The use of premiums—or giveaways—has increased significantly over the past two years, according to a survey conducted by Inside Direct Mail.
This trend flies in the face of the movement to cut marketing costs. For publishers, it means stripping packages down to voucher formats and then adding the premium. The voucher itself removes the editorial sell completely, and the premium also stands in front of the magazine so that it can't be seen. And yet this is allegedly working.
Look at the math. Without any premium, you get a 2% response. With in-mail costs (including lists) at, say, $350/M (on a quantity of 500M), your gross order cost is $17.50. You test a premium that costs you $2.00 each to fulfill. To lower your cost per order by 10% and justify the premium, you'd need a 2.55% response or 25%+ increase.
If you spend $3.00 per net order on the premium, under the same circumstances, you'd have to increase response to 2.75% to make it worthwhile. However, if your costs for the package were $500/M instead of $350/M, use of the $3.00 premium would have to increase response to only the 2.55% level.
So the more expensive your original package, the more you can probably afford to spend on the premium.
Editorial-related premiums are, of course, normally much cheaper to fulfill than $3.00 or $2.00. If you deliver the premium online, your costs become miniscule. The question is whether the edit premium is sexy enough to boost response significantly. TEST: modest nonrelated premium @ $2.00 versus edit premium at $.25.
Edit premium boosts response from 2% to 2.2% and lowers cost per order for the $350/M package from $17.50 to $16.16. To achieve the same $16.16 cost per order, the $2.00 premium offer must pull a 2.48% response.
Using Premiums as a Reward for Fast Response
Normally, faster response means more response. You get people who would put your mail aside (and later reject it) to act on impulse. There are two ways to couch the offer:
- Give the premium to everyone responding by a specific date (and even to those whose responses arrive within two weeks of that date); or
- Give the premium to the first X people responding. This ploy is known as the “Fast 50,” but if you mail large quantities, seriously consider expanding the quantity beyond 50. For a nationally known product or service, people think “First 50? I have no chance.” It's like sending a time-limited offer and giving prospects just a week to respond.
In the case of No. 2, say your giveaway costs you $100 and you offer 100 on a mailing of 500,000. That increases your costs by $10,000 or $20/M. Here, to decrease gross order cost by 10%, you'd only have to increase response to 2.333%. The larger the quantity, the more No. 2 works in your favor.
Aside from magazines, the “Fast X” offer should be tested for consumer catalogs and financial offers like home loans. It may backfire on mailings to the mature adult market and for luxury goods and services.
Premiums Used to Boost Average Order
Of course this is prevalent in the catalog sector—and is used by both consumer and business marketers. But newsletter publishers have added a premium for subscribers taking a longer term (usually two years versus one), and some magazine publishers do the same thing.
Say you now get a 2% response and $40 average order. If you can boost that average by 10%, or $4.00, that means an increase in revenue of $80/M mailed. For orders above $40, you can afford a $3.00 premium, because the number of people qualifying will be a fraction of your 2% response rate.
Premiums Used to Increase Net Orders
In most cases, premiums should be delivered upon payment. This increases payment with order (which is the rule for catalogs and TV direct response) and also puts some teeth into the billing notice for those who don't prepay. In publishing, you can afford extra issues for those who prepay. While that's not particularly compelling, the economics work out quite well.
Premiums for Personal Visits/Demonstrations
If you're selling high-ticket equipment or services, economics are really not a consideration in your choice of premiums. Getting prospects to take time to attend a demonstration or listen to a formal presentation could be worth a $25, $50, or even $100.
The question then becomes ethical rather than economic—is this a thank-you or a bribe?
Continue reading "The Economics of Premiums" ... Read the full article
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