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.