Imagine you had a slot machine into which you could put $1, and the next day it would spit out $2. You would put every dollar that you had into that machine and would put every dollar that it spits out right back into the machine until it stopped returning double your money.<\/p>\n
The principle illustrated by that example is called ROI \u2013 return on investment. The investment is the one dollar that you put in and the two dollars that you get back are your return on investment (ROI) – in this case 100%. The more you put in, the more you get out.<\/p>\n
Now imagine that every dollar that you put in returned a different amount every time you pulled the lever. Sometimes it returned $50, and sometimes it swallowed your dollar and returned nothing. That\u2019s a more accurate representation of how ROI works in the direct mail marketing world. Sometimes you invest $500 for every $50,000 returned, and sometimes you invest $5,000 and get nothing in return.<\/p>\n
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How ROI Works in Direct Mail<\/h2>\n<\/div>\n
ROI in direct mail is calculated by taking the total return, subtracting your investment, then dividing the difference by the investment, and finally multiplying that total by 100.<\/p>\n
For example, if you spend $10,000 from a mailer that makes $13,000 back, you would calculate ROI like this:<\/strong><\/p>\n![\"Calculating](\"https:\/\/daviesis.io\/postalgia\/wp-content\/uploads\/Calculating-ROI-1024x512.png\")
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The cost of the mailer \u2013 the initial investment ($10,000) – is subtracted from the return ($13,000) to calculate the gain. The gain ($3,000) is then divided by the investment ($10,000) to give a result of 0.3. That 0.3 is multipled by 100 to find the ROI, which is 30%.<\/p>\n
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The Two Levers That Drive ROI<\/h2>\n<\/div>\n
There are two ways to raise the ROI on a campaign, and they are the two levers that you can play with and tweak to try to get your slot machine to spit out the maximum amount of money for every dollar you put in.<\/p>\n
The first is reducing the cost of the campaign without dramatically lowering the effectiveness. If you can find a way to pack the same punch for less money, that\u2019s a great way to raise ROI. You\u2019ll often here people in the fundraising world referring to this as lowering the \u201ccost per dollar raised\u201d (CPDR) – put differently: How much does it cost you to raise one dollar?<\/p>\n
This is the mirror-image of ROI (which asks: how much does each dollar invested raise you?) but is ultimately asking the same question in spirit.<\/p>\n
The second lever that you can pull to raise ROI is to increase the effectiveness of your campaign without dramatically increasing cost, by using direct mail best practices to increase response rates or gift sizes.<\/p>\n
For example, suppose you have a campaign that raises $5,000 at a cost of $2,500. Your ROI is 100%. The next year, you run the same campaign and raise $5000 but your cost is only $2,000. Your ROI is now 150% because you used the first lever to lower costs.<\/p>\n
By the same token, maybe the next year you spruce up the piece a bit and sharpen your ask and raise $6,000 for $2,000 spent. Now your ROI is 200%.<\/p>\n
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Lowering Costs Without Hurting Results<\/h2>\n<\/div>\n
There are hundreds of tried and tested ways to lower costs in fundraising, but the trick is to lower costs without adversely affecting results. For example, many nonprofits have tried to get rid of their direct mail fundraising altogether and replace it with free email, only to find that their costs go from $50,000 to $0, and their returns go from $250,000 to $25,000.<\/p>\n
That said, we\u2019ve counseled dozens of nonprofits on how to improve their ROI by lowering costs without sacrificing any effectiveness.<\/p>\n
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