MarketSmart

# Direct Mail Metrics: How to Measure ROI

Measuring the effectiveness of direct mail campaigns can be a bit tricky. When you think of direct mail, you think of response rate. Of the traditional direct mail metrics this is the most commonly used to measure success or failure. But response rate on it’s own is too simplistic and provides a very limited scope for analysis. When it comes to analyzing your overall direct mail campaign(s), you’ll need a few more metrics and reports.

If your goal is to simply measure the engagement received from one of your direct mail campaigns, then response rate can take you relatively far. If you are more interested in determining if you should increase or decrease direct mail efforts, and which ones will generate the best return, you’ll want to analyze a few more numbers. Keep in mind that the metrics you want are the ones that help you make a strategic decision.

Unfortunately, doing a more refined analysis on direct mail performance can be tricky. And not for the reason you are thinking. Creating the reports and calculating the metrics is actually easy thanks to advances in software–no more Excel wizardry! It’s the data that can be tough to come by.

Direct mail campaign data usually lives in the direct mail (or caging) firm’s database, and that can complicate things. The direct mail firm you work with has one goal–retain your business. With that in mind, don’t be surprised if they send you a report that highlights some “vanity metrics” (number of people engaged, number of of new donors acquired,  response rate, etc.).

These metrics are nice to have, but they don’t help you with overall strategy.

As you do your analysis, one of your goals may be to determine Return on Investment (ROI). Answering the question, “how effectively is our fundraising budget being spent on direct mail?”

Determining ROI can seem impossible when the direct mail firm only provides you with a few metrics and reports. But, fortunately it is easier to do then you think!

First, let me outline the 4 direct mail metrics we are going to calculate:

What is great about these 4 metrics is that you don’t need any information from the direct mail firm to calculate them. You simply need the list of individuals who received a particular campaign. Let’s go through these step by step and then tie them all together at the end.

## Donor Acquisition Cost

I recently wrote a lengthy piece on the importance of measuring donor acquisition cost (DAC). Please give it a read.

The concepts from that post can be directly applied here to our direct mail analysis.

DAC is the amount of money spent to acquire a new donor. To calculate DAC, you sum all the costs of appeals and marketing over a given period, including salaries and other employee-related expenses, and divide it by the number of donors that you acquired in that period.

DAC = Total costs ÷ Total # of acquired donors

The hope with direct mail is that your DAC will be low. You will want to calculate DAC on a per campaign basis.

As you will see in a moment, DAC goes hand in hand with one of our other metrics to create a holistic view of your campaign’s effectiveness.

## Average Donation Amount

This is one of the more aptly named fundraising effectiveness metrics. Average donation amount is exactly what you think it is–the average transaction size.

We will want to calculate average donation amount on a per campaign basis, just as we did with DAC. To do this, I recommend using the Fundraising Report Card®.

You will need to pull the list of individuals who you sent a particular campaign to from your donor CRM. You will want their donor IDs, donation dates, and gift amounts in the file. Name that file “my-campaign.csv.”

After you drag and drop that file in the Fundraising Report Card®, you will be greeted by your average donation amount on the key performance indicator page. It’s that easy!  Your average donation amount from recipients of a specific direct mail piece is right there for you.

Of course, you could calculate average donation amount from scratch. The formula is pretty simple:

An even more telling metric than average donation amount is donor lifetime value (LTV). Where average donation amount provides you with a snapshot in time (this is the size of an average gift at this exact moment), donor lifetime value tells you a more compelling story (the amount of revenue an average donor produce over the lifetime of their giving).

Calculating LTV can be a bit difficult. The formula is straightforward, but getting some of the inputs (donor lifespan for example) can be tough.

LTV = Lifespan × Average donation amount × (Total # of donations ÷ Total # of donors)

This is another one of those direct mail metrics that the Fundraising Report Card® will calculate for you. You’ll find LTV on the same page as average donation amount, making it easy to analyze both at the same time.

## Retention Rate

Last but not least is retention rate. This is the metric that many direct mail marketers fear the most. How many of those acquired donors are sticking around and donating next year or the year after that? We all know that it is more cost-effective to retain donors than it is to constantly acquire new ones (remember DAC!), so it is pertinent to track and measure retention of direct mail acquired donors.

Again, this is one of the metrics the Fundraising Report Card® calculates for you. You’ll find it on the Retention Report page.

## Bringing it all together

All these numbers, charts and reports are great, but what do they mean? One of our readers recently commented, “numbers should always be accompanied by narrative that offers insight about what they mean and do not mean.” She couldn’t be more right.

With that in mind, here are a few high-level trends and patterns you should look out for during your analysis of these direct mail metrics.

• DAC should be less than LTV
• This is an absolute must. If you are spending more money to acquire a donor then they donate to your organization you will end up in the red, quickly.
• Direct mail is a low DAC channel, so your DAC should be considerably lower than other campaigns and departments.
• Average gift amount shouldn’t be a surprise.
• This may be the first time you are looking at the average gift amount from a direct mail campaign. Use this opportunity to create a benchmark for future campaigns.
• Compare LTV with donors acquired through other channels.
• What other channels do you use to acquire new donors? Whatever the answer may be, calculate the LTV of donors from that segment as well. Compare the LTV of those segments to help determine which channel deserve more long term investment.
• Retention may be low, but lookout for future reactivation.
• It’s no secret that direct mail acquired donors tend to churn relatively quickly. Use your retention report to help set benchmarks for future direct mail campaigns and also stay cognizant of reactivation (the number of donors who stop donating and then return in a different year).

The biggest takeaway here is the fact that these direct mail metrics are no longer hidden behind a locked door. You have access to this information. And you don’t have to be an Excel master to calculate them.

With that in mind, there are many different ways to interpret your numbers. There are general trends and patterns to lookout for, but every organization is different. When it comes to direct mail, measuring these performance metrics can you help determine if your investment is paying off.