The Junk Mail Business Model

Posted by psabilla

October 13, 2006

Even though I submitted our phone number and mailing address to the FTC’s “Do Not Contact” list, I still get a lot of junk mail. As I sift through the mail, it dawned on me that the people behind the mailings aren’t trying to bother me — no intentionally anyway, but that they are trying to make money. The second I mentally placed myself in the enterprising perspective, which is where I feel pretty comfortable, I wasn’t so annoyed anymore.

So, how do direct mail companies make money?

In direct mail campaigns, costs are response rate are critical factors. For direct mail, cost can be comprised of the following: print on the material and any associated creative fees, material costs, and postage. Pretty simple. Response rate is defined as actual people responding to the campaign.

So, the break-even model is pretty standard. It follows the profit tree model I wrote about several months ago. Here’s the model for a direct mail campaign:

Break-even model is,

((R) revenue per mailing) – ((C) cost per mailing) = 0

But, response rate (rr) is critical here, so

(rr)*(R) – (C) = 0

Let’s assume that JunkMail Vendor decides to engage in a junk mail campaign. JunkMail’s costs are .30 per mailing and they decide to mail to their target demographic. Their revenue per postive response is $20.00 — what is the response rate needed for JunkMail to break-even?

20rr – .30 = 0

.30 / 20 = rr

rr = 1.5%

So, given the example above, only 1.5% of those that received the junk mail need to respond in order for the firm to break-even. Given the low risk and massive upside, no wonder junk mail is such a prevalent and annoying marketing tactic. By the way, the inverse is true also: if Cost Per Acquisition (CPA) were higher than the expected revenue, the model still works — the campaign would just require a higher response rate or profit wouldn’t come until the second year, perhaps, it it’s a subscription model.

The enterprising me say’s “wow, it doesn’t take much, really, to make money from this marketing strategy.” The consumer me says “I hate junk mail and email spam. I hate ‘em.” But, one can’t argue that it’s an easy and relatively cost effective way at increasing revenue, winning customers, and increasing brand awareness. No wonder credit card companies like Discover Cards, American Express, Chase Cards, and Capital One Credit Cards spam the crap out of people like me; and others outside the credit card industry love to send junk mail too — it’s a cash cow for them.