. To do this, direct marketers need a financial plan. One that can predict your response rates, projects your products sold, and helps limit risk.
You need an advisor who can offer a plan to profitability.
Just Who Can Give Me a Plan?
These are fast-changing times in the direct business. Today there are advertised some 50,000 mailing lists and alternative media choices. You can buy these from AT LEAST 14,300 companies in the US and in Canada.
Someone once said, “The list IS the market.” I couldn’t agree more. Why pinch pennies and reach the wrong prospects? People who resell cheap data or recommend “re-packaged” compiled data are more concerned with inexpensive list costs and with limiting non-deliverable liabilities. These companies all say the same things. “Our lists are comprehensive. Our lists are deliverable. Our lists are the largest, and We are the Original Compiler!”
I don’t care about cheap data. Nor do I care about 97% deliverability—some of the most profitable lists I’ve ever mailed were much less deliverable, and these were definitely not comprehensive. Price is important when buying media, but it is not the end all.
Follow the things that make a difference. Give me plan based on bottom-line results. That’s all that matters. Is my investment making money? If so, when?
Key your eye on the back-end dollars and DM STILL WORKS
A Plan? My List Broker Told Me…“No One Can Predict Response Rates.”
Ask yourself, “Do I need a Financial Planner or a Mailing List Broker?” Of course, the answer is yes. You do. And, it should the same person (at least when it comes to your direct marketing investments). The person that places your media, should know why you’re spending these advertising dollars.
Is it to grow your customer base; to gain new profits? Or, is your purpose simply to create a commission for the broker? A good broker needs to know which customers you will want to acquire, and how much you need each group to spend. To be clear, there is a big difference between “predicting” results and GUARANTEEING RESULTS.
You are ultimately responsible for every investment decision. When you mail or advertise you need to have a plan, a way to track results, with an eye on the back-end (bottom-line) return. If your suppliers answer, "How am I supposed to know that?" Or, "A List Broker never estimates your response", then RUN!
Buying Lists On-Line
One final thought. There is a trend today. New upstart companies expect YOU to go online to process your own mailing lists. AVOID this. First, you’d think that it since you’re doing all the work, it would be cheaper. It’s not. Second, when you program your own list buys, you miss out on all the combination selects that only seasoned compiled list sales PEOPLE know how to make.
Buying mailing lists and other media is not easy, especially if your goal is to make money. Sure pinch pennies, but work with a capable list or media broker.
If you have questions about this article or it’s subject matter, please post your questions on www.DMchat.com in the Direct Mail Forum.
Jerry Mamola is Managing Partner of AmityDirect, Inc. A privately held firm that works with catalog and club marketers to generate new and repeat customers. As a leading advisor in cooperation with the National Mail Order Association’s Advanced Member Services Jerry is a "hands on" user of direct media and provides the projections, budgets, and response information needed to launch or grow club, mail order catalog or subscription-based promotion. Please visit http://www.nmoa.org/Membership/growbusiness.aspx for more information and contact info.
Direct Marketing Discussions at; www.DMchat.com
Direct Marketing Seminars, Events and Tradeshows at: www.DirectMarketingEvents.com
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