November 25, 2007

Three Types Of Catalog Buyers, And Profitability

Catalogers face big challenges when evaluating the profit of catalog mailings. Given that matchback analyses have long over-stated profitability (at the benefit of the vendors providing these analyses, or the list/co-op industry, folks who depend upon inflated catalog results for improved financial success), we've trained a generation of catalog and online marketing experts to evaluate catalog profitability in a suspect manner.

Some catalogers are studying profitability by evaluating quarterly contact strategy tests. These catalogers purposely choose to not mail segments of customers for three months at a time. At the end of the test period, the difference in performance between the mailed and control group is evaluated.

There are three types of catalog buyers that are frequently evaluated.

First, let's evaluate customers who only shop via telephone. These customers are the easiest to measure, because they seldom buy online, meaning our old-school analytical techniques are still effective.

Quarterly Test Results


Audience = Telephone - Only Buyers







Phone Online Stores Total
Mailed Group $15.00 $2.00 $2.00 $19.00
Not Mailed Group $0.00 $1.00 $1.50 $2.50
Increment $15.00 $1.00 $0.50 $16.50










Demand

$16.50
Net Sales 80.0%
$13.20
Gross Margin 50.0%
$6.60
Less Book Cost

$3.00
Less Pick/Pack/Ship 11.0%
$1.45
Variable Profit

$2.15

This analysis is straightforward. The mailing strategy generated $16.50 demand and $2.15 profit per customer. Matchback analyses are typically accurate among this audience, due to limited spend in the online or retail channels. As long as online/retail spend is minimal, matchback analyses are accurate.


The second segment of customers provide more of a challenge. In the past twelve months, these customers shopped via telephone, and shopped via the internet. Here is what the results can look like within this audience/segment.

Quarterly Test Results


Audience = Telephone + Online Buyers







Phone Online Stores Total
Mailed Group $7.00 $8.00 $2.00 $17.00
Not Mailed Group $0.00 $4.00 $1.50 $5.50
Increment $7.00 $4.00 $0.50 $11.50










Demand

$11.50
Net Sales 80.0%
$9.20
Gross Margin 50.0%
$4.60
Less Book Cost

$3.00
Less Pick/Pack/Ship 11.0%
$1.01
Variable Profit

$0.59

This is where matchback algorithms begin to fail. The matchback algorithm will take credit for all $8.00 per customer spent online, allocating that revenue to the catalogs that were mailed. Mail/holdout tests tell us the true story, however. Had catalogs not been mailed, $4.00 would have happened online anyway.

Your matchback vendor tells you that you got $7.00 over the phone, and $8.00 online, so all is good! In reality, you got $7.00 over the phone, and $4.00 online --- profit isn't nearly as good.


The third audience includes customers who only shop online. Multichannel pundits strongly believe that catalog mailings drive these customers online. Here's what one might observe, after a quarterly contact strategy test.

Quarterly Test Results


Audience = Online - Only Buyers







Phone Online Stores Total
Mailed Group $2.00 $13.00 $2.00 $17.00
Not Mailed Group $0.00 $9.00 $1.50 $10.50
Increment $2.00 $4.00 $0.50 $6.50










Demand

$6.50
Net Sales 80.0%
$5.20
Gross Margin 50.0%
$2.60
Less Book Cost

$3.00
Less Pick/Pack/Ship 11.0%
$0.57
Variable Profit

($0.97)

This audience is treated incorrectly by matchback algorithms. Your matchback vendor will tell you that you got $2.00 via the phone, and $13.00 online, yielding $15.00 total. Your matchback vendor will tell you that this is good!!

However, your mail/holdout test results tell you something different. Had you not mailed catalogs, you still would have gotten $9.00 of the $13.00 online. Therefore, when you run the incremental profitability calculation, you find that catalog marketing is unprofitable in this audience.

The reality is that natural search, paid search, e-mail marketing, affiliate marketing, portal advertising, shopping comparison marketing, word-of-mouth, and brand recognition all contribute to the $9.00 of volume you achieve if you don't mail catalogs to this customer.


This type of analysis is sorely missing in modern catalog planning. Some matchback vendors understand these issues, and genuinely try to help us. Sometimes, the thought leadership simply isn't there --- and it is costing catalog marketers millions of dollars of profit.

My level of frustration on this topic continues to grow. Recently, I was told by a vendor-based industry leader to stop talking, and "get on the multichannel bandwagon".

I have no problem with multichannel marketing. I do have problems with industry leaders that mislead (maybe not purposely) catalogers in a way that harms catalogers, but helps the very vendor industry that depends upon catalogers for success.

3 comments:

  1. I feel your pain Kevin. That’s why I don’t like the agency that also owns the printing company or vice versa. This setup makes objectivity from the agency virtually impossible.

    Our job is to enrich the client and make a fair profit in the process with complete intellectual freedom. As a consultant, you and I are both unfettered by potential loss in personal profits when a given channel does not deliver. That gives the client a special resource. It’s called “objectivity.”

    As far as going multichannel in your thinking as advised by your vendor, he/she needs to help clients understand the true source of their sales.

    Yes, multichannel marketing gives you more bang for the buck than single channel marketing. It always has.

    But balancing the budget allocation percentages and timing between the various channels is where the action is. And you can only do that if you know the impact of each channel on the total sale.

    So analyzing by multichannel is essential. But so is analyzing the contribution of each channel in the mix.

    Your analysis shows that careful review of the facts uncovers real money making opportunities by diverting budgets to more effective channels depending upon the market segment.

    Great post, as usual.

    Ted

    ReplyDelete
  2. Very well said Kevin.

    I've had much success in the past with this type of analysis. With a strong campaign execution team and an able minded analyst, any DTC business can execute this type of test.

    Your P&L will drastically change with this system of measurement (a correct way) and your ad dollars will shift (or drop to the bottom line.)

    One note of caution - be sure to include the catalog folks when doing this analysis. Including them can yield valuable insights and you'll improve your chances of adoption.

    ReplyDelete
  3. You do need to include catalog folks in these analyses.

    These things get to be really enjoyable once you start analyzing the combination of catalog+email, catalog+search, email+search, and other combinations.

    ReplyDelete