What is a Reasonable Response Rate (part 2)?

October 17, 2007

Selena Maranjian, in an October 5, 2007 article for The Motley Fool asks the question, "Will Credit Card Offers Finally Go  Away?"  She finds the answer to be that despite credit card direct mail response rates approaching zero, the marketing of credit cards using the U.S. mail remains profitable. Very profitable.

Ms. Maranjian cites Curtis Arnold of cardratings.com: "In 1998, credit card issuers could count on a response rate of 1.2% to the offers for new cards that they sent out ... The projected response rate this year is only 0.28%, or four times less than what the credit card industry received less than a decade ago...(yet) 42% of us got our newest card via a piece of mail."

This means that for credit card marketers to maintain or even increase their current level of income, they will need to send out even more direct mail offers.

So, let's suppose that Chase sends out just 200 million credit card offers this year (probably low), which costs an average of $0.50 to produce and mail (remember, Chase gets a huge break on postage due to their volume).  So, Chase invests $100 million in this direct mail effort.  If the bank gets a response rate of 0.28%, that's a mere 560,000 new accounts.  According to CardWeb.com, the average account balance is $3,500 for all credit cards, and the average household pays their lender $1,000 a year in finance charges.  So, we estimate that Chase will gross $560 million on their investment of $100 million.  Don't you wish you could earn $5.60 on every $1.00 you spent?

So, why do so many bank marketers feel that low response rates mean direct mail is not an effective medium?

The Direct Marketing Association reports that the average response rate to direct mail marketing program is 2.6% overall, while noting certain industries enjoy higher than average response rates: non-profits (5.35%); retailers (3.36%); and travel companies (2.98%), among others.

Writing to customers rather prospects also improves response rates.  The Biltmore Group reports that financial services marketing to customers typically out-performs prospect mailings by as much as 10-to-1.  Research with office supply companies indicates that prospect mailings typically gather a 1% response rate, versus a 2% response rate from customers.

For Part One of this article, see bankmarketingblog.com/2007/02/01/what-is-a-typical-response-rate.aspx

Source: (http://www.fool.com/personal-finance/credit/2007/10/05/will-credit-card-offers-finally-go-away.aspx; For CardWeb.com, see www.fool.com/ccc/secrets/secrets01.htm).

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Posted by Mark Rodrigues at 10/17/2007 12:05 PM
Categories: Direct Mail
 

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  • 10/18/2007 5:56 PM Tom M wrote:
    The ROI calcualtion is a bit misleading due to flawed assumptions . . . up to 50% of acquired accounts will be considered "inactive", meaning no or few transactions are conducted . . . additionally, recent studies suggest that 40-45% of active cardholders pay off their balance in its entirely, meaning no interest income (although interchange fees are received, but nothing that approaches the $1,000 per year figure cited). Direct mail, when targeted appropriately, does indeed generate a positive return on the marketing investment, but not 560%!
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  • 10/23/2007 5:06 PM Mark wrote:
    Cardweb.com reports card usage trends and statistics. Their calculation of average balance and average interest income includes those that payoff and those that carry no balance. Given that, the ROI calculation is very straightforward. The estimate provided was intended to illustrate why Chase is successful with the volume they mail and their apparently low rate of response. Even if Chase retains only half of the new accounts acquired in this illustration, their program remains highly profitable. Some marketers get hung-up on response rates, when really they should be concerned about income generated. Direct mail works, no question. Does everybody get 560% ROI across the board? Of course not. Do some? Most definitely.
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