Categorized | List Building

Direct Response Marketing – How a "Break Even" Ad Can Make You Rich

When you run an ad and find it breaks even, rather than being discouraged, you should be screaming with joy… provided you know how to exploit such a situation. In the next few paragraphs I’ll explain how you can do exactly that.

Let’s say you’re running a print ad in a publication that has a daily frequency, like a newspaper. Once you’ve established credit with the specific vehicle you wont have to pay for the ad until after it’s published, until after it “breaks.” If the money you take in covers the cost of the fulfilled product and the advertising, you’re at break even. That means your media costs, your product, fulfillment and data entry costs have all been covered. The money you use to pay the media will come from the money you’ve already collected. In essence, your customers paid for the ad… And, that’s basically the way it should be… that’s why you ran the ad to begin with.

Your suppliers will also agree to payment after the ad runs provided you’ve established credit with them as well. If you can get quick tun around (like in some ads where they say allow 30-60 days for delivery), you can do that whole thing without a cent of your own money.

The fact that you didn’t earn a profit is inconsequential.

The same would be true if you ran in a weekly or even a monthly publication.

Some optimistic marketers would then say “Well, I added new names to my database and it really didn’t cost me anything to do that so, I guess I’m OK.”

First… recognize that when you run an ad in a publication or in broadcast the rates you pay are based on volume. If you have an ad that breaks even you can run that ad frequently to increase the volume of advertising you are buying… resulting in a lower cost per insertion. If, then your ad would normally cost $1,000 and by running it three times you get a discount of 5% then you will pay only $950 per insertion. That’s a savings of $50 per insertion. If the ad broke even at $1,000 and you only have to pay $950, you just made $50 every time you placed this “break even” ad. This is done all the time by the major mail order houses, the break even ads are referred to as “rate holders.”

I know of several very successful mail order houses that run rate holders all the time in order to achieve savings of 5%, 10% sometimes 25% or even more… because the increased volume of space earns either frequency or volume discounts with the specific vehicles being used. Look at the rate cards and you’ll see what I mean.

But that’s just the beginning.

If the ad breaks even in one advertising vehicle, think about the number of other advertising vehicles that are similar to the one you proved to result in break even. A newspaper in Denver has audience similarities (demographics) to 50 other newspapers spread out throughout the United States. Make yourself $50 in one paper and multiply that by 50. That’s $2,500 in gains every time you run in those 50 newspapers… which could be monthly, weekly… even daily.

Now let’s take it a step further for the real pay off.

Let’s look at the business model. Your mail order business is a business that defines a market, targets the market and offers a product (or service). That’s the business model. The product (or service) is a variable. Today widgets are the item you are offering… but you may not be offering widgets next week or next year… or… you may continue to offer widgets but also start offering digits… to the same or perhaps to a different market. So the product is the variable.

The constant is you are buying distribution of your ad(s).

If you went through an ad agency the ad would be either discounted to the ad agency in the amount of 15% by the media or your agency agreement would allow the agency to mark up the media buy by 17.65%. Don’t let the variable percentage numbers confuse you… it’s actually the same amount of money. 15% of $100 is $15 bringing the net due the media to $85. If the net rate from the media was $85 and the agency marked it up by 17.65% it would come to the same $100.

To break even you’d have to earn a net of $100 after all media, product and fulfillment costs are covered. If the ad is doing that, if the ad is a break even, then the $15 earned by the agency is covered as well… and you’re still at a break even…

So if you also owned the advertising agency, when you bought the media, the agency would earn that $15… Or 15% of the gross media buy.

Now think about the scenario created.

The mail order company is receiving all the money needed to break even… the ad agency is earning 15% of the media expenditure. So if we went into a monthly magazine group and ran a break even ad every month, 15% of that money would be earned by the ad agency… on an ad that only “breaks even.”

If you bought five magazines each with a similar audience and the total circulation was 10,000,000 and your average cost per thousand was $7… The “gross cost” of buying the media would be $70,000. The money your mail order company needs to pay your agency is $70,000 and your agency (called a “house agency”) is liable to the media for $70,000 less 15% or a net amount of $59,500. Your ad breaks even and your in house advertising agency is earning $10,500 for the transaction.

Do that once a month and your break even ad is earning your house agency $126,000 a year. Plus you’re building your database for future sales and income from list rental.

If your house agency has not established credit with the media (and it only takes a couple of insertions to establish credit) then the up front payment to the media earns an additional discount. For a payment with order the discount is gross less 15% less 2% so on a $70,000 buy that has to be paid with order (and that payment can usually be delayed until you supply the camera ready artwork to the publication, typically two months before the scheduled release date of the issue) the net amount paid by the agency would be $59,500 less 2% or $58,310. The agency, then is earning $11,690 for the example used.

Now couple that with the frequency or volume discount we discussed earlier… let’s say it’s 15% under the open rate (the rate you use to establish your break even). That brings the cost of the ad schedule down to $59,500 and the agency (payment based on 15% discount) earns $8,925 per month.

So now your break even of $70,000 is paid from your orders… you paid the agency $59,500 making a profit for the mail order company in the amount of $10,500 and a profit for the house agency in the amount of $8,925. Since you own both companies, you made $19,425 on money that you didn’t lay out… it was in your hands from the orders generated before any payment had to be made to the media.

And… if you use the same company name in the advertising, the offers can be changed and still achieve the frequency discounts discussed.

So… how do you create an “In House” Agency? The same way you created your initial mail order company… you form a separate corporation. You declare that there is an agency and your mail order company enters into a contract with your agency. The agency issues insertion orders to the media and carries the liability of payment to the media. Your mail order company has payment liability to your agency as it would no matter who the owner of the agency was. The agency remains a constant, your mail order company places ads for the same or other products or services through the agency and your break even ads cry all the way to the bank.

The same is true if you are using direct mail. Your agency will mark up any production charges at the rate of 17.65% and your “in house” list brokerage will go to the source of a list and buy at a discount of 20% and you may be able to negotiate volume discounts on the list too.

If you plan on blasting emails using rented lists, the same discount of 20% should be applicable to your email blasts. Just make sure you’re going to the actual list manager of the list, not through a broker who is not the manager since they will mark up the list costs charged to your in house list brokerage. You can subscribe to SRDS to find the sources of lists… and there is another SRDS subscription you may want to get for print and for broadcast rates.

While it is important to have break even ads, you goal is to try for out and out killer response. Seasonality often creates a variable on response levels achieved. An ad for a tomato plant wont pull as well in November as it would in May or June… so there are times you will not run a break even ad. But if you have gone though the testing and understand the variables applicable to each ad you develop, having an arsenal of break even ads achieves lower costs, causes appreciable profits for your agency and enhances the profits achieved by those high response ads that also often face seasonality variables.

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