December 14, 2014

2014 In Review: My Mailbag

We're going to go through my mailbag for the rest of 2014 - your questions shape what we need to focus on in 2015.

This question was asked of me in January, from a Catalog Executive.

Question: We conducted extensive holdout testing, and learned that we are overstating catalog performance by 100% - in other words, 50% of the demand attributed to a catalog happens anyway when we stop mailing catalogs. If we obey this outcome, then a series of terrible outcomes happen.
  1. We will cut housefile circulation by between 40% and 45%, shrinking the customer file by between 5% and 10%.
  2. We will likely eliminate 15 of the 27 in-home dates we have, because these in-home dates don't generate enough incremental volume to justify being on the mail calendar.
  3. When we eliminate 60% of our catalogs, we have to eliminate many, many jobs.
  4. I don't want to eliminate many, many jobs. That's too painful to go through.
  5. Therefore, I don't want to adhere to what the test results suggest. It would kill my business.
  6. Tell me that I'm doing the right thing, Kevin.
There isn't a right or wrong answer to the arguments above, is there?

We get to pick the business we want to manage.

If we want to manage a $60,000,000 business that generates $2,400,000 of pre-tax profit by mailing a lot of customers a lot of catalogs, and we keep people employed in the process, then that's the choice we make. 

To get to 10% pre-tax profit, however, we're going to need a monumental improvement in merchandise productivity. And that's not going to happen. Even if it happens, given current practices, you'd mail even more, causing you to never achieve 10% pre-tax profit. Geez.

If we want to manage a $50,000,000 business that generates $5,000,000 pre-tax profit by drastically reducing mailing volume, and many employees lose their job as a consequence, then we can make that choice, too. Painful. But if ownership demands $5,000,000 pre-tax profit, then this is how we get there.

Or we can pick something in-between.

In 2015, we need to make choices. We've been doing the same thing, year-after-year, expecting better results. Better results do not seem to be part of the 2015 forecast, are they? It's time to choose the path we want to take. And if we want to choose the $60,000,000 / $2,400,000 solution, then let's just publicly acknowledge what we're doing and move on, and realize that the minute merchandise productivity takes a 5% hit, we're losing money and we're letting people go and we're doing the things we'd be doing by achieving 10% pre-tax profit, just for a different reason.