Measuring Direct Mail Effectiveness

Too often, we don't transfer the tools we use in one type of fundraising activity to another. This is perhaps nowhere clearer than when we plan a direct mail appeal.

When we plan an event, we know exactly how much our fixed costs are (e.g. facility rentals), variable costs (e.g. per meal or per invitation cost) and the minimum number of guests required for the event to break even.

Why not use these same metrics in direct mail?

In direct mail, these metrics have a greater impact because you can forecast the success of the campaign before you spend a single dollar.

One critical metric in direct mail, that's often overlooked, is what's the minimum number of people who need to receive this mailing so the nonprofit can raise more money than the cost of the mailer.

This is called the Break Even Quantity (BEQ).

For events, the Break Even Quantity is calculated by subtracting fixed costs (audio visual, facility rentals, awards) from sponsorships. Then, subtract your variable costs (meals and invitations) from your variable revenue (ticket sales).

Your calculation looks like this:

BEQ=(SPON-FC)/(REV-VC)

Where:
BEQ = Break Even Quantity; minimum number of people who must attend your gala before you make money
SPON = Sponsorship Revenue
FC = Fixed Costs
REV = Variable Revenue
VC = Variable Costs

To convert this formula from events to direct mail, you need to make three changes:

1. Take out sponsorship (SPON)
   
2. Change "Revenue" to "Average Gift" (AG)
   
3. Multiply AG by your "Response Rate" (RR), which gives you "revenue per unit mailed"
   

Your new calculation:

BEQ=FC/(AG*RR-VC)

Where:
BEQ = Break Even Quantity; total number of people who must receive your appeal
FC = Fixed Costs; this may include staff time
AG = Average Gift; total revenue raised divided by total number of donors who will give
RR = Response Rate; what % of donors who receive your direct mail will give
VC = Variable Costs (e.g. postage, printing)

SAMPLE NONPROFIT DIRECT MAIL APPEAL

Table 1
Sample Nonprofit
Constituents		10,000
Fixed Costs:
Mail set-up		$250
Design		$2,000
Total Fixed Cost		$2,250
Variable Costs
Printing		$0.5
Envelopes		$0.25
Reply envelopes		$0.25
Postage		$0.2
Variable Cost		$1.2
Average Gift		$75
Response Rate (2%)		0.02
BEQ=FC/(AG*RR-VC)
BEQ		7,500

Table 1 shows that Sample Nonprofit is doing a direct mail and they have 10,000 constituents (donors and prospects) in their database.

They looked at previous direct mail campaigns to forecast for this campaign:

• A 2% response rate;

• Average gift of $75;

• Fixed Costs and Variable Costs, based on vendor estimates.

*Plugging this information into the above calculation, their breakeven quantity (BEQ) is 7,500.

Because the number of constituents (donors and prospects) in their database (10,000) is greater than their BEQ (7,500), this will be a successful mailer.

Hooray!