Tuesday, May 17, 2016

Pareto Principle and Direct Mail

I’ve reminded you all about the ParetoPrinciple, and written about Pareto2.  It’s all well and good in theory.

But how can it be applied in practice?

One of the most obvious applications is when targeting and budgeting in direct mail.

If I am working on a direct mail pack to my house file (people who have donated through direct mail before) I can use the principle to increase revenue. And usually for no extra cost!

A fundamental mistake in direct mail is when the goal is to reach as many people as possible, as cheaply as possible.

Generally the bigger and better the pack, the better it will perform.  A ‘better’ pack may get a higher response rate and/or a higher average donation.  But it probably costs more per pack to mail.

Applying the logic of the Pareto principle, we can quickly work out that sending a bigger, better pack to fewer donors will raise more money.

A really easy example is that I may be planning on spending $1.50 for a standard pack to 20,000 people.  That will cost me $30,000.  (Print and production is expensive here in Australia!)

My ‘better’ pack is going to cost me $3, but my budget is stuck at $30,000.

I would mail the $3 pack to the top 20%, about 4,000 people. Wiping out $12,000 of my budget I now only have $18,000 left and 16,000 people I could still mail.

Now, with the remaining budget I can either:

Mail a much cheaper pack to all of them ($18,000/16,000 = $1.12 per pack) OR
I only mail 12,000 people with the $1.50 pack.

Whichever I choose, I will raise more money in total.  But only if the pack really was better.

Nice and clear?

Here it is in a video.


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