May 23, 2010

Dear Catalog CEOs: More Profit

Dear Catalog CEOs:

As mentioned last week, I receive one message a month from business leaders ... sometimes catalog CEOs, sometimes catalog marketing leaders, sometimes the owners/executives running vendor-based organizations. The message outlines a premise that I am not on the side of the catalog leader, that all I want to do is move a business online, that I don't respect the magic of the catalog marketing model, that my previous experience is irrelevant because I don't understand the unique characteristics of certain catalog business models.

If this is your point of view, then allow me to walk you through an example, so that you can visually see how I view this challenge.

Take an average RFM-based segment. You mail this segment of customers 14 catalogs a year. You generate $60.00 demand across the 14 mailings, yielding $11.20 of catalog marketing cost and $9.80 profit. Your RFM-based analysis suggests that the average catalog generates $0.70 profit per customer.

That's good, right?! Your matchback analytics prove that every catalog is profitable.

Here's how I view the world.

First, I use my proprietary methodology to determine the "organic percentage", the percentage of demand that will be generated independent of catalog marketing. Let's say that the number is 40%, and is validated based on your own mail/holdout tests. This means that 60% of the remaining demand is truly generated by catalog marketing.

Second, I use proprietary my proprietary methodology to estimate how much demand is generated by each incremental catalog mailed. It turns out that, across most business models, each incremental contact generates less and less incremental volume.

By combining the organic percentage with the incremental volume generated by each incremental catalog, I run a profit and loss statement at each combination of catalog mailings. The table looks something like this:

Catalogs Organic Via Mail
Total Cost Profit
0 $24.00 $0.00 $24.00 $0.00 $8.40
1 $24.00 $5.68 $29.68 $0.80 $9.59
2 $24.00 $9.22 $33.22 $1.60 $10.03
3 $24.00 $12.25 $36.25 $2.40 $10.29
4 $24.00 $14.98 $38.98 $3.20 $10.44
5 $24.00 $17.51 $41.51 $4.00 $10.53
6 $24.00 $19.89 $43.89 $4.80 $10.56
7 $24.00 $22.16 $46.16 $5.60 $10.56
8 $24.00 $24.33 $48.33 $6.40 $10.52
9 $24.00 $26.42 $50.42 $7.20 $10.45
10 $24.00 $28.45 $52.45 $8.00 $10.36
11 $24.00 $30.41 $54.41 $8.80 $10.24
12 $24.00 $32.32 $56.32 $9.60 $10.11
13 $24.00 $34.18 $58.18 $10.40 $9.96
14 $24.00 $36.00 $60.00 $11.20 $9.80

Look at the table. This business mails an RFM-based segment 14 catalog mailings a year, generating $9.80 profit. However, my proprietary methodology suggest that profit is maximized at just seven mailings a year, generating $10.56 profit.

So, within this segment, I can increase profit from $9.80 to $10.56 per customer.

Now, certain leaders in the catalog industry continually beat me up on this topic, suggesting that it is a very bad thing to decrease overall demand from $60.00 per customer to $46.16 per customer. They will claim that they are losing market share, and that is a bad thing.

Ok, if that is your point of view, then why don't we simply re-invest the $5.60 of catalog marketing expense in customer acquisition --- not even in online marketing, but in customer acquisition?!!!

Let's pretend that your average order value is $100. Among our housefile RFM-based segment, here's what the average individual catalog profit and loss statement looks like:
  • Response Rate = 1.98%
  • Average Order Value = $100.00
  • Dollar Per Book = $1.98
  • Profit = ($0.109)
  • Profit Per Order = ($5.51)
This is the magic of the methodology. Your analytics don't allow you to see that the final seven catalog mailings of the year to this customer segment cause you to lose $5.51 per order.

Pretend that you are circulating customer acquisition to break-even ... that you don't want to lose money on customer acquisition ... or that you are willing to lose $2.00 profit per order acquiring customers. Instead of losing money mailing your housefile, go ahead and lose money acquiring new customers ... as long as you lose less than $5.51 per order, you are going to be more profitable re-investing the money in customer acquisition than you are going to be mailing your housefile.

If you are a catalog marketing vendor, maybe in B2B or B2C, a business that helps catalogers find new customers, what is not to like about this scenario? My methodology actually drives more business to the vendor community, keeps demand flat for catalog clients, generates more profit for catalog clients, and increase the number of new customers, which helps grow the entire industry. Who in the catalog industry is losing under this scenario?

Why, vendor community and various catalog business leaders, if you are actively demonizing this methodology, would you do so when the benefits are self-evident? Your business grows under this scenario, and the business of the catalog clients you support grows, all because of this methodology.

Show me the downside to what I outlined?
Use the comments section to offer your thoughts. And click here if you want for me to help you with a project of this nature.

Thanks,
Kevin

2 comments:

  1. No argument with the position ... Consistent with what I have seen and how we have evolved our business model. There is a flaw hhowever ... Or at least a big challenge ... where to spend the money. You can preach invest in prospecting but the incremental options to spend look so bad and/or risky its hard to pull the trigger with some sense of fiduciary responsibility. Soooo we hold profits and shrink until the fixed cost overwhelm the p&l and die. Sorry for being debbie downer ... Maybe a cup of coffee will help.

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  2. So that rules out catalog prospecting. I assume your merchandising or marketing team have created a prospecting catalog that is tailored to your new customer audience, with best products presented using the best creative, loaded with goodies in the first 20 pages, and having a small page count that allows your prospecting activities to work much better?

    Otherwise, you can invest in stuff like search ... assuming that is being managed to a different level of profitability than is catalog marketing.

    Or, you are stuck!

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