Direct Marketing Math & Finance Seminar

SELF ASSESSMENT QUIZ ANSWERS

See how you did on these key direct marketing questions.

1. QUESTION: If a promotion sent to 25,000 people produces net sales of $20,000, what are the sales per thousand? Is this a good outcome?
   
   ANSWER: 20,000/25 = $800/M. Sales/M alone will not tell us whether or not this is a good outcome. That will depend on many other factors including whether this was the result of a house or prospect effort, what we expected based on previous experience, hat medium was used, what the cost per buyer is if we lost money, etc.
   
   
2. QUESTION: If a promotion costs $600/M and each average sale of $100 contributes $40 to promotion cost and profit, what is the net sales/M I need to break even?
   
   ANSWER: $600/$40 = 15 orders per thousand to break even or a 1.5% response rate. With each order worth $100 in sales, breakeven sales/M = 15 * $100 or $1500/M. This can also be solved by dividing promotion cost by the contribution %: 600/(40/100) = 600/40% = $1500!
   
   
3. QUESTION: Is a $7 cost per buyer too much to spend to acquire a new customer?
   
   ANSWER: It depends on the customer’s lifetime value.
   
   
4. QUESTION: Your business markets widgets selling for $50 in several media. Your ad agency says you should estimate the cost to acquire a new buyer by dividing the promotion cost by the number of buyers each promotion acquires. Is this correct?
   
   ANSWER: No. Since the widget brings in revenue, the correct way to calculate acquisition cost is to divide net profit (net sales less cost of goods, operating, overhead and promotion costs) by the number of buyers acquired.
   
   
5. QUESTION: An Internet marketing effort costing $500 results in $1,200 in revenue from 20 first time buyers. The average contribution per order is 30%. How much does each of these 20 new buyers cost to acquire?
   
   ANSWER: ($1200 * .3) - $500 = ($140). Cost (loss) per buyer = ($140)/20 = -$7
   
   
6. QUESTION: A space ad costing $2,500 that solicits requests for more information about a life insurance policy generates 100 leads. The insurance company estimates that on average new policy holders generate $500 in contribution to promotion cost and profit over their first three years. What is the cost per lead? Is this ad successful?
   
   ANSWER: Cost/lead = $2500/100 = $25. There is no way to know whether or not the ad is successful. It depends on the conversion rate of leads to sales.
   
   
7. QUESTION: You ran a split test of a control vs. a test package which involves only copy changes. In roll-out quantities the package promotion cost/M will be the same. The test beat the control by .5%. Applying the proper statistical test shows you can be only 80% certain the test result truly is better. Do you adopt the new package as your control?
   
   ANSWER: It depends. If the control is relatively recent and hasn’t been used too often, the risk of changing is minimal. If it is well established and test quantities were small, you should probably retest the new package, but in larger quantities.
   
   
8. QUESTION: Your business is able to acquire new customers at breakeven or better and has therefore adopted a rule to only roll-out efforts that exceed breakeven. You therefore believe there is no need to establish the long term value of a customer. Is this view correct?
   
   ANSWER: Not really. Though breaking even or better is admirable, by ignoring long term value you may be sub-optimizing business growth. Also, if response rates decline you will be unprepared for the day when a breakeven goal may no longer be sustainable.
   
   

No need to worry, you’ll need only basic arithmetic: +, -, x, and ÷. No complex math here – just practical tools presented in a language anyone can understand.