September 08, 2014

Pick A Path

We all know that Amazon plows every penny of profit back into CapEx.

Meanwhile, here in catalog land, we run a $50,000,000 business that generates $2,500,000 of pre-tax profit ... 5% ... not good ... not awful ... just a mediocre level of performance.

Let's say that you took that $2,500,000 of pre-tax profit, and ran it back into what are currently unprofitable customer acquisition activities.
  • Average Catalog Cost = $0.50.
  • Expected $ per Book, Incremental 8,500,000 Co-Op Names = $0.70.
  • Profit Factor = 40%.
  • Co-Op Cost = $0.06 Per Name.
  • Extra Co-Op Mailings = 8,500,000.
  • Extra Co-Op Demand = $5,950,000.
  • Extra Co-Op Profit = $5,950,000*0.40 - 8,500,000*($0.50+$0.06) = -$2,380,000.
  • Total Company Pre-Tax Profit = $2,500,000 -$2,380,000 = $120,000.
Look at that. You just grew your top-line by 11.9%. Did you generate profit? No.

This is what Amazon is doing.

Your business is stalled at $50,000,000 and you cannot increase merchandise productivity. You are stuck.

You could forgo profit ... all profit ... and invest every penny of anticipated profit with your co-op partners ... and your business might grow by 10% or 11% or 12%. You trade profit for growth.

Do that for three or four years, and all of a sudden your $50 million dollar business is a $65 million dollar business.

You get to pick.

Do you want profit? If so, you limit growth.

Do you want growth? If so, you limit profit.

Your choice.

Pick a path.