July 20, 2011

But I'm Only Losing $0.03 Per Catalog Mailed!

There are days when you realize that we're failing at math.

Here's the argument, as presented to me.
  1. Company has 1,000,000 lapsed buyers (last purchase 13+ months ago).
  2. On average, 1% of these customers respond to a catalog, if mailed, after matchback.
  3. On average, if the company mails these customers, the company loses $0.03 on every catalog mailed.
  4. Company only mails these customers ten times out of twenty annual mailings (whew).
  5. We're only losing $0.03 per catalog mailed, that's not so bad, and they are our existing customers, so why not boost our customer file???!!!
  6. The long-term value of a reactivated buyer is $20.00 profit, so we only lose $0.03 to gain $20.00 profit.
Here's the argument, as presented by me:
  1. You are mailing 1,000,000 * 10 = 10,000,000 catalogs.
  2. Only 1% respond, after matchback (and we've debunked that one a million times on this blog, right), meaning that 10,000 customers purchase.
  3. You actually lose $0.03 * 1,000,000 * 10 = $300,000 profit, per year.  $300,000 profit.
  4. You actually lose $300,000 / 10,000 = $30.00 profit per reactivated buyer.
  5. You actually lose $20.00 long-term gain - $30.00 reactivation profit = $10.00 per reactivated buyer.
  6. Strategy = DON'T DO THIS!!
Pennies are seductive.  It's so easy to make the decision to lose a few pennies, who's going to notice?

Well, pennies are the difference between being a highly profitable company, and being just plain average, or below average.

Yes, pennies.

What would Kevin do (WWKD)?
  1. Realize that half of the customers you are mailing would have reactivated anyway, due to your organic percentage being around 50%.
  2. This means that you are actually reactivating half of the customers you think you are reactivating, meaning that you are actually losing $60.00 profit to reactivate a name, a rate of profit you'll never make up with $20.00 of future profit.
  3. I would pocket half of the profit now, and re-invest half of the profit in new customer acquisition, growing your customer file more profitably in the process.  I mean, be honest, you're not losing $60.00 of profit acquiring new names from Abacus, right?  So spend a bit more with Abacus, be willing to lose $12.00 to acquire a customer that generates $20.00 of future profit, and you come out way ahead.
The difference between industry-leading profit and average profit is pennies ... pennies per catalog mailed.  When you say you're willing to lose a few pennies here and there, you're deciding to be average.