I was asked by email about forecasting direct mail response and a test of
500 probably would not be a valid sample size, there again because the
environment changes, nothing really is more than a rough indicator. If you
need high quality print etc., it will also be quite expensive per contact.
Consider creating the communication so it can used some other way to bring
down the costs.
I would never give response rates, there are too many variables and they
could come back to haunt you.
For instance, you might make a great offer based on competitive interest
rates and while the package is in the mail the central bank might cut the rate.
I had an ad for a client in a Sunday newspaper the week a rival paper had Prince Charles's account of his marriage with accusations of mental instability.
The ad was a flop!
A bad offer could outsell a good offer if it is made to look good, a good
offer can be drowned by creative which won't get out of the way.
So response rates are chaotic. You can test then do a rollout and the rollout figures differ from the test. Anything is just an indicator.
You probably saw that coming, and it is not very helpful.
I work on a risk analysis basis when helping clients decide what to do.
What is most important is sizing up the risk of losing money on the project.
The first test is to look at rough normal profit margin, then at postage,
often this is enough to sink a project!
Then look at margin and rough total costs. The key question here is: how
many sales do we have to make to break even. Then see if this sounds reasonable.
Response figures normally bandied around are 1 to 2 percent and followup
can increase response.
But you can't depend on that.
What I would do is present a risk analysis, in your case the margins should
be good, so the risk low, point out that it is a test, then show income at
various percentage points.
You can then go on to discuss the value of repeat business, if x percent
repeat and how much each customer is worth over their career "lifetime
customer value" is the jargon.
Sometimes one makes a loss in the first place to recruit a valuable customer.
Direct marketing can be a long haul, trying different offers etc. If you
watch Time Life, you see offers for some publications once or twice, then you get lots and lots of activity on one theme, right now it is Ancient Egypt. That's how inaccurate forecasting is!
Readers Offers Direct who are big in the U.K., selling off the page, only
make money on about 2 out of 20 products, yet their turnover is millions.
Target Online from Target Marketing magazine and DM News will have more about response.
There's a terrific how to report about Direct Marketing
Arithmetic for sale at Target Marketing Reports
Edith Roman Listbroking have a response/profit calculator which takes you
through some of the issues. They also have lots of articles.