September 15, 2013

Dear Catalog CEOs: The 80/20 Rule

Dear Catalog CEOs:

Did you read this article (click here)?

A portion of this article made sense to me, and it directly relates to your catalog business.

Most of us are dealing with catalog marketing as if it was 1995. Deceived by the way matchbacks overstate results, we mail the same circulation depth we always have. If we used to mail 400,000 housefile names, then we still mail 400,000 housefile names.

Back in 1995, our profit and loss statement looked like this:
  • Demand = $3.00 per customer.
  • Profit Factor = 30% of demand.
  • Cost of the Catalog = $0.40.
  • Profit = $3.00 * 0.30 - $0.40 = $0.50 per customer.
Today, when we properly evaluate incremental demand via mail/holdout tests, our profit and loss statement looks like this:
  • Demand = $3.00 per customer.
  • Incremental Demand = $1.50 due to catalog, $1.50 happens anyway online.
  • Profit Factor = 40% of demand.
  • Cost of the Catalog = $0.60.
  • Profit = $1.50 * 0.40 - $0.60 = $0.00 per customer.
Now, 9 in 10 catalog CEOs would look at this situation, and say "fine, we'll keep mailing customers".

Of course, in five years, the relationship is going to look like this:
  • Demand = $3.00 per customer.
  • Incremental Demand = $1.00 due to catalog, $2.00 happens anyway online.
  • Profit Factor = 45% of demand.
  • Cost of the Catalog = $0.65.
  • Profit = $1.00 * 0.45 - $0.65 = ($0.20) per customer - a loss.
But there's no sense talking about what is coming ... you are busy projecting 2014 as we speak.

Back in 1995, the 80/20 rule was largely intact ... but it meant that you could mail very, very deep, and keep generating profit.

Today, with the internet (and, increasingly, mobile) generating sales that happen independent of a catalog, without any catalog mailings at all, the 80/20 concept allows you to greatly free up your advertising budget. 20% of the 12-month buyer file is responsible for 80% of the demand generated by a catalog - the world has changed.

In fact, in most of my Catalog PhD projects, I can cut 25% to 30% of the housefile circulation with only a 2% to 5% impact on demand, greatly increasing profit.

Go rank your housefile circulation, top to bottom - then sum cumulative profit. I'll bet you learn that almost all of your profit comes from the top of the housefile. 



Purchase on Amazon, click here.

Hire Kevin for your own Catalog PhD project - email me (kevinh@minethatdata.com).