To Mail or Not to Mail?

Once we're comfortable with average gift and response rate, we can figure out whether we should even do a direct mail appeal.

First, we need to calculate our revenue and expenses. For revenue, we multiply: number of constituents (people on our list), average gift and response rate.

For expenses, we multiply constituents by variable costs. Then, add fixed costs (table 2 shows the costs, expenses for net revenue for the chart above):

REV=CON*AG*RR
EXP=CON*VC+FC

Where:

REV =Total Revenue
CON = # of Constituents in Database
AG = Average Gift
RR = Response Rate
EXP = Total Expenses
VC = Variable Costs
FC = Fixed Costs

Table 2
Revenue		$15,000
Expenses		$14,250
Net Revenue		$750

Fantastic! We made $750 (roughly $.05 per $1 spent).

WHEN EXPENSES ARE GREATER THAN REVENUE

There are two situations when expenses exceed revenue:

1) when Variable Cost (VC) is greater than the Response Rate (RR) multiplied by the Average Gift (AG) and

2) when Break Even Quantity is greater than the number of constituents you have.

For the first case, do not continue with the mailer. Each time you put a solicitation in the mail, you're losing money!

In this instance, you need to rethink the costs of the mail piece. In the model below, you'll know this is this case because you get a negative BEQ! Bad news (see table 3 below).

Table 3
Sample Nonprofit
			BAD NEWS	CAN WORK	ADJUSTMENT
Constituents			10,000	5,000	5,000
Total Fixed Cost			$2,250	$2,250	2,250
Variable Cost			$1.2	$1.2	1.2
Average Gift			$75	$75	75
Response Rate			0.01	.02	.03
Per Unit
Revenue			$0.75	$1.5	2.25
Expenses			$1.2	$1.2	1.2
Per Unit Net			$-0.45	$.3	1.05
BEQ			-5,000	7,500	2,143

The second case is a little more nuanced. Here, you are making money each time you put a solicitation in the mail, but you do not have enough people to mail to cover your fixed costs (FC).

To remedy this, you can:

• Send your mailing by bulk (~$.27) instead of regular mail ($.42). Your mail will take a couple weeks to hit, but it may well be a trade-off worth making;

• Reduce the number of inserts, cutting your paper and printing costs;

• Identify which geodemographic cluster has the lowest response rate and eliminate that population from the mail piece. This drives your response rate up, perhaps to profitability.

• If removing that geodemographic cluster improves the response rate to 3%, then the BEQ becomes 2,143 (above). Because we started with 5,000, but by removing that 1,000, the appeal goes from losing $750 to making $1,950.

The point is: we can make these decisions before investing a single dollar in this appeal.