January 09, 2008

Profit And Loss Responsibility

If there's anything the past three weeks have taught me, it is that there are two kinds of marketers.
  1. Those who have had P&L responsibility.
  2. Those who have not been blessed/cursed with P&L responsibility.
Those who have had profit and loss responsibility seem more likely to defend "what has always been done".

Those who have not been blessed/cursed with this responsibility seem more likely to take risks.

Why don't we analyze a multichannel business, and see what profit and loss responsibility does to one's psyche?

Table #1: Current Profit And Loss Statement











Catalog Online Online Online Onilne Total

Ph/Mail Via Catalog Via E-Mail Marketing Organic Volume







Demand $50,000 $25,000 $5,000 $10,000 $10,000 $100,000
Net Sales $40,000 $20,000 $4,000 $8,000 $8,000 $80,000
Gross Margin $20,000 $10,000 $2,000 $4,000 $4,000 $40,000
Less Ad Cost $7,500 $3,750 $50 $1,250 $0 $12,550
Less Pick/Pack/Ship $4,600 $2,000 $400 $800 $800 $8,600
Variable Profit $7,900 $4,250 $1,550 $1,950 $3,200 $18,850
Less Fixed Costs $5,000 $2,500 $500 $1,000 $1,000 $10,000
Earnings Before Taxes $2,900 $1,750 $1,050 $950 $2,200 $8,850
EBT … % of Net Sales 7.2% 8.7% 26.2% 11.9% 27.5% 11.1%

Here's a perfectly healthy business. The catalog channel, e-mail channel, and online channel combine to yield a business that generates $80 million in net sales and $8.9 million in earnings before taxes.

Now let's say that somebody in management says "We don't need catalogs anymore ... customers can simply use the internet to shop!!"

If you've had profit and loss responsibility, you're likely to think that this is what your profit and loss statement will look like:

Table #2: Elimination Of The Catalog Program, Catalog Demand Lost









Catalog Online Online Online Onilne Total

Ph/Mail Via Catalog Via E-Mail Marketing Organic Volume







Demand $0 $0 $5,000 $10,000 $10,000 $25,000
Net Sales $0 $0 $4,000 $8,000 $8,000 $20,000
Gross Margin $0 $0 $2,000 $4,000 $4,000 $10,000
Less Ad Cost $0 $0 $50 $1,250 $0 $1,300
Less Pick/Pack/Ship $0 $0 $400 $800 $800 $2,000
Variable Profit $0 $0 $1,550 $1,950 $3,200 $6,700
Less Fixed Costs $0 $0 $2,000 $4,000 $4,000 $10,000
Earnings Before Taxes $0 $0 ($450) ($2,050) ($800) ($3,300)
EBT … % of Net Sales 0.0% 0.0% -11.2% -25.6% -10.0% -16.5%

Once you've had profit and loss responsibility, you are likely to be terrified of ending anything! Heck, look at the numbers!

The executive team would be likely to assume that all of the phone/mail volume, and half of the online volume, would disappear if catalogs weren't mailed. $8.9 million of profit becomes a loss of $3.3 million. This business is sunk!

Of course, the folks who originated the idea that all of the volume would simply move online will chime in, citing anecdotal evidence of Aunt Helen in St. Louis who throws her catalogs out, only buying online from credible brands.

If you're lucky, your circulation team tested what happens when catalogs aren't mailed. Most folks who execute these tests realize that a third of the volume will occur anyway, while two-thirds is driven by advertising.

So, let's add a third of the catalog-driven volume back into the profit and loss statement.

Table #3: Elimination Of The Catalog Program, 2/3 Catalog Demand Lost









Catalog Online Online Online Onilne Total

Ph/Mail Via Catalog Via E-Mail Marketing Organic Volume







Demand $0 $0 $10,000 $20,000 $20,000 $50,000
Net Sales $0 $0 $8,000 $16,000 $16,000 $40,000
Gross Margin $0 $0 $4,000 $8,000 $8,000 $20,000
Less Ad Cost $0 $0 $100 $1,250 $0 $1,350
Less Pick/Pack/Ship $0 $0 $800 $1,600 $1,600 $4,000
Variable Profit $0 $0 $3,100 $5,150 $6,400 $14,650
Less Fixed Costs $0 $0 $2,000 $4,000 $4,000 $10,000
Earnings Before Taxes $0 $0 $1,100 $1,150 $2,400 $4,650
EBT … % of Net Sales 0.0% 0.0% 13.7% 7.2% 15.0% 11.6%

Now we're getting some place. Earnings before taxes improve to $4.7 million. Still, sales and profit are not where they were, prior to eliminating the catalog. Those accountable for the P&L dig their heels in!

A final scenario is run. E-mail marketing goes from one campaign per week to two campaigns per week. And online marketing spend increases from $1.2 million to $5.0 million dollars, assuming this money can actually be spent in an efficient manner (and hopefully, somebody would have tested this before getting to this stage). Quadrupling online marketing results in a doubling of online volume, in this example.

Here's the profit and loss statement.

Table #4: Elimination Of The Catalog Program, Increase Online Budget









Catalog Online Online Online Onilne Total

Ph/Mail Via Catalog Via E-Mail Marketing Organic Volume







Demand $0 $0 $14,140 $40,002 $20,000 $74,142
Net Sales $0 $0 $11,312 $32,001 $16,000 $59,313
Gross Margin $0 $0 $5,656 $16,001 $8,000 $29,657
Less Ad Cost $0 $0 $200 $5,000 $0 $5,200
Less Pick/Pack/Ship $0 $0 $1,131 $3,200 $1,600 $5,931
Variable Profit $0 $0 $4,325 $7,801 $6,400 $18,525
Less Fixed Costs $0 $0 $2,000 $4,000 $4,000 $10,000
Earnings Before Taxes $0 $0 $2,325 $3,801 $2,400 $8,525
EBT … % of Net Sales 0.0% 0.0% 20.6% 11.9% 15.0% 14.4%

At this point, earnings before taxes are about equal to the current profit and loss statement, a statement that includes catalog marketing.

Of course, the business loses about $20 million in net sales, suggesting that a portion of the catalog volume was not being generated efficiently.

Here's the rub. Those who have never had profit and loss responsibility are willing to change strategies, in large part because they've never been accountable for delivering promised sales and profit numbers to owners/shareholders. Those who have had profit and loss responsibility are often not willing to change strategies, because the risk involved in trying something different might cost them their job.

In-between those who advocate risk, and those who have to deliver numbers, are a set of assumptions that can help leaders feel comfortable with a different business model, a different strategy, a different approach.

What is needed is a healthy mix of strategy, database research, open-mindedness, and fiscal accountability.

The future of the catalog industry will include all three of these components.