In an increasingly cost-focused business environment, marketing is coming under more and more pressure to justify spending and achieve ROI hurdle rates laid down by management.

ROI has been a sensitive issue in marketing because of its inherent intangibility: For most marketing vehicles, it is difficult to directly estimate the proportion of revenues in the financial year that are the result of marketing.

Direct mail, on the other hand, seemingly makes it very easy to measure ROI. With direct mail, you have an upfront and direct measure of sales that came as a result of the campaign, since each application is tracked from mailing to response to closing.

An ANA-sponsored study conducted by WPP's Lightspeed Research in 2003 cited direct mail as the best vehicle for measuring ROI, and pointed to media advertising as the worst vehicle for measuring ROI. But contemporary methods of measuring direct mail ROI may not always be as accurate as one might like to believe.

Direct mail accounts for up to 20% of total advertising spend, and it might be well worth the effort to compare standard direct mail ROI measurement to methods used in measuring ROI for other vehicles.

How do DM campaigns typically measure ROI?

Typical DM campaigns use control groups to evaluate performance of campaigns. A control group is a subset of the total population that is to receive mail in a campaign. This control group is set aside and not sent any mail as part of that campaign, which gives marketers a measure of what sales would have been in the absence of direct mail.

The population that receives mail is called the test group. Revenue per customer is calculated for both groups over a time period that includes the promotion period and a sufficient amount of time afterward to rule out purchase acceleration impact (revenue per customer = Total Revenues in group / Number of people in the group). The higher the number of responders in a group (control or test) the greater the revenue per customer.

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Joy V. Joseph is a director in the Business and Consumer Insights group at Information Resources, Inc. (IRI), global provider of enterprise market solutions for the consumer packaged goods, retail, and healthcare industries.