Tax Time Marketing

I got a brilliant piece of marketing in the mail yesterday. I’ve actually gotten the same piece every year for the last several years. That tells me at least one very important thing: it’s working.

A company would not keep sending out the same mail piece if it wasn’t working to generate revenue.

What was this brilliant piece of “junk mail”?

A software CD.

So what is it that makes this such a brilliant marketing piece?

Let’s think about this for a moment. I’m going to have to make some very broad assumptions here but I think they’re reasonable.

            1. Every adult in America is required to file taxes, even if they have no income.
            2. Most of those people will file using their computer in some way, either online or by using software just like what was sent to me.
            3. This software was probably sent to several hundred thousand households. My guess is that all of them are previous users of this very same program from prior years.
            4. The software is neither more nor less expensive than if I went out to a store and bought a copy myself. What I save is the time, gas money and all-around hassle of doing so.
            5. The software comes from a well-known company; one of the two or three largest in their industry.

Now let’s think about the economics of this mailing. To keep the math simple, I’m going to assume that they only sent this CD out to 100,000 households.  (In reality, it was probably several times that many.)

The cost to get a CD mass-produced in those quantities amounts to only a few cents per unit. Likewise, the cost of the case and label is only a few cents per unit. Their largest cost is postage but even then they get bulk mail rates thanks to the volume and the way they sorted and prepped their mail pieces.

Total cost should be well under $1.00 per unit but, again to keep the math simple, let’s call it an even dollar.

I happen to know that typical response rates to mailed solicitations is 2%-3%. Again, this came from a very well-known company and was sent primarily to existing customers and was selling a product that those customers are essentially “required” to use so their response is likely much higher but let’s just stick with 3% for now.

So they paid $100,000 to create and send out these CDs. 3,000 people actually purchased the software at the lowest cost option of $34.95. (Some of those people certainly paid extra for an upgrade or to add on a state tax program but we’re keeping it simple here.) So that amounts to revenue of $104,850.

Meaning that even going with our ultra-conservative estimates, the company made a profit on this mailing. (Yes, my assumptions ignore things like the programming cost to develop the software and assorted operational overhead to keep the lights on at company headquarters.) This is essentially their worst-case scenario; the mailing bombs and they make only a tiny profit. (Boo-hoo.)

What’s more likely? They sent out 500,000 pieces at a cost of around $0.85 each for a total mailing outlay of $425,000.

Given the nature of the product and the list to which it was mailed, response was likely something north of 20% but let’s keep it at 15% just to be safe. So that’s 75,000 buyers. Let’s assume that 45,000 of them (60%) bought only the lowest cost program ($34.95) and nothing else. That’s a subtotal of $1,572,750.

The remaining 30,000 purchased upgrades. There are $44.95 and $64.95 options. Most people don’t need the highest priced option unless they own a small business so let’s assume that upgraders spent an average of $48. This will account for the small fraction who got the highest level upgrade available on the disk. So the subtotal for upgraders is $1,440,000.

Combining these two subtotals equals revenue of $3,012,750. Backing out the original mailing cost gives a margin of $2,587,750. Certainly plenty to pay developers and still make a handsome profit.

Plus, let’s not forget that this is a huge and very well-known company. They also sold some of those very same disks in stores. (The extra volume brought their per-disk manufacturing cost down too.) They also leveraged their software development cost by reusing the code for their online and in-office offerings.

So essentially they made a profit of at least a million dollars plus got an inventory of merchandise they could sell in stores for free. (Pure profit!) As if that weren’t enough, they also got profit-generating website development essentially for free and still get to use the software in their offices (yet another profit center).