March 01, 2009

Co-Op Pricing And New Customer Elasticity

Thanks to all of you who forwarded me average co-op costs per prospect and per housefile customer. The data indicate inconsistencies and volume discounts. Some of the smaller brands get hosed on price ... some of the bigger brands get hosed because they contribute so many transactions that smaller companies benefit from.

From an economic standpoint, the data suggest that there isn't a huge benefit to the co-op to lower pricing.

Take a look at the following table, illustrating new customer acquisition, and profitability levels, given different co-op pricing tiers per prospect. The table assumes mailing to an incremental loss of $15.00 per new customer (at the margin).

Co-Op Elasticity Table










Cost/HH Circ Buyers Demand Profit Prof/Cust Co-Op $
$0.00 210,000 2,724 $354,151 $8,453 $3.10 $0
$0.01 195,000 2,587 $336,247 $8,486 $3.28 $1,950
$0.02 185,000 2,493 $324,082 $7,979 $3.20 $3,700
$0.03 175,000 2,398 $311,717 $7,601 $3.17 $5,250
$0.04 165,000 2,301 $299,139 $7,349 $3.19 $6,600
$0.05 155,000 2,203 $286,330 $7,215 $3.28 $7,750
$0.06 150,000 2,153 $279,833 $6,441 $2.99 $9,000
$0.07 140,000 2,051 $266,639 $6,524 $3.18 $9,800
$0.08 135,000 2,000 $259,937 $5,928 $2.96 $10,800
$0.09 125,000 1,895 $246,304 $6,206 $3.28 $11,250
$0.10 120,000 1,841 $239,365 $5,778 $3.14 $12,000

Assume that you're one of the poor souls paying $0.08 per name for prospects from your favorite co-op. You are able to mail 135,000 households (in my example), generating 2,000 new customers, and $5,928 of profit. Your co-op generates $10,800 revenue.

Let's say that you want the $0.05 pricing level that a larger competitor enjoys. Well, you'd benefit! You could now mail 155,000 households (in my example), generating 2,153 new customers, and $7,215 of profit. Your co-op, however, generates just $7,750 revenue.

If we exclude competitive pricing pressure between co-ops, there simply isn't any incentive for co-ops to lower prices for you. And because most co-ops have achieved a critical mass of households and transactions, there isn't enough of a threat of you leaving the co-op to encourage price incentives.

If you decide to participate in a co-op, you need to participate in at least two co-ops, clearly communicating to each organization how you are shifting circulation between them, being fully transparent about overall performance.