Category Archives: Economics

Culture, Economics, Science

Getting Charged Ain’t Easy

The nation is getting its head around all-electric powered cars by 2035. It sparked me -haha- to wonder if electric cars really generate a carbon footprint smaller than gas-driven cars. My research confirmed it: in a “well-to-wheel” comparison, an electric car generates about one-third the level of carbon compared to the gas guzzler. So case closed on that.

But what troubles me is the generally held notion that we will just plug our car into an outlet every night, and be ready to drive by daylight. Where is the electricity coming from? That is a thornier question, and it doesn’t appear to have a satisfactory answer yet.

Here are some numbers worth knowing. 

  1. The US annual consumption of electricity in 2020 was 3,800 Twh. A ‘Twh” is a terrawatt hour. Because I know you really want to get into this, a terawatt is one trillion watts. That’s with 12 zeros.
  2. The US annual production of electricity for the same year was 4,009 Twh. 

Understanding these two numbers, you see we have a margin, say, a surplus of 209 Twh. Just for fun, that’s 209,000,000,000,000 watts.

What is interesting though is that the US also sells and buys electricity during the year, based on peak demands and capacity levels. But net, we imported 47 Twh last year. So we did not actually have enough to go around, based on our own production capacity.

Not having enough is generally a foreign concept in America, but there you have it.

So: will we have enough electricity for the car in our garage come 2035? That troubles me. Here’s why.

In 2016, American automobile mileage was 3.22 trillion miles. We are “trillionaires” for everything, it seems. Assuming that electric cars replace all the gas guzzlers, and that we still drive the same distance, happily guilt-free of carbon fears, will we have enough electricity?

I am not so sure. Tesla’s 2018 Model 3 has a commendable “mileage” rating of 26Kwh. That is, it can drive 100 miles using only 26 kilowatt hours of electricity. This is the best there is, today, beating out the Chev Volt, VW Golf, and BMW i3. By the way, 26Kwh is the equivalent of burning a 40-watt light bulb over your stove for 27 days. Doesn’t seem so bad, really.

But the total mileage of 3.22 trillion divided by Tesla’s 26Kwh/100 miles will require a total of 837Twh of electricity. That’s additional energy over what we use today. And we only have a margin of 200Kwh.

We do get one break. By shutting down the unnecessary gasoline refineries, we will save 47Twh. So our actual new requirement for electrical power is only 790Twh. That’s 790,000,000,000,000 watts.

Meanwhile, the State of California is enduring periodic black outs. Why? Because in the effort to be a good environmental steward, they have been closing their coal and nuclear power generating stations in favor of wind turbines, solar and hydro-electric power, aka, power dams.  Unfortunately, when there is no wind, no sun, and no water, there is no power. Local cynics refer to the disruptions as ‘Green Outs”. 

It turns out that the engineers in public and private sectors have been noodling on this. Some of the more common solutions are wind turbines. Did you know that today there already 67,000 turbines thrumming the winds in America?  And solar panels? There are 2,500 such farms today.  Of 80,000 dams in the country, some 2,400 are hydro-electric power generators.

These solutions generally fall under the heading “renewable energy” sources. In total, renewable energy supplies 20% of all the power generated in the US.

There is another solution which is being developed, and that is the reversible battery charger. It allows for energy to flow both ways from your electric car. You might plug it in for one night last week to charge for six hours, and then you left your car undriven, and cooling in the garage for several days. During that time, if you have a permit, the power company may take electricity back from your car to top up the grid. You would get a credit, and maybe an empty battery, but you would be a good person.

The lack of surplus electrical energy is not top of mind for many right now, but as we approach the next decade, the subject will arise much more frequently. Stay tuned, and as usual, turn out the lights upon leaving.

Thanks for reading and sharing! Will you get an electric car? Will you get the charger too?

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Culture, Economics, Marketing

Along The Amazon: The Real Invasion

The Brown Marmorated Stink Bug: perennial invader.

For the two previous summers, our community has been infiltrated by legions of quietly intrusive stinkbugs.  They seemed to magically appear, just out of the corner of our eyes, posing on a wall or lampshade.  

Amazon Prime van passes the broken shell of a Macy’s store.

Little did we know that these were just the first wave, doing reconnaissance for the main invasion: Amazon. Now, virtually on every street, at every corner, we catch a glimpse of an Amazon delivery truck slipping in and out of view.

Amazon first broke into our consciousness in 1995 with a simple concept: a place to buy books online.  Their ads claimed access to all of the world’s contemporary literature available, and their warehouse was in outer space, “The World’s Biggest Bookstore”.  We might have listened.

Today Amazon is the world’s second largest company, by market capitalization, following Microsoft, and just ahead of Apple.  It has the world’s second largest retail sales volume, following Walmart.  

Barbarians at the gate: Amazon vans use shuttered Macy’s parking lot in Northbrook, IL.

It has up-ended the retail business model.  In 1997 3% of its sales were attributed to third party sellers.  Today, 58% of its sales come from third party.    In response, 2019 saw the closing of 9,300 big brand retail stores in the U.S.  The shift will continue.

The most physical sense of Amazon’s presence is its growing fleet of delivery vans.  In 2019, Fedex and UPS and the United States Postal Service delivered approximately 13.9 billion parcels in the United States.    But on its own, Amazon dropped 2.5 billion pieces at our doors.  According to Morgan Stanley, that will increase to 6.2 billion in the next 3 years.

The Amazon convoy. Dispatched regularly in 10-15 vehicle sorties on Butterfield Road.

I remark on these stats primarily because we watch the daily procession of Amazon trucks that travel Butterfield Highway, between Libertyville and Mundelein. The company has leased space to stage its fleet in an available lot on Technology Way on Libertyville’s west side.   There, independent owners and employees are regularly dispatched in squads of 10-15 vehicles at a time to head south to Allanson Road in Mundelein where they will pick up their allotted parcels for delivery.  The system is efficient, and it is supported by a good road, courtesy of Lake County.

Staging area in west Libertyville.

Just over the Illinois/Wisconsin Line, there is a vast Amazon distribution center off of US Route 94.  It measures several football fields in size, plus parking lot.  Not coincidentally, directly across the highway sits an equally large U-Line facility that makes shipping boxes. One wonders if there is a tunnel.  According to Amazon’s 2018 statements, the company has 230 million square feet of fulfillment space.  Its premises house nearly 650,000 employees.  One might also wonder how many of those people used to work for Sears, Macy’s, Pier One Imports, Abercrombie & Fitch, Office Depot, Victoria’s Secret, The Gap, and Payless Shoes.

This is not a critique of Amazon in any way.  The company’s mission statement is in part to serve a “customer-centric obsession”.  To that end, it has grown from simply books to sales of more than 100 million items.  Its website lists not a few business diversifications, but a vast portfolio of divisions relating to fashion, video streaming, groceries, pharmaceuticals, publishing, music, movies, web services, home automation and home security.

We can mourn the loss of the local store, but we have gravitated toward a business model that for much of our wants and needs, is just plain easy.

I wish I could feel as good about the stink bugs. 

 

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direct mail, Economics, Marketing, Media, USPS

The Last Post

This is my last post on USPS performance. If you are in the direct marketing or direct mail business, you have seen these before, but unless things stabilize, I don’t want to report, thanks.

The USPS Postal Regulatory Commission has just released the latest Revenues, Pieces and Weights quarterly report. They call it FY Q1/2020.This covers October 1 to December 31, 2019.

Cutting to the chase, I highlight these numbers:
1. First Class revenues are off $161 million, down 2.3% just for the quarter. This was supposed to be the Christmas, Thanksgiving, Halloween and holiday greetings season.
2. Direct Mail or “Marketing Mail” as they have renamed it, down $252 million, or off 5.4% during what was traditionally a good season.
3. Direct mail volume for the quarter was off 1.7 billion pieces…down 7.9%. Hello??
4. Periodical mail continues its slide, revenues off 7.7%, volumes off 7.4%
5. Competitive Packages and Parcel mail, revenues up $137 million, or 2.1%, but quantities down 68 million pieces, off 4.0%.

I suppose I am naiively conservative, but I really expected for this past quarter to shine, and I have been rudely shaken to grasp what everyone else has been saying for years.

On an annual basis, the numbers are no more encouraging. I have created the chart below, converting the USPS fiscal year reports to normal business calendar years: January to December.

Compared to 2018, here are a few highlights about 2019 volumes:
1. First Class revenues off 2.2%; pieces off 3.4%
2. Direct mail revenues off 3.7%; pieces off 5.6%
3. Packages and Parcels revenues up 3.5%; pieces down 2.8%

Clearly, email, chat, web, and social media has displaced the need to use the mail. The only beneficiary in this trend is the package delivery business, which the USPS has carefully cultivated, though the decline in pieces is still a concern.

If there is any bright spot in this numbers soup, it might be that the direct marketers who mail to live know what they are doing; that it’s the small local businesses which used to mail have opted for web and social media instead.

We’ll see, but unless they do, this is my last post on the USPS.

Thanks for reading and sharing.  If you are in the DM business, and have an alternative observation to make, I would love to hear it!

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direct mail, Economics, Government, Media, USPS

USPS: A Six-Month Stagger Into 2019

What can you say about a cursory glance at the most recent USPS Revenues Pieces and Weights report other than “CURSES!!” ?

What else can one say? They raised their rates around 2.5% last January, and six months later, revenues, pieces and weights are down.

SPOILER ALERT: This is all about numbers, which mean little, unless you are thinking about money.

You can see the details for yourself, but a cautionary word: the official RPW report above covers 9 months, from October 1 to June 30.   I have extracted the numbers below to cover from January to June, 2019.

 

In First Class Mail, which is all about bills, statements, cards and letters to mom and the folks, volume was off 3.2%– 904,000,000 pieces less than 2018.

Marketing Mail– direct mail was off 4.9%, — down 1,839,000,000 pieces from a year ago. Even more disturbing, the weight of those direct mail pieces also shrank about 2% from 1.49 ounces in 2018 to 1.46 ounces in 2019.

Leavened economics: 4 for $8.00 or 1 for $3.50?

The lesson here is that when you raise prices, despite your dominant position in the marketplace, people will buy less. We experienced a similar phenomenon at our favorite bakery when they raised the price of a cinnamon bun from $2.00 to $3.50. We used to buy 4, for $8. Now we buy one. Who’s happy?

The only bright light in the USPS tunnel to perdition is the package volume. Thanks to Internet orders, parcel shipments are still growing revenues, up 3.6%, though pieces and weights are off 1.7% and 3.3% respectively.

For wholly different reasons, magazine volume is also continuing its slide. Pieces are off 7.7% to 2,345,000,000 total delivered to as many as 159 million addresses in each of the past 6 months. If these magazines are all monthlies, there are approximately 391 million subscriptions in effect. About 2.4 for every household in America. While that may seem like plenty, just 5 years ago, the USPS delivered just over 3 billion periodicals, honoring approximately 502 million contracts, or 3.2 for every household.  But face it: if it wasn’t for the waiting rooms outside doctors’ offices, lube shops and office lobbies, the count would be less.

None of these figures should surprise you.  We all know the effect of the Internet on hard copy, paper, ink, and postal delivery.  Still, it is distressing to see a vital communications channel slowly price itself into a retreat, fulfilling a prophecy of irrelevance.

USS Ronald Reagan, a meager 110,000 tons.

But it’s not irrelevant.  Total mail volume in the fiscal year 2018 was 146 billion pieces.  That weighed 12.3 million tons. For those of you who are counting, that’s 108 USS Ronald Reagan aircraft carriers, soaking wet.

I have said it several times before, that the USPS, as an independent government agency has lots to be proud of, starting with its relatively minuscule cost to the US taxpayer.  Its 2017-2018 annual report showed an operating loss of $3.9 billion.  Sounds like a lot!  It’s 0.095% of the total U.S budget.   Less than one tenth of a percent.

The reality is, the USPS is still the bargain of all the media choices: it’s part of our lives, 6 days a week, with door-to-door pick-up and delivery, costing the taxpayer household about $23 per year, plus stamps.  Beat that, Amazon Prime.

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direct mail, Economics, Marketing, USPS

Geez, Wally, What Are We Gonna Do Now?

Did you ever have a little brother, or sister, look up to you, and ask how to get out of the latest jam some misadventure brought upon them?

We might wonder how the latest USPS postal increase jams up direct marketers. Bottom line, it comes down to cost per response, or indirectly, response rates. There’s a formula you need to apply now, and it’s coming up shortly.

First off, the added cost of postage is somewhere around 2.4% to 3.0%, depending upon postal densities. So if you used to pay as much as 30 cents per piece for a mail drop, effective January 27th you will fork out as much as 30.8 cents. Not insurmountable, but that heavily laden camel is looking nervously for any straw piles nearby.

But what counts in the direct marketing arena is ROI. What does the postal rate do to returns on investment?

Just because postal rates go up, say, 2.7% doesn’t mean your mailing costs go up 2.7%. The total in-the-mail-cost includes creative, art, print, list, letter shop, freight and postage. For the basic #10 kit with letter, flyer, reply form and BRE, you may be paying $450-$600/m. It’s shocking to think that half of that cost is postage, but there it is.

A USPS 2.7% increase adds $8 to a $300 postal bill. But that is $8 added to a total in-mail cost of $450, or an 1.8% increase in total cost.

Your figures will vary from this. If you are mailing simple post cards, the increase in total cost is more significant. If you are mailing expensive, feature-rich, multi-component, highly customized mail, the increase is not as noticeable.

Still, you will experience a hike in cost, and that means you will see an increase in cost per response. That means if you used to have a $450/m cost, and a 2% response, your historical cost per response is $22.50 each, ($450/20=$22.50) Add in an $8/m postal hike, and your cost per response has grown to $22.90. The 40-cent increase doesn’t seem like a deal breaker, but the accountants will point out that your entire business functions on controlling cost.

So what do you do?

Calculate what higher response rate is now needed to mitigate the effect of the postal increase:

(New in-mail cost) divided by (Old in-mail cost) times current response rate.

($458/$450) x 2.00 = 2.0355…..2.036% response.

Where you used to get 20 responses per thousand, you now need 20.36.

So now, we have a target, what do we do?

Go back to the basics: list, offer, format, copy.

Examine your list to remove low propensity response groups, ensure addressing is current, and at the same time consider list increases if higher densities will lower postage. Optimize delivery, too. Are you commingling and co-palletizing mail for maximum cost reductions?

Does your offer optimize pricing?  Do you include an incentive premium?  Is there an incentive with deadline?  What can you add to the offer for free?

Format changes can boost response.  Change your envelope shape and color.  Add in additional pieces: buckslip, lift note, testimonial letter, freemium, sample, cards, labels, personalization, variable graphics. Remember anything up to 3.5 ounces costs the same, so don’t be bashful.

What about your copy?  Is there another theme to test?  A letter change?  New outer envelope copy?

Your opportunities to kick up your response rates never evaporate.  There’s always more to test.  Quantum leaps in response are uncommon, but still, a simple postal increase is cause for finding those drivers that will deliver the increases you need to keep up with the USPS.

Lastly, isn’t it great to have a little brother or sister asking for advice, or better yet, to be one?  Enjoy your holidays with family!

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Culture, direct mail, Economics, Government, Marketing, USPS

USPS: Hidden Good Fortunes

Every quarter the USPS publishes their Revenues, Pieces and Weights Report. For the numerical savants out there, this is a feast of numbers beyond one sitting, for sure.

But the big story is, the USPS continues to perform in a stellar fashion, despite the ravaging onset of online displacement of hard copy as we know it.

If you think the post office is in trouble? Have another think.

Q3 YTD Results–9 Months Only
~The bad news– and what is publicly perceived, First Class revenues have fallen from $22.7 billion in 2013 to $19.9 in 2018. (off $2.7B or -12%).

~In the same 5 years, Magazines and Periodicals dropped from $1.3 billion to $984 million. (off $276M or -22%)

These two categories accounted for a $3 billion shortfall in revenue.

~Direct Mail, which includes catalogs, has ceded $294 million over the past 5 years. (off -2%) to $12.5 billion in the first three quarters of fiscal 2018.

Now for the good news.

In 2018, competitive Parcel and Package delivery has grown from $9.8 billion in 2013 to $16.9 billion. That’s a $7.1 billion growth, or 73%!

So we can certainly see how internet and digital media have blasted the legacy paper and ink communications business to smithereens.

What we did not see however was that online commerce has grown so rapidly that the USPS has found its newest niche: order delivery.

Year to date, 9 months, FY 2018, the USPS has delivered 4.2 billion pieces. Compare that to 2.3 billion, 5 years ago.

The USPS has another interesting report available, entitled Public Cost and Revenue Analysis, Fiscal Year 2017.

I like this report because it tells you how well it covers its costs of operation.  For instance, First Class Mail has a cost coverage of 210%.  Basically, its revenues are double its costs.

Direct Mail cost coverage is 153%.  Magazines and Periodicals, only 69%.  But the Package and Parcel delivery business, in the competitive markets, cost coverage is 155%.

Overall revenues for 9 months are $53.8 billion, up 5% from $51.2B 5 years ago.

These numbers indicate the ebb and flow of the door-to-door, pick-up-and-delivery business, and how the USPS is responding to America’s choices in communications.  True, the numbers do not account for front office costs, and legacy benefit and pension challenges, where there is a different story to tell.

But for making their daily appointed rounds, no one does it better than the USPS.

 

Thanks for reading!  If you would like to see these reports for yourself, have at it!

Click here: Fiscal year 2018 Q3 Revenues Pieces and Weights

and here: Public Cost and Revenue Analysis 2017

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direct mail, Economics, Education, Fundraising

What It Takes To Raise A Buck

The Dream Catcher: the ultimate gift.

It may be a function of age, but we receive a fair share of fundraising direct mail. Occasionally we get kits that amaze us for their content, with the underlying question, how can this possibly make money?

St. Joseph’s Indian School uses a donor acquisition package that pushes the boundaries, but based on their frequent use, this kit makes money. But it still amazes.

A personalized lift note accompanies the letter.

The key to powerful direct mail is rolled up in this slogan: List-Offer-Format-Copy. You can figure it out. But a subset of “Format” is fundamental to understanding good design: Size-Cards-Labels-Diecuts-Personalization.

Take a look at St. Joe’s and how they go beyond the formula.

The 9×9-1/2 Flat kit is hard to ignore.

Size
The envelope is 9×9-1/2. No wait, it’s not an envelope. It’s more like a bag, a catch all, and it’s a half inch thick. Not normal! Right away, we are talking a Flat, not a letter. Odds are it weighs more than 3.3 ounces, so no kidding, this is a small trunk in the donor’s mailbox. Despite its bulkiness, it is still machinable, but I’ll bet the USPS would love to be rid of this mini-parcel bouncing through their multi-million dollar sorters. Remember, in direct mail, size counts.

The calendar is one of 8 personalized pieces.

The perfed donor form highlights what your donation will buy.

Cards
Many successful kits provide a card. It’s personalized, perhaps laminated or plasticized, embossed, and maybe delivered in pairs. Very common in retail, insurance, service and association mailings, cards convey belonging and entitlement. While St. Joe’s doesn’t have a card per se, they do include personalized memorabilia like calendar cards, and gift certificates.

27 address stickers, enough for every utensil in the kitchen drawer.

Labels
Do we have enough address labels? Maybe, maybe not. Until you have labeled all your electronic gear, computers, cell phones, 14 golf clubs, CDs, Vinyl, USBs, chargers, staplers, umbrellas, Christmas cards, 3-hole punch and entire library of Clive Cussler books on loan, you aren’t done. And beside labels, anything that is pressure sensitive, like Post-it notes, velcro and magnets counts as an involvement device that draws your reader in a tactile way to your mailing. St. Joe’s goes over the top to provide stickers and labels for the donor, their children and the next door neighbor’s cat.

Mood aubergine: more labels for every occasion.

Die-Cuts
Really a technical obsession for printers and origami artists, the die-cut is a subtle paper carving that uses perforations, kiss-cuts, windows and trimming to create a 3-dimensional or engineered aspect to your kit. The recipient will work those die-cuts intuitively, without thinking, to unfold and self administer a little presentation for their personal viewing. Again die-cuts precipitate movement and finger work, which is involving your reader.

The Post-it note doubles down on the ask.

Personalization
St. Joe’s knows how to attract the eye, and that starts with calling out to the reader repeatedly. 8 times in fact. Envelope, letter, donor form, certificates, address labels, stickers, calendar, lift note…no matter your persuasion, it is hard to casually throw out a piece of paper that has your name on it.

I offer an additional element that may trump the 5 attributes above–

A 24-page calendar with original art makes this kit indispensible.

Indispensibility
Above and beyond the formula I gave you, the appeal of the St. Joe’s piece is that you just can’t throw it out. Why? Because in addition to all of the features, the envelope is packed with gifts, and useful items: three shrunk-wrapped greeting cards, a note pad, a 24-page calendar with art, the stickers or course, and the piece de resistance: the Dream Catcher. Not to mention the 3 penny stamps affixed to the reply envelope. Almost impossible to throw in the bin…just can’t do it. Arrrgh!

So there you have a fully loaded kit.   But can it pay for itself?

The first rule of fundraising: donors don’t come free. So management knows they must develop their donor files, which is what this kit is for.

The note pad’s backer explains the mission and prayer of the Lakota community.

It’s a bit of a guess, but based on a nickel a page, this kit probably cost around $2.50 to print and assemble, plus the Dream Catcher…, maybe $3.00. Postage will be around 50-55 cents, based on a 6.4 ounce kit, automation rate, non profit.  Add in the lists, freight and data processing and it has to be $4.00 a kit.

Wow!  “Who has that kind of money?” fret the accountants, and by the way, a lot of donors, too.

But here’s the thing, because of its impact, its stopping power, this piece could have a 5-8% response rate.  Let’s say 7%.

Three tastefully designed greeting cards, individually wrapped, are an extra push for donation.

Then $4.00/7% = $57.00 cost per response.  And what is the average gift? They are asking between $8-$70.  Again say it’s $30.  So the net cost is $27 to get a new donor.  That donor will have a longstanding, profitable relationship with St. Joe’s and looking at the financial statement, there is about a 10% chance that the donor may make a final bequest in their will to the organization.

Overall, St. Joe’s has a fundraising efficiency of about 31%, according to their financial statement. 31 cents to raise a dollar.

This may seem higher than some of the nation’s largest, more well known non-profits.  But keep in mind that those have strong, pervasive brands, high impact causes like hurricanes and disease, and oodles of corporate in-kind support, too.

Thanks for reading!  Please share!

 

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direct mail, Economics, Fundraising, Marketing, USPS

The Mysterious Cost To Raise A Dollar

The tiny silver disc leapt from the shelf.

The convolution of three events today raised my antenna that there is a superior organizing force out there that is directing our path as we hurtle through space.

As I was cleaning off our bookshelf, a small battery dropped to the desk. These are the tiny nickel-cadmium dots that we find in cameras and calculators. Not the larger lithium incendiary bombs that we have in our laptops and hover boards.

The calculator that failed to light up.

The battery was all that was left of a calculator I tried to resuscitate a few months ago. When the machine didn’t light up, I undid about 9 tiny screws to retrieve the battery.  As I popped off the back, the entire calculator sprung into a hundred pieces of keys, buttons and circuit board.  Incalculable.   I saved the battery to take into the hardware store for a replacement, just in case the calculator could be reassembled.

The next thing that happened was while emptying out the washing machine, we discovered that I had left my Moleskine diary in my shirt pocket. We retrieved the diary cover, very soggy, and found the rest of its contents spread like a million flakes of oatmeal over all our clothes. So much for keeping notes on paper.

A misadventure, attempting to extract the battery for replacement.

As the morning progressed, Lonny the mailman came by, and stuffed our mailbox with lots of missives from people we don’t know, but asking for money. The largest piece in the delivery was a giant, lumpy, shiny, pebbled envelope from Disabled Veterans National Foundation.

The DVNF package was an exceptional “Flat”: 12″ x 15″.   So huge that all the other mail was folded in with it.

In direct mail, size counts.  So I opened it immediately to find, mirabile dictu––another calculator!  And—- another diary!  Wow.  I am completed.

The Mystery of Fundraising By Mail

After admitting that the USPS may be a supernatural force, most would ponder the imponderable: how does DVNF get away with sending out calculators, books and notepads, and expect to earn any money for their cause?

A “max flat” the 12 x 15 kit is shiny, pebbled and lumpy. It was folded to fit the mailbox.

That, dear reader, is one of the great mysteries of direct mail fundraising, and one that I will unravel for you now.  All you need to know is what the package really costs, response rate and average dollar gift amount.

To calculate the cost, I first took the kit down to the USPS post office for an official weighing.   Ranjit asked with a jaded smile on his face, “Why?  Do you intend to sue them?”

“No.  I want to calculate their postage, and how much this whole thing cost in the mail.”

Ranjit replied, “It’s non-profit, but don’t kid yourself, they are making money.”

I pulled out the new calculator and said, “Look at this!  That’s gotta cost a buck anyway…”

Ranjit smirked, “Nope.  Twenty cents.  About $2 dollars a pound. It’s from China.”  We weighed it: 3.3 ounces.  “That works out to 40 cents, ” I figured.  Ranjit countered, “OK so maybe $1 dollar a pound, that’s 20 cents.”

A new pocket diary, calculator, memo pad and pen, all personalized.

I stared at him as I pondered that number.  At the same time Ranjit extended his arm across the counter to flash a beautiful bejeweled wristwatch, sparkling in buttons, numbers, dials, and a bright yellow face.  “How much do you think this cost?”  He smiled.

“Uh, I don’t know.  Ten bucks?  A nickel?   79 cents?”

“Close.  It cost me $2 dollars.  Made in China. I bought 5 for $10 bucks, each a different color, for every day at work.”

Smitten with this new-found knowledge of international commerce, I bid him a good day and took my 20-cent calculator back to the car.

The whole mail kit, which included the calculator, the notebook, DVNF pen and some letters and envelopes weighed 9.1 ounces.  According to the USPS, this Flat was part of a 3-digit automation scheme, so I estimate the non-profit postage was about $0.59 a piece.

This pocket diary replaced the soggy Moleskine in a nick of time.

The envelope was made in China, as was the notebook.  Without asking, one can only guess that the components all assembled, shipping included, must have cost around $2 dollars.  Add another 50 cents for the 5-way match on name (envelope, calculator, notebook, donor form and notepad) and you have a kit that surely cost over $3 dollars to put in the mail.

And Now, Using The New Calculator:

That’s $3,000/m for you printers out there keeping score.

The donor form offers a $2.50 check as a tempting diversion. But they want $15-$25. Go figure.

When most mail kits ring in around $0.35 cents each, $3 dollars is a hefty challenge.   In their calculations DVNF finds a breakeven point by dividing the total cost of the kit by the average gift amount.   Looking at their donor card, they suggest a gift of $15-$25.  Taking the lower end, their breakeven response is $3/$15 = 20% response.  At the higher end, 12% response.

12% – 20% response is a steep hill.   This particular charity is known for its high fundraising costs.  According to Charity Navigator their fundraising efficiency is $0.71.  That means for every dollar raised, they spent 71 cents.

For this package, that translates to $3/.71 = $4.23 raised for every piece mailed.

If their average gift is $15, then their response rate would be $4.23/$15 = 28.2%.

And at $25, the response is 16.9%.

There’s no way to be certain, and DVNF is unlikely to share their response results.  But the package itself is a donor acquisition kit.  That is, a high pressure sales pitch to get a new donor.   If indeed it did generate a 28.2% response rate, with a gift of $15, the cost per new donor is:  ($4.23-$3.00)/28.2% = $4.36, which is pretty darn good, if not downright incredible.

It also follows that every new donor will be repeatedly contacted for further donations, which over time, leads to a real surplus, destined for program expenses that support the disabled veterans.

 

Thanks for grinding through these numbers with me!  Please note that Disabled Veterans National Foundation should not be confused with Disabled American Veterans.

 

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direct mail, Economics, Marketing, Media

Awakenings: What Happens When USPS Cuts Prices

Spoiler Alert: This Is All About Direct Mail Math

It was not a well publicized announcement, 10 days before Christmas, that the USPS will most likely cut the price of a first class stamp by 2 cents, April, 2016.  That’s a 4% cut!

Whether the consumer figures out that a letter will mail for only 47 cents is a question, but for the direct mail community, the news is big.

First of all, direct mailers don’t talk cents. They communicate in thousands. (‘000’s.) A 2-cent drop in mail cost is worth $20 per thousand pieces mailed.

Hopefully the marketing folks at USPS have now awakened to the merciless mathematics of direct mail. In the civilian world, when we experience a cost of living increase, we suck it in, or look for a raise in pay to compensate.

In direct mail however there is a brick wall facing an increase in mailing costs.   The reality is, mailers don’t manage by total program cost. Rather, they manage by cost per response.

For instance, if a charity spends $1,000 to mail 3,000 letters, it is because they expect to get a 2% response…60 donations, at a cost of $16.66 each.

That cost per response (CPR) is bedrock..an anchor around which all other budgeting decisions are made. So when the USPS issues a 1% increase in postage, the CPR goes up, which is unacceptable.

The Story Behind The Story

When the post office raises its prices, we experience the inelasticity of direct mail performance, because mailers must preserve that cost per response.  The only way to do that is to spend less on something else, and that is exactly what happens: smaller envelopes, fewer pages, cheaper paper, less ink, for example.

The bogeyman in this reduction process is that the cheaper the package, the lower the response, which drives up the cost per response again!

The end game option in this vicious circle is to cut out lower responding markets, by mailing fewer pieces, and diverting funds to other direct media.

None of this helps the USPS.

Mail Trends 2008-2015 Prove The Point

In 2007 the USPS delivered 104 billion pieces of direct mail, its highest performance in a 240-year history.  Next year, the U.S. economy had a collapse, and there was a 4.3% drop in direct mail.  In 2009, there was another drop of 16.8%, eroding 21 billion pieces over two years.

Slide1

From 2007 to 2015 Direct Mail volume shrank 24 billion pieces.

Revenues likewise fell from $20.8 B in 2007 to $17.3 in 2009.  $3.5 billion dollars–gone.  Looking for cash, the USPS raised its prices nearly 13% from 2006 to 2009.

The bottom line is that the USPS has held direct mail revenues in the $17 B tier ever since, with three more price hikes from 2009 all the way up to 2015.  Its actual revenue per piece has gone up from 20 cents to 22 during that time.  Direct mail volumes have stabilized around 80 billion pieces, down 23% from its stellar 2007 year.

What You Don’t See

Slide2

Revenue per piece grew 10% while weights decreased 13%.

While the USPS has been able to weather the economic storm, the quality of mail has deteriorated.   In 2007 the average piece weighed 1.83 ounces.   In 2015 that shrank to 1.60 ounces, a 13% decline in paper, ink, pages and envelope.  More post cards, fewer envelopes, fewer flats.

The irony in this is that the USPS is actually earning more money for every ounce delivered: 11 cents in 2007, versus 13.8 cents in 2015, a 25% increase.

The Good News

A 4% reduction in postage in 2016 may not mean much to the consumer, but to the direct mailer, it opens the door to better creative, design, and production.  These lead to better response, lower cost per response, which drives up mail volumes.  Whew!

This price cut is good, good news.

PS: Kudos to you for getting through this important math lesson!  Please share.

PPS: You can check all the numbers by reviewing the USPS Revenues, Pieces and Weights report which they faithfully publish very quarter.

 

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direct mail, Economics

All That Glitters

IMG_3733

The solid gold gift pack. Gotta open it.

Our mailbox opened this morning to present a gorgeous golden Flat from Veterans of Foreign Wars.

It is highly improbable that the recipient of this gilded kit would toss it in the bin without at least checking to see if there was a $10 dollar bill waiting inside, too.

Just might have been too, considering the total payload we discovered:
-12 Christmas cards and envelopes

IMG_3739

12 Christmas cards and envelopes, a big offering.

-1 gift bag

-1 pen

-1 calendar card

-1 set of gift & address labels

Of course, there was also a letter/donor form and BRE.

But two unusual items cropped up.

IMG_3749

The gift bag, big enough for a ham sandwich.

First, the headline alerted us: WOUNDED VETERANS ARE IN CRISIS.

If you are at all disposed to the plight of these warriors, as countless Americans are, you are going to open this labeled treasure chest to see what the crisis is.   Foreclosure on the home?   Withdrawal of benefits?   Family disintegration?   What is the crisis?

IMG_3735

Crisis: a powerful set up.

Inside, the letter launches in to a completely different train of thought: “When we began sending out these free special edition Christmas cards and other gifts, people said we were crazy.”  Only three paragraphs later do they mention the main focus of their cause: the wounded Veteran.

Version 2

The non sequitur: handwringing debate about cards.

While this may seem nitpicking, the golden rule of good headlining is to pay it off.   VFW brings the reader to the edge of their seat, and then chats away on the frivolity of costly free gifts.  Crisis takes a back seat.

The second wrinkle is more about economics, and a good lesson is taught here.  This 6.8-ounce kit probably cost $2-$4 dollars each, all in.   Conventional marketers would roll up their eyes, cross themselves and close the garage door before spending that kind of money, especially when the response might not break 5%.

IMG_3743

Labels and stickers, a fitting complement.

But what if it does?   The real question is, what’s the average gift, and how long before it pays itself off?

So assume for a moment this scenario:

Mailed 10,000 at a cost of $40,000.  700 donors, at a cost of $57.14 each. Response, 7%.  $17,500 in gifts.  Average gift, $25.

IMG_3751

Cello-wrapped pen.. not since Time magazine!

What does VFW have? 700 new donors at a net cost of $32.14 each.   What are the odds that over the next five years, the group will turn in another $100,000 through renewal mailings, bequests and planned giving?   Pretty good, actually.

Version 2

This compliant disclosure gives pause to the reader.

It’s all speculation, of course.   For some background on VFW’s fundraising success, check their website for its latest financials.   Total gifts, $66.8 million, fundraising expenses, $25.6 million.  Roughly 2.6/1.  By comparison, its major competitors turn in gift/fundraising ratios of 3:1 up to 7:1.

The challenge is knowing in advance what the numbers can, and need to be.  Here is a formula worth knowing–witnessed by a fly on the wall of VFW, where for a fictional moment, you are now working.

Budgeted Cost per Piece

Your boss went sideways over the cost of the Gold Lame’ package.  Piqued, she said the gross cost per response can’t exceed $32.14.  You blurt out,

“But that’s the net cost on our Vanilla kit.   Gimme a break.”

“Give you a break? I have to explain this gold cadillac to the board.   If it doesn’t beat Vanilla, I will be back in community service, and you will be on the phones while you are licking envelopes.   Got it?”

IMG_3745

Gifts up to $500. If you don’t ask…

So you have a ceiling: the cost per response must not exceed $32.14.   Historically, you have generated a 3% response on the Vanilla conventional mailing format.   The all-in cost of the Gold Lame’ must not exceed $32.14 times 3% = $0.964 each.

Impossible.  The vendor stares through you with crocodile eyes.  Three bucks without postage, he grins.

But you feel strongly about Gold Lame’.  Your all-in piece cost totals $3.75.  Divided by the boss’s ultimatum, $32.14, you need 11.67% response.   Phew.

At this point, you wake from this disturbing nightmare.   Will Gold Lame’ quadruple Vanilla response?   We may not know, but at least you know the formula to weigh the risk.

Remember: ($ piece cost) / ($ response cost)  =  % response

Now, back to our piece.

  1.  Fix the headline to set up the letter, or change the letter to pay off the headline.
  2. A bold choice of cards: an unabashedly Christmas theme.  Just make sure your list is of that persuasion.
  3. The donor form offers 8 gift choices, from $10 – $500.   Good!
  4. Lastly, the prepaid BRE is worth it.   Whole campaigns can falter for want of a postage stamp.
  5. Mail it.   Whatever the response, whatever the gift, if you don’t test, you will never know.

Lastly, find a good quote to share with your boss, something like Teddy Roosevelt’s, “better to have failed while daring greatly than to live with those cold and timid souls who have neither known victory nor defeat.”

A little wordy, but it may work.

 

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