March 27, 2011

Dear Catalog CEOs: How To Measure If You Are Mailing A Segment Too Often

Dear Catalog CEOs:

Your marketing team tells you that you are mailing catalogs profitably.  They'll show you a profit and loss statement, where they decide to mail a segment of customers at just above break-even.


Demand $2.00
Net Sales $1.60
Gross Margin $0.88
Less Ad Cost $0.65
Less Pick/Pack/Ship $0.16
Contribution $0.07

When you look at this segment, on an annual basis, across twenty catalogs, "all is good", right?


Demand $40.00
Net Sales $32.00
Gross Margin $17.60
Less Ad Cost $13.00
Less Pick/Pack/Ship $3.20
Contribution $1.40

Now, let's pretend that you don't believe in the organic percentage stuff that I specialize in --- you 100% believe that your matchback analytics are rock solid.  Ok.


You still have an opportunity for profit improvement.


Mail/Holdout tests clearly indicate that you get maybe 70% of the catalog demand on 50% of the catalog mailings.  This has been known for decades.  Therefore, you can create a relationship that helps you understand how many of twenty catalog mailings yields an optimal level of profitability.  Take a look.

Catalogs  Demand  Ad Cost    Profit
0 $0.00 $0.00 $0.00
1 $4.91 $0.65 $1.12
2 $7.98 $1.30 $1.57
3 $10.60 $1.95 $1.87
4 $12.97 $2.60 $2.07
5 $15.16 $3.25 $2.21
6 $17.22 $3.90 $2.30
7 $19.18 $4.55 $2.36
8 $21.06 $5.20 $2.38
9 $22.87 $5.85 $2.38
10 $24.62 $6.50 $2.36
11 $26.32 $7.15 $2.33
12 $27.97 $7.80 $2.27
13 $29.59 $8.45 $2.20
14 $31.16 $9.10 $2.12
15 $32.70 $9.75 $2.02
16 $34.22 $10.40 $1.92
17 $35.70 $11.05 $1.80
18 $37.16 $11.70 $1.68
19 $38.59 $12.35 $1.54
20 $40.00 $13.00 $1.40


Mailing this customer segment nine times a year yields more profit than mailing this customer segment twenty times a year.  Take all of your ad cost savings, and invest it in customer acquisition, or in online marketing, or in something new and interesting.  I assure you, these profit opportunities exist all across your database.


Now, pretend that you believe the premise that customers generate demand without the need for catalog marketing.  Pretend your organic percentage is 30% --- then 70% of your demand is from catalog mailings.  Here's what your catalog profit and loss statement looks like, after removing organic demand:

Catalogs  Demand  Ad Cost    Profit
0 $0.00 $0.00 $0.00
1 $3.44 $0.65 $0.59
2 $5.59 $1.30 $0.71
3 $7.42 $1.95 $0.72
4 $9.08 $2.60 $0.67
5 $10.61 $3.25 $0.57
6 $12.05 $3.90 $0.44
7 $13.43 $4.55 $0.28
8 $14.74 $5.20 $0.11
9 $16.01 $5.85 ($0.09)
10 $17.24 $6.50 ($0.30)
11 $18.43 $7.15 ($0.52)
12 $19.58 $7.80 ($0.75)
13 $20.71 $8.45 ($0.99)
14 $21.81 $9.10 ($1.25)
15 $22.89 $9.75 ($1.51)
16 $23.95 $10.40 ($1.78)
17 $24.99 $11.05 ($2.05)
18 $26.01 $11.70 ($2.34)
19 $27.01 $12.35 ($2.63)
20 $28.00 $13.00 ($2.92)


We learn that three catalog mailings is optimal.


This is why my Catalog PhD projects are able to yield about $1,000,000 of additional, incremental profit, per year, every year, for a $100,000,000 business.  What's not to like about that?


Hillstrom's Catalog PhD:













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