South-Western College Publishing - Economics  
Guess what? People don’t like direct mail the way they used to…
Subject The effectiveness of direct mail advertising is dropping.
Topic Elasticity, Monopolistic Competition
Key Words

direct mail, response rate, financial services

Full Article If you have an InfoTrac or BCRC access code, click on the appropriate source to login and view the full text article.
Reference ID: A139084286
News Story

Despite people’s vehement dislike of direct mail, the annoying fliers work. Or, at least, they used to. Marketers liked direct mail because they could directly measure its response rate—and thus the return on advertising dollars—unlike investments in television or billboard campaigns.

That was the good news. The bad news: direct mail’s return on investment is falling. Response rates have fallen in the last year from 2% to just 1.4%. For “direct-order” campaigns, in which recipients actually sign up, rather than just expressing an interest, the response has fallen from 3.5% to just 0.7% over the same time frame.

Why? Overkill. Simply too many direct mail campaigns send too much material to too many people. The information overload causes many recipients to simply dump what they receive into the round file, rather than actually read it. The financial services industry and credit card companies are the biggest culprits, trying to differentiate themselves from everyone else in the market by offering lots of different deals for consumers on second mortgages and credit cards.

What is the solution? Direct marketers need to create more targeted campaigns, but those are more expensive because it involves learning more about target audiences--and that costs a lot of money, sometimes necessitating buying or sharing customer lists.

Questions
1.

By creating more targeted direct mail campaigns, how do companies hope to affect to elasticity of demand for their products?

2. Why isn’t the market for financial services and credit cards perfectly competitive?
3. What impact do you think the Internet has on direct mail campaigns? Why?
Source “Crouching trader, leaping prices.” The Economist. 17 November 2005. http://www.economist.com
Instructor Discussion Notes Discussion Notes
These notes are restricted to qualified instructors only. Register for free!

Return to the Elasticity | Monopolistic Competition Index

©1998-2005  South-Western.  All Rights Reserved   webmaster  |  DISCLAIMER