First things, first: What’s your Break Even Point?

Before I spend a lot of time developing a direct marketing plan or budget, I’ll generally do what I call the ‘Pencil Test’ first. The pencil test is a simple overview exercise I always employ to find what response I need to achieve to just cover my costs or break even. What I’m looking to see is where the breakeven point is, in terms of response, to see if this campaign has even half a chance of being profitable.

If I’ve got half a chance of making the campaign successful, then I’ll spend the time and energy to develop a campaign plan and budget. If the results of the Pencil Test show me that the response I’ll need is just not realistic, based on previous experiences, I’ll go back to the ‘drawing board’ and rethink the whole approach.

Believe me; it’s much better to do this first before you put in a lot of time and energy into a losing proposition!

Before you start the pencil test, you should know what the general overhead and product costs are per unit sold. Once you have these figures in order, do some simple calculations based on the anticipated response rates to calculate your breakeven point.

Outlined below is a simple one that I put together for a direct mail campaign. You can use this format just as easily for any type of direct response campaign. Depending on what your metrics are you can change this as you need for other mediums.

Pencil Test – Direct Mail Campaign

Marketing and Sales Activity

Mail Quantity
10,000
10,000
10,000
10,000
10,000
10,000
10,000
Anticipated response %
0.25%
0.50%
0.75%
1.00%
1.5%
1.75%
2.00%
Responders (Inbound callers)
25
50
75
100
150
175
200
Close %
60%
60%
60%
60%
60%
60%
60%
Sales #
15
30
45
60
90
105
120
Average Sales Price
$750
$750
$750
$750
$750
$750
$750
Sales Revenue
$11,250
$22,500
$33,750
$45,000
$67,500
$78,750
$90,000
Sales and Marketing Costs
Mail Costs ($1/mail piece)
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
Estimated Telemarketing Costs ($65/sale)*
$975
$1,950
$2,925
$3,900
$5,850
$6,825
$7,800
Product Cost ($150 / sale)
$2,250
$4,500
$6,750
$9,000
$13,500
$15,750
$18,000
Overheads ( $10/sale)
$150
$300
$450
$600
$900
$1,050
$1,200
Total Costs
$13,375
$16,750
$20,125
$23,500
$30,250
$33,625
$37,000
Cost per Sale
$892
$558
$447
$392
$336
$320
$308
Cost per Sale %
118.89%
74.44%
59.63%
52.22%
44.81%
42.70%
41.11%

* TM costs estimated at $65 TM cost per Operator hour/ 1 sales per Operator hour

In the scenario above I’ve highlighted the breakeven point in yellow. This assumes a 52.22% Cost of Sale works in this situation. Of course, the other key metrics aside from the Response % – Close % and Average Sales Price should be representative of what you usually experience. You need to resist the temptation to play too much with these metrics just to make the numbers work.

The question you have to ask yourself is: Will I really get at least a 1% response? If you can put your hand on your heart and swear you can do better than 1%, then it’s time to put your campaign budget together.

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