marketing math: part one

Marketing Math: Part One

Determining the Value of a Response

What constitutes a return on investment?

ROI can take many forms• generating sales• generating leads• capturing information• increasing customer loyalty

– retaining a customer– reducing customer attrition

• preempting an adverse action• up or cross-selling a customer• increasing list value• increasing brand awareness.

How much is a response worth to us?

• Usually Financially Based• Can Be Objectives Based (awareness example)• [LTV - (COGS+COFG+COCS+x) = COA] x Conversion Rate = Response Value

Why we use “Response Value” instead of Other Metrics

• Works for Direct Sale, Lead Generation AND Traffic Generation

• Also allows us to compare the strength of responses gathered by different media and means

• Allows us to determine what our true acceptable COA is.

• Allows us to isolate and improve “points of attrition”

• Focuses on the positive rather than than the negative.

Calculating Response Value

• Least understood/appreciated aspect of marketing

• Requires:– an accurate gauge on LTV– an accurate understanding of

real COGS– an accurate estimate of

conversion rates• It’s hardly ever perfect• Always be ready to account for

hidden costs• Always be searching for ways

to leverage and increase lifetime customer value

Calculating Lifetime Customer Value

• Second least understood/appreciated aspect of marketing

• Requires:– an understanding of the lifecycle of an

average customer– an understanding of customer attrition

rates• It’s hardly ever perfect

Calculating Cost of Goods Sold

• Cost to Produce Product (or Service)• Materials/Manufacturing• Labor• Overhead• Wholesale price of merchandise• Loss status if loss leader pricing• NOT typically Cost of Sales, Marketing

or Advertising

Calculating the Cost of Fulfillment

• Shipping• Tracking• Personalization/Customization• Packaging• Premiums• Discounts• Order Acknowledgment• Value of shelf space, stocking charges,

etc. ($/per sq. ft. in retail)

Calculating the Cost of Ongoing Customer Service

• Installation• Training• Service• Returns• Q&A• Web support

Calculating Acceptable Cost of Acquisition

• How much we spend (or can spend to acquire a single customer (a conversion) to have a profitable relationship with that customer

• Requires understanding of:– Profit on Product/Service– Lifetime Value, Attrition Rate,Life Cycle– Cross-Sell, Up-Sell Potential (brand

affinity)– List Value

Calculating the Conversion Rate

• The rate at which your responders convert and become customers that have lifetime value

• (For some: the rate at which your suspects become prospects or the rate at which your prospects respond.

Break Time

COGS: Credit Card Example

Cost to Produce Product (or Service):Item Average CostApplication Processing $.50Open Account/Assign #’s $8.50Credit Approval Coding $4.50*Database Updates $1.50Pressing/Personalizing Card $.05Online Access Setup $2.00Processing Premiums/Setup $.10*Subtotal: $17.15

*Includes processing 20% declines. *10% selected credit insurance or premium offer


Cost of FulfillmentItem Average CostCard Fulfillment $1.50Decline Fulfillment $.75Problem Resolution $.50*Purchase/Open Ins. Policy $4.00*Card Activation $4.50Subtotal: $11.25

10% of Customers selected credit insurance1% wrong address, missing card, disputed decline


Cost of Ongoing Customer ServiceItem Average Cost

24 hr. Help Line $13.50Statement Processing $18.00Duplicates/Stolen Cards $.05Subtotal: $31.55

Total COGS: $59.95 (annually)


Other Potential Costs: • % of customers defaulting on debt (avg.. balance)• % of customers who take legal action• % of fraud claims per customer• arrangements with VISA and MasterCard• system updates, mergers, recession, legislation• unanticipated inflation rates• the 9/11 factor

Acceptable Cost of Acquisition: Credit Card Example

Product Profitability:

$1,553 average balance x 9% (net) interest rate = $11.65 per month or $138.75 annually/customer52 transactions/ year = $2.08 in transaction fees$30.00 annual fee

Total Revenue: $170.83 per customerTotal Cost: $60.00 per customerProfit: $110.00 annually

Acceptable Cost of Acquisition: Credit Card Example

Lifetime Value ItemsItem Item ValueCross Sell/Up-Sell $0Attrition Rate/Lifecycle (2.25 yrs) = 2.25X = $247.50List Value $.10 x 3/month x 2.25 yrs.= $8.10Ave. Lifetime Value: $255.60

Conversion Rate: Credit Card Example

• We start with 1,000 responders:• 5% of applications are incomplete and cannot

be completed with follow-up: 950 remain• 15% of the remaining credit applications are

declined as uncreditworthy: 807 remain• 15% of those, never activate their cards:

Only 686 remain!• Conversion Rate: 68.6%

The Value of a Response: Credit Card Example

Product ProfitabilityTotal Annual Revenue: $170.83 per customerTotal COGS: $60.00 per customerProfit: $110.00 annually

Lifetime Value ItemsItem Item ValueCross Sell/Up-Sell $0Attrition Rate/Lifecycle (2.25 yrs) = 2.25X = $247.50List Value $.10 x 3/month x 2.25 yrs.= $8.10

Acceptable COA: $255.60 (or less)Conversion Rate: 68.6% 255.60 x 68.6% = $175.34Value of a Response: $175.34

Valuing Various Types Responses

• Direct Order -

Aside from the obvious (profit from sales), items for consideration include customer returns, bad credit card account numbers, undeliverables, etc.

• Leads -

The more qualified the lead the better your conversion rate will be. Therefore, you may be able to spend more $$’s on your lead generation efforts to create more qualified leads. Items to consider how much non qualified leads cost you. Sometimes the value of a big response rate is misleading.


• Information -Usually considered lead generation.

The more you know about your targeted audience, the more you can focus your message and offer. Consider how much more you would spend if you lacked critical data.


• Preemptive Action -

Getting a prospect/customer to take action to avert a negative response. The critical factor to consider here is the cost of inaction.


• Customer Retention -

An effort that extends the lifecycle of a current customer can have a profound impact on the bottom line, see the credit card example. If we can extend the cardholder’s lifecycle by one month, we get approximately $12.00 in additional revenue. The critical factor here is to know when to let go.


• Brand Awareness – (key in B2B)

Calculate the effect of media on awareness among the general public along with the $$’s spent on the media. By focusing your message on your critical targets you will likely achieve potentially higher levels of awareness for less money.


Questions/Comments/Discussion

Collect at least three samples of direct marketing that request three different types of response.

Bring these to class on October 3rd.

They can be ANY form of direct response marketing.

(this will count toward your class assignment grade).

Assignment One: