Determining the ROI on a newsletter program is not as straightforward as it is for a standard direct mail or direct email campaign. For most direct marketing campaigns, determining the ROI requires simply calculating the direct sales and costs for the campaign. With newsletters, direct sales are usually not the primary focus of the campaign, so the standard calculation neglects the principal objectives of the program.

Newsletters expand customer relationships, establish brand association, build customer profiles, and maximize customer retention. Each of these benefits drives long-term sales for a company. Therefore, a thorough ROI calculation compares the long-term revenue and costs for recipients of a newsletter to the long-term revenue and costs of non-recipients.

In order to calculate the long-term customer value of individuals, you need to be able to track and record each individual's purchases. This may only be possible online and with offline loyalty programs.

HOW TO REALLY CALCULATE ROI

It is necessary to analyze 5 pieces of data to accurately determine the ROI for a newsletter program. The analyses should be for a pre-determined time period that is sufficient to capture the long-term benefits of a newsletter program. The required time period will depend on the sales cycle of the product in question. For a frequently purchased product or service such as CDs or books, a 6-month period should be adequate.

Here are the 5 required pieces of information you will need to make the calculation:

A. The number of newsletter recipients.
B. The number of newsletter non-recipients.
C. The revenue generated from newsletter recipients during the time period.
D. The revenue generated from non-recipients during the time period.
E. The cost of the newsletters for the time period.

The calculation has 5 steps:

1. Determine the average revenue per recipient by dividing C by A.
2. Determine the average revenue per non-recipient by dividing D by B.
3. Determine the cost of the newsletters per recipient by dividing E by A.
4. Determine the difference between recipients and non-recipients by subtracting the amount obtained in step 2 from the amount obtained in step 1. (C/A)-(D/B)
5. The ROI is obtained by dividing the amount obtained in step 4 by the amount obtained in step 3. ((C/A)-(D/B)-(E/A))/(E/A)

Let's walk through an example.
20K of your customers receive a newsletter (A) for 6 months and 50K do not (B). The revenue generated from newsletter recipients is \$2.1M(C) and from non-recipients it is \$5M(D). The cost of the program is \$40K (E). The average revenue per recipient is \$105 (\$2.1M/20,000). The average revenue per non-recipient is \$100 (\$5M/50,000), which makes the difference \$5. The cost of the newsletter program per individual is \$2 (\$40K/20K). The ROI is 250% (\$5/\$2).

COMPARING THE ROI ON DIFFERENT CUSTOMER SEGMENTS

In order to maximize the ROI of a newsletter program it's valuable to compare the ROI achieved from different segments of your customers and prospects. Even if the overall ROI is positive, newsletters may not be a good investment for all of your prospects and customers.

If your ROI is negative, you may discover that you can create a positive ROI by focusing on certain segments of your customers and prospects. It is important that the overall ROI for the newsletter program is positive at all times and the ROI for each recipient is positive whenever possible.

Determining the ROI for different segments of your prospects and customers requires a modification on the standard calculation. To determine the ROI for a specific type of customer or prospect, it is important to use the variable cost for adding an individual to the newsletter instead of the average cost per individual. Since much of the costs for a newsletter program are fixed, and the variable cost of delivering an additional email is minimal, the average cost and variable cost can be very different. The average cost per individual per newsletter is often in the \$0.10 to \$0.20 range, while the cost per sending the newsletter to an additional recipient is often in the range of \$0.02 to \$0.05.

As is the case with the standard calculation, there are 5 required pieces of data required to determine the ROI of a certain segment of your customers. These 5 pieces of data should be analyzed over the same time period as the calculation for the overall ROI for the newsletter program.

The 5 required pieces of information are:

A. The number of newsletter recipients within the segment.
B. The number of newsletter non-recipients within the segment.
C. The revenue generated from newsletter recipients within the segment during the time period.
D. The revenue generated from non-recipients within the segment during the time period.
E. The variable cost of delivering an additional newsletter to a recipient for the time period.

The calculation to determine the ROI for a given segment is ((C/A)-(D/B)-E)/E

Ok, why don't you give this calculation a try for yourself - click here.

If the ROI from this calculation for a segment is positive, then the segment should continue to receive the newsletters. Two examples of different segments that can be analyzed and compared are Prospects Vs Customers and Active Recipients Vs Non-Active Recipients.

PROSPECTS VS CUSTOMERS

In order to analyze the ROI for prospects, it is necessary to track prospects that registered for newsletters to those that did not. For example, if prospects register on your website or at an event to receive additional information, you can compare those that opt-in for a newsletters to those that do not opt-in. If you can compare recipient and non-recipeint prospects, it is important that these prospects be included with customers to determine the overall ROI for a newsletter program, and analyzed separately to determine the ROI for prospects.

If you are unable to track prospects that did not register for a newsletter, it is equally important that prospects who register for the newsletter not be included in the overall ROI. Since not every prospect who registers for the newsletters becomes a customer, including prospects into the customer calculation will bring down the average revenue per recipient and therefore the calculated ROI. The lowered average revenue per recipient may show a false negative ROI when the ROI on customers is really positive.

ACTIVE VS NON-ACTIVE RECIPIENTS

The modified ROI calculation can also be used to compare active newsletter recipients to non-active newsletter recipients. You may find a greater difference between active and non-active recipients than there is between non-active and non-recipients. Determining the ROI from each segment will help clarify the goals for your newsletter program.

Results from this analysis can usually be classified into 3 categories.

Result #1: A high ROI is achieved on all newsletter recipients.
· Action: Enroll more customers into newsletters.

Result #2: A high ROI is achieved on active newsletter recipients.
· Action: Increase activity of non-active recipients.

Result #3: A positive ROI is only achieved on active newsletter recipients
· Action: Require non-active members to opt-in again to continue to receive the newsletter.

The fundamentals that determine the ROI on existing newsletters can also be applied for creating projections for potential newsletter campaigns. As is the case with analyzing existing campaigns, the calculation for projecting the ROI for potential newsletter campaigns must analyze the long-term benefits of the program.

Projections for existing customers
Estimates need to be made for 3 variables to determine the projected ROI for a newsletter program targeted at existing customers. The projections should be for a pre-determined time period similar to the ones described for analyzing the ROI on existing campaigns.

The 3 required estimates are:
A. The cost of the program over the designated time period.
B. The number of customers that would be enrolled into the program.
C. The revenue from up-sell or cross-sell opportunities per customer that would result from the newsletter program.

The projected ROI is ((B*C)-A)/ A

Projections for prospects
Estimates need to be made for 4 variables to determine the projected ROI for a newsletter program targeted at turning prospects into customers.

The 4 required estimates are:
A. The cost of the program over the designated time period.
B. The number of prospects that will be enrolled into the program.
C. The percent of prospects that will become customers due to the program
D. The average revenue generated from new customers.

The projected ROI is ((B*C*A)-A)/D

A CAVEAT IN THE CALCULATIONS

The ROI calculations do not account for one potential benefit of a newsletter program -- referrals. A common objective for newsletters is to increase referrals from current customers and prospects. Unfortunately, it is difficult to track and properly calculate the value of these referrals in most cases. For the sake of simplicity, referrals are not incorporated into this calculation. Peter Meyer can be reached at pmeyer@ifinder.com