Find New Customers Without Breaking the Bank

You have a slew of choices when trying to reach prospects without paying postage, including direct response space advertising, broadcast and other channels.

By Denny Hatch

It is imperative to determine the lifetime value of customers by source. Robert Hackett, RRD Direct's vice president of sales, provides the following formula:

Lifetime value is a function of frequency of purchase, multiplied by the gross margin, multiplied by the duration of brand loyalty.

What can you afford to pay for a new customer? To make that determination, Gary Hennerberg of the Hennerberg Group suggests you take the following steps:

--Research customer lifetime value.

--Calculate every imaginable fixed and variable cost associated with selling your products, including cost of goods sold, inbound

800 number costs, business reply mail, postage, fulfillment, returns prospecting, etc.

--Establish a profit objective. If, for example, it is 20 percent of net sales, subtract that number from your contribution.

--The number remaining is your allowable marketing cost. Divide that into your cost per thousand, and you'll learn how many orders per thousand you need to meet your objectives.

As Peter Rosenwald, author of the new software program offered by The Direct Marketing Association that enables marketers to understand their allowable cost per order, says, "Profit must be treated as a cost of doing business."

While you're at it, suggests Hennerberg, analyze your response by media month. Clearly, if you lose big money on April promotions, don't promote in April.

Next, you want to circumvent the killer cost of old-fashioned catalog prospecting: renting cold lists, paying postage and sending out catalogs at $750/M to $1,000/M or more.

Abacus & Other Co-Op Databases

A co-op database is made up of the transactional and demographic data of a group of catalogers' hundreds of millions of transactions, and tens of millions of buyers. Membership in the co-op enables catalogers to build a model of their best, most profitable customers and to find more like them.

Not only are prospect mailings precisely targeted, but members pay less to rent the co-op lists than they would to go to an outside vendor. Indeed, it can be beautifully efficient.

Bob McKim of msdbm offers the following steps to help you discern your best customers:

*Clean your customer address files.

*Add transactional data.

*Find the promotion source.

*Add household characteristic data.

*Segment the customer records that are most complete, and score them.

*Find "like" names.

Direct Mail

One way to circumvent the high cost of sending catalogs is to emulate The Sharper Image, which sends eight flights of four solo direct mail pieces—a program that's used for prospecting as well as encouraging customers to order direct via the phone or Internet. Instead of a full catalog, these solos offer individual items. Of course, The Sharper Image has the advantage of creating proprietary products, which means it enjoys higher margins.

Other catalogers have been known to send stripped-down versions of their catalogs, offering the most profitable and popular items in their product lines and not paying to promote what's, at best, only marginally profitable.

Other Mailing Strategies

Four other techniques should give your catalog mailing a bit more bang for the buck (and mailing a catalog to a cold list does indeed cost about a buck, what with printing, postage and list rental).

1. Find and target multi-buyers, individuals whose names appear on two or more outside rented lists that you plan to use in a prospect campaign, suggests Stephen R. Lett, president of Lett Direct, a catalog consulting company.

2. Rent hotline names that may cost a little more but will give you the "R" (recency) in the RFM formula and so should be better responders.

3. Hallie Mummert, editor of the direct mail industry newsletter Inside Direct Mail, suggests catalogers consider list exchanges rather than rentals. Instead of paying $100+/M for new names, the cost is more like $15/M running charges when you exchange. Just be sure to exchange for equal value, not necessarily on a name-for-name basis.

4. To further refine rented lists, prospectors should look to enhancements and selects, such as presence of children, homeowner status, age and household income.

Remember catalog consultant Susan McIntyre's "Rule of Lists": Mailing to the right lists will have a bigger impact on your response rates and sales than anything else you do.

Alternative Media

You have a slew of choices when trying to reach prospects without paying postage, including direct response space advertising, broadcast and other channels. According to consultant Bob Doscher, with many alternative media, it's a buyer's market—great deals are available by negotiating. If someone says the going rate is $60/M, offer $30/M, says Doscher, and settle for $40/M.

Iris Shokoff, freelance media consultant, counsels clients: "Never buy retail. Only if you absolutely must have page 3 or page 5 of a major magazine should you pay full price."

Consultant Lois Boyle of J. Schmid Associates says the first decision to make is whether to ask prospects to request a catalog (two steps) or actually buy a product (one step). The price of your products often will determine the appropriate method.

Either way, create your offer with the answers to two questions in mind: What do I have to offer that will motivate a prospect to act immediately? And, how can I convince prospects they'll be missing out on something special if they don't act immediately?

Doscher is unequivocal in his thinking: "Offer a product for sale, and make it your very best-selling, most popular product."

Boyle suggests the product must be within your brand image and representative of your overall product mix; it must have broad appeal and be easy to show and describe; and the price must be affordable for someone to take the initial risk, e.g., $9.99, $19.99 or $29. And she suggests offering a discount for ordering more than one. Other catalogers offer a free gift, such as a tote bag, to entice shoppers to buy off the page.

After all, in the words of consultant Axel Andersson, "If you want to dramatically increase your response, dramatically improve your offer."

Leon Henry Inc., one of the premier brokers of alternative print media, estimates 1,000 to 1,500 media opportunities are available to reach consumers at home or at their place of business. Cheryl Bagdan of Leon Henry offers the following tips when selecting alternative media outlets:

*Package inserts—printed pieces that are enclosed with a merchandise shipment of a mail order purchase. The reasoning goes that customers who are delighted with their purchases will be in a buying mood and read promotional material. Ballpark cost: $50/M.

*Statement stuffers, which go in bills and statements from cable companies, business-to-business

(b-to-b) invoices, department store bills, credit card statements, etc., are mailed first-class. A stuffer can't be so heavy as to tip the mailing into the next postal rate category. These are mailed in huge volumes. Ballpark cost: $35/M to $45/M.

*Co-op mailings come in two flavors, says Bagdan. National co-ops, such as Valpak, mail in a #10 envelope and contain package goods offers. But few catalogers use these. Another co-op, Money Mailer, is a 6-by-9-inch mailing driven more by local merchants, such as restaurants, pizza parlors and cleaners. Other co-op programs exist for homeowners, new parents and more prospects. Ballpark cost: $10/M to $20/M.

*Supermarket take-ones—that rack of cards by the exit of supermarkets. Should you test this? The next time you visit a supermarket, spend some time at those racks to see if your competitors are there and what (if anything) they're offering.

*Card decks, mostly found in the

b-to-b arena, can take your statement-stuffer-sized insert, or the publisher will print from your artwork. There's usually not enough room to sell a product, so they're generally used by catalogers to solicit catalog requests. Ballpark cost: $20/M or less.

*Catalog bind-ins and blow-ins. If you use these, Bagdan suggests, be sure your broker places your pieces only in those books going to the mailer's housefile. Unsuspecting marketers sometimes get into catalogs that are going to outside lists and get creamed. Ballpark cost: $20/M or less and can require a minimum of 50,000 pieces.

*Free-standing inserts in newspapers are used by catalogers to sell a product as a lead generator. The best deals are remnant ads. If you want specific geography or a time slot, you'll pay more. Ballpark cost: $5/M for a full page.

*Lifestyle changes, such as marriage, buying a house, birth of a child or death in the family, are the times when people are most likely to buy. If you sell baby products, for example, test prenatal and post-natal gift packs that are given to expectant or new mothers and filled with samples of baby food, diapers and related goods. Ballpark cost: $35/M.

n Telephone company new-mover polybags—bundles of goodies that go along with the hand-delivered phone directories to new homeowners. Ballpark cost: $30/M to $40/M.

Space Ads

Run an ad in a magazine, and it reaches the lion's share of the market at the same time, rather than dribbling out in the mail across country. Use these tips from Jack Schmid and Lois Boyle if you want to purchase space ads:

*Research remnant space.

*Test until you have it right.

*Make your creative unique.

*Know your numbers cold.

*Track responses.

*Choose product carefully.

*Be wise about the two-step space. If you build a catalog request ad (two-step) try prequalifying your prospects by charging a nominal fee. Or consider the following story:

Recently, executives from a start-up catalog placed a magazine ad offering a free catalog. They were astonished that it received 30,000 responders! But conversions were dismally low. In a subsequent ad, they featured a product and its price (although they weren't trying to sell the item). This strategy reduced the number of catalog requests but increased the rate of conversion.

Where should you advertise your catalog? There's one basic rule: Go where your competitors go. If you find a publication that looks right for your product but contains no mail order ads, skip it. The New Yorker is loaded with small mail order ads that seem to produce results, since many of the advertisers are there again and again. In addition, The New York Times and The Wall Street Journal have regular catalog shopping sections.

Ballpark: Ads in The Wall Street Journal's "Catalog and Online Shopping" section generally run 2 1/2 inches square representing 35 agate lines and will cost about $2,500 to reach 4.1 million readers.

Referrals or M-G-Ms

In the book and record club business, Member-Get-a-Member (M-G-M) was the second most lucrative medium for acquiring customers. (Space ads were No. 1.) Nightingale-Conant, the seminar and self-help company, prints a referral effort on the back of its BREs' message offering to send a catalog to a friend or relative for free and providing room for two names and addresses. The logic here: The order has been placed, the BRE sealed, so the added request wouldn't interfere with the ordering process.

Book and record clubs generally offer the new member a free product and a thank-you product to the individual who did the referring once the referral bought something.

Radio

Check out the massive radio campaign from vacuum cleaner merchant David Oreck. Taking a cue from Oreck, Richard Thalheimer, founder of The Sharper Image, recorded radio spots and also delivers loose scripts for on-air personalities to deliver their own commercials. Generally these are geared to drive the listener to one of The Sharper Image's retail stores.

However, if you listen to Rollye James or Art Bell late at night, you'll also hear commercials by the

C. Crane Co. offering individual merchandise, as well as a free catalog. Both James and Bell not only exude enthusiasm for the products but create a real sense of personality and brand for the catalog.

Television

Tony Farrell, senior vice president of The Sharper Image, said the catalog does a significant amount of television advertising, both two-minute and 28-minute direct response commercials on various stations, in many markets and throughout the day. The product is its proprietary Ionic Breeze Quadra, the silent-air purifier. "We do very well on a direct basis and believe we also benefit from the spillover advertising effect that helps support our stores, Internet and catalog," he says.

Denny Hatch, contributing editor, consultant and freelance copywriter, is the author of the books "Method Marketing" and "2,239 Tested Secrets for Direct Marketing Success." He can be reached via www.methodmarketing.com.