Science: How mailshots score bull's-eyes: All that literature that flutters through your letterbox is being targeted with increasing sophistication. Lynne Curry reports

The world is made up of wealthy equity holders, middle-aged assured, settled pensioners, comfortable investors, thrifty singles, affluent mortgage-holders, prosperous savers, younger spenders, working families, older cash users, low-income unemployed and better-off borrowers.

In the marketing-speak of banks, building societies and insurance companies, only the homeless escape classification, because they cannot be linked to a postcode. And only they will not be the targets of mailshot marketing.

Computer technology is turning direct marketing into a more powerful and sophisticated tool - and few sectors have grasped this fact more eagerly than the financial institutions. In the second quarter of this year, direct-mail traffic - in which the Royal Mail still has a monopoly, as each envelope costs under pounds 1 to deliver - was 8 per cent higher than a year ago, and by the end of the year, is expected to be up by between 10 and 12 per cent.

More than 25 per cent of these bulging mailbags are filled by the financial sector. Insurance companies account for 10.3 per cent of the total, followed by banks with 9.6 per cent, credit card agencies with 5.5 per cent and building societies with 2.4 per cent (charities, another major user, account for 7.5 per cent).

Delivery of these letters does not come cheap. Even through Mailsort, the Royal Mail system that offers discounts in return for some self-sorting by the sender, postage is never less than 13p for each envelope (the maximum discount for a million items on the seven-day delivery service). And to that must be added stationery and production costs.

In an effort to stop the literature going straight from doormat to dustbin, Lloyds Bank printed this plaintive line on its envelopes: 'Important information - please read.' It is reluctant to say whether this improved its direct mail penetration.

Unlike Lloyds, which uses mailing houses, Norwich Union organises its direct marketing in-house. 'We acquire lists from a list broker and combine them with the results of other campaigns we have run,' it says. 'We constantly learning from our own experience and do not use any particular software package. Between 6 and 7 per cent of business comes in from direct mailing.'

Most institutions are reticent on the subject, possibly due to the single-figure responses most campaigns have traditionally achieved; a 10 per cent response rate is considered exceptionally successful. Today, however, computers can combine the great detail in the 10-yearly Census with information from sources as diverse as magazine subscription lists, opinion polls and car sales statistics.

CACI, a west London company which has just launched a new financial classification system, relies heavily on National Opinion Poll's Financial Research Survey to split the population into 51 categories. While the Census is the heart of the system, the Royal Mail's Postcode Address File is its enabler, linking information about particular areas; the big assumption is that people in one vicinity have a lot in common.

Keith Dugmore, the director of CACI's financial services, who deals with most of the big banks and building societies, says that carefully managed information can provide pointers for most of their business decisions. 'Even in the past five years the scope for the analysis of huge volumes of data has increased so much, as have the capabilities of personal computers.

'The major institutions are looking at whom their business projects are - and are not - going to be aimed. Although the success rate of one mailing may still be only 5 per cent, targeting will have improved that response. Direct mailing is a balance of how much you spend on targeting against how much you could spend on wasted mailing.'

Nigel Lawrence of the Royal Mail, which operates a three-tier Mailsort system for postcoded mailshots - the least discounted, next-day service costs less than 4p an envelope below first-class postage - says that by the end of the century computer processing costs will have halved again.

'The main objective is to get people to have a greater interest in what it is and why it's being sent to them. Fifteen or 20 years ago it was a novelty; now it's a substantial industry, not just for ourselves but for print houses and all the creative services. The growth has been not just in more businesses by existing customers, but in sophistication.'

Postcode files can be bought on floppy discs for less than pounds 25 each; the Address Manager Plus CD, which enables postcode matching, costs pounds 2,500; and Cenario, a targeting and geodemographic system, is pounds 3,000.

Laurence Holt, managing director of Quidnunc, a west London software house, says that current systems handling large amounts of information are inflexible. Two of its mailshots resulted in 11 per cent response rates - followed by a disappointing 1 per cent, because a mailing house had been unable to supply a breakdown of a magazine's subscribers.

Mr Holt is among those who are convinced that relational databases are the foundation for future marketing. The problem is that the business is as much an art as a science. As the financial institutions are repeatedly discovering, people continue to confound the soundest logic.