The Competitive Edge Of Direct Selling

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There are also strong economic advantages that favour a DSO marketing low-cost consumer goods, as against the same products marketed through direct mail. To illustrate this point let us consider two marketing campaigns designed to create a market and obtain orders for a new household product, with a RRP of £20 using a four-colour leaflet to describe the product.

First let us consider a mail order campaign. Assume that the company decided to mail the leaflet with an order form to 5o 000 likely prospects using a rented list of demographically likely prospects with whom they had not previously done any business. If the response rate was 2 per cent, that would be considered to have been successful campaign. In the direct marketing industry a 1 per cent response is nearer the average. The cost-build up of delivering the mailing piece might be as follows:

Print – origination costs, leaflet, order form and envelopes 20p
List rental @ £60 per thousand names 6p
Envelope ‘stuffing and mailing administration 4p
Postage – including prepaid response with Mailsort
discounts. 30p
Total 60p

If the response rate were 2 per cent then it would require 50 mailing pieces to result in one order of £30. This is greater than the sales revenue and is clearly uneconomic. It is therefore difficult to justify direct mail as a way of marketing low-cost products. The only exception is if the item is one of a range of lines, in a catalogue, offered to a ‘house list’ of regular mail order customers.

In this case response rates could be as high as 20 per cent. At that response rate the resulting cost per order would be reduced to a much more reasonable figure of £3.00.

As a general rule, a successful direct marketing campaign requires a mark-up, from cost price to RRP less VAT, of at least three times. This means that it would be difficult to justify direct mail as a way of making any sale with an order value of less than £50. For a small-time mail order trader there is also a substantial fixed-cost commitment to the campaign.

Following for the non-use of reply paid envelopes , the fixed cost of a 50 000 mail shot, based on the above costs, would be £30 000. This is a substantial and risky investment for a small trader or even a small business.

Direct selling on the other hand, offers a much less risky and very often a more effective way of introducing low-ticket products to new customers. Assuming the same new household product, priced at £20, with a potential demand in every home, and using a catalogue with the same message as a direct mail shot.

Assume also that the catalogue is presented by someone who is unknown to the prospective customer, but who appears to be a credible business. In these circumstances the order rate can easily be between 9 per cent and 10 percent.

For lower ticket lines it can be as much 20-25 per cent. The reason for the dramatic increase in response is just that the personalized presentation demands more attention, particularly if the direct seller explains that they would like to leave the catalogue and to call again to collect it, a day or so later.

Reference: Direct Selling: Richard Berry