TUTORIAL 13:
Applying Direct & Interactive Marketing Math and Metrics
CLASS ACTIVITIES:

Revise Topic 13

Tutorial questions

Case Discussion Questions
Learning outcome

Understand why it is important to determine customer value and be able to calculate
customer lifetime value

Understand the concept of marketing penetration and how it is utilized

Understand the concept of a “lift” and be able to perform a “lift” calculation

Understand why being able to calculate “break-even” is important and be able to perform the
break even analysis

Be able to describe the role that fixed costs, variable costs and unit margins play in
establishing a marketing budget

Be able to explain the importance of Return on Investment (ROI) and perform the ROI
calculation

Explain the reason for creating a test for a planned direct marketing campaign and give
examples of what would be measured in a test
Tutorial questions
1. Why do we bother to examine the costs of marketing?
spending money on marketing?
What should result from
Every business is in business to make money for investors, and to do this, a company must
create and keep customers. Marketing is a cost that leads to benefits. It’s the ratio between
the two that matters. Direct marketing can be called successful, i.e., creates benefits, when it
gains new customers (or new orders from existing customers) for a company. We need to
remember that direct marketing also has costs, e.g., conducting research, acquiring lists,
creating advertising campaigns, and fulfilling orders. The goal is to create a marketing
campaign that not only “breaks even” – that is, gains enough sales to pay for all costs – but
results in a profit.
2. Why calculate the value of customers?
a. It determines how much each customer is worth to your organization.
b. It tells you how much money you can afford to spend to acquire a new customer like your
current customers.
c. You need to identify your best customers in order to seek out new prospective customers
who match the customer profiles of your best customers.
3. Why is the concept of break even important? Is this always a goal in a direct marketing
campaign? What might be another goal of the campaign?
A company needs to know how much it needs to sell to cover costs. But typically,
companies want to make a profit, not just sell enough goods to cover costs or break even. If
a marketer recovers promotion cost from the gross profit (beyond cost-of-goods sold and
overhead) of the total number of units sold, he or she breaks even on those sales. Sometimes,
when introducing a new product or trying to penetrate a new market, a company may have
goals other than to break even, e.g., getting the new product into the market or selling to a
new demographic, but at least they need to know what the break-even numbers are even in
these cases.
The simple formula for calculating break-even is:
Break-even in units sold = Fixed Costs in Dollars
Margin Per Unit in Dollars
Always add the desired profit margin (in dollars) to your other fixed costs to give yourself
the new number to divide by the unit margin (in dollars).
4. Why do advertising costs count as fixed costs?
Advertising costs count as fixed costs because they are allocated and spent regardless of the
amount of product sold – therefore they are “fixed” in the budget and do not vary with
production.
5. In a specific direct marketing campaign, if we want to improve the ROI, what are some
ways to do this?
a. Variable costs, including costs of goods sold, could be reduced.
b. The offer could be improved without adding additional marketing costs.
c. Advertising costs could be reduced, for example, by finding a more cost-effective direct
marketing medium or by negotiating for lower media buy rates.
Case Discussion Questions: SafeLife (Textbook p.368 – 370)
1. What value propositions or offers would you recommend that the company use in
targeting organization consumers? How do you plan on measuring the response to
these offers?
SafeLife’s alcohol detection products help to improve existing protective and safety
measures in law enforcement agencies, the work environment and communities. Therefore, a
central value proposition is that use of the hand-held breathalyzer will “help increase the
safety of people who drink”, and this proposition should have appeal for all major market
segments. A second value proposition might be that the breathalyzer “helps your clients
view you as trustworthy and caring”, positioning the organizations and businesses that buy
the product as being proactive and helpful to their clients.
Marketing tests can be created to test different offers with each major client segment. For
example, two different direct mail pieces could be developed for the restaurant/bar sector.
The first offer would highlight the “help increase the safety of people who drink” message;
the second would use the phrase “helps your clients view you as trustworthy and caring”.
Assuming an equal number of businesses were assigned to each test, SafeLife could
determine which message produces the better sales results. Similar tests could be conducted
for other potential and existing market segments.
2. How would you allocate a budget of $49,500? What media and message strategies
would you recommend to the company for inclusion in its direct and interactive
marketing campaign?
Note: students should have flexibility to create a campaign that could include a number of
different elements in their media mix, possibly including but not limited to:
a. Direct Mail, including expenses for mailing list rentals and other costs of
materials creation, mailings and response devices
b. Local radio, television and/or cable direct response advertisements, including
the costs of maintaining a call-in number
c. Events that promote the breathalyzer, e.g., at local fairs, conventions
d. Billboards, posters, bus sides
Students need to be realistic about the media they use. For example, $49,500 would buy
virtually no regional or national television time but could effectively be used for limited
direct mail or possibly radio and special events. Messages can be tailored to market
segments, e.g., different messages would be developed for the law enforcement segment, the
MADD segment, and the restaurant/bar segment, although the underlying value proposition
could be similar. In developing the campaign, it is important for students to remember that
there are always costs of production for each medium and costs of a response vehicle
whether it is a return post card, an 800 number or some other device.
3. What rate of response is needed for SafeLife to break even on this campaign?
The break even in units sold before adding any desired profit is 198 units; therefore, 198
responses are needed. Calculation: Fixed marketing costs ($49,500) divided by the Unit
Margin ($250) = 198 units. Unit margin is $250. Calculation: Selling Price ($1200) less
Variable Cost per Unit ($950) = $250.00
4. Are Safelife’s desired profit and ROI realistic for this campaign? Why or why not?
Overall, the answer is that Safelife’s desired profit and ROI are realistic, given the following
calculations:
1. Units to achieve 10% better than break even: 217.8
Calculation: 10% x Fixed Costs ($49,500) = $4,950
Add Fixed Costs ($49,500) and 10% margin ($4,950) = $54,450, new target
Divide new target ($54,450) by Unit Margin ($250) = 217.8 units
2. Units to achieve 15% better than break even: 227.7
Calculation: 15% x Fixed Costs ($49,500) = $7,425
Add Fixed Costs ($49,500) and 15% margin ($7,425) = $56,925
Divide new target ($56,925) by Unit Margin ($250) = 227.7 units
3. Units to achieve 20% better than break even: 237.6
Calculation; 20% x Fixed Costs ($49,500) = $9,900
Add Fixed Costs ($49,5000 and 20% margin ($9,900) = $59,400
Divide new target ($59,400) by Unit Margin ($250) = 237.6 units
4. At a 2% response level, is 10% profit achieved? Yes.
In calculations #1 (above), we found that the company must sell 217.8 units to achieve
a profit 10% better than break even. If there was a 2% response rate, then: 36,000
prospects x .02 = 720 units sold. Only 217.8 units needed to be sold to achieve the
10% better than break even.
5. At a 5% response level, is 15% profit achieved? Yes.
In calculation #2 (above), we found that the company must sell 227.7 units to achieve
a profit 15% better than break even. If there was a 5% response rate, then: 36,000
prospects x .05 = 1800 units sold. Only 227.7 units needed to be sold to achieve the
15% better than break even.
6. At an 8% response level, is 20% profit achieved? Yes.
In calculation #3 (above), we found that the company must sell 237.6 units to achieve
a
profit 20% better than break even. If there was an 8% response rate, then:
36,000 prospects x .08 = 2880 units sold. Only 237.6 units needed to be sold to
achieve the 20% better than break even.
7. ROI at the 2% response level: 263.6%
Calculation: 2% response = 36,000 x .02 = 720 units sold
720 units – 198 units (break even) = 522 units achieving full profit
522 x $250 (unit margin) = $130,500 (profit)
$130,500 divided by $49,500 (fixed costs) = 2.636 x 100 = ROI of 263.6%
8. ROI at the 5% response level: 809%
Calculation: 5% response = 36,000 x.05 = 1800 units sold
1800 units – 198 units (break even) = 1602 units achieving full profit
1602 x $250 (unit margin) = $400,500 (profit)
$400,500 divided by $49,500 (fixed costs) = 8.09 x 100 = ROI of 809%
9. ROI at the 8% response level: 1354.5%
Calculation: 8% response = 36,000 x .08 = 2880 units sold
2880 units – 198 units (break even) = 2682 units achieving full profit
2682 x $250 (unit margin) = $670,500 (profit)
$670,500 divided by $49,500 (fixed costs) = 13.55 x 100 = ROI of 1354.5%