Great Threads direct mail model
Mailing inputs Model of responses
Text Box: Range names used: FCostPrinting - B4 VCostsMailing - B6:B7 NumMailed - B8 AvgOrder - B11 VCostOrderPct - B12 VCostEnvelopes - B13 ResponseRate - E4 NumResponses - E5 Revenue - E8 Costs - E10:E12 TotalCost - E13 Profit - E14
Fixed cost of printing $20,000 Response rate (trial value) 8%
Variable costs   Number of responses 8000
Printing $0.10
Mailing, buying names $0.15 Model of revenue, costs, and profit
Number mailed 100000 Revenue $320,000
Costs
Order inputs Fixed $20,000
Average order $40 Variable from mailing $25,000
Variable cost (% of order) 80% Variable from orders $257,600
Variable cost of envelopes $0.20 Total cost $302,600
Profit $17,400
Question 1 - Sensitivity of profit to response rate
Response rate Profit
$17,400
1% -$37,200
2% -$29,400
3% -$21,600
4% -$13,800
5% -$6,000
6% $1,800
7% $9,600
8% $17,400
9% $25,200
10% $33,000
Question 2 - Breakeven response rate
Solve the following equation with Goal Seek, using ResponseRate as the changing cell:
Profit = $0
Question 3: If the company estimates a response rate of 3%, should it proceed with the mailing?
No, because the profit is negative.
Text Box: Limitation of the model: The reasoning above is based on short-term view. However, we should realize that many customers who respond to direct mail will reorder in the future. This will, in turn, affect the return for the company. This model is a very simple model, failing to incorporate other elements that could be found in more complex models.