December 29, 2015

The 2016 Catalog Thesis Becomes Clear

Here's an outline of what I described yesterday.
  • Housefile names are somewhat protected by increasing organic percentages.
  • Acquisition name performance is not great, and is being impacted by a shortened "life of a catalog".
  • Math dictates that we will have to mail smaller catalogs in response.
  • Smaller catalogs generate less demand.
  • We will have to mail smaller catalogs more frequently.
  • Should the life of a catalog continue to erode, smaller catalogs will struggle to perform well, requiring us to personalize the merchandise assortment to each individual customer, based on customer history (both our history and recent co-op history).
  • In response to these trends, catalogers are going to take one of four paths (more on this to follow).
Let's focus on the math.

Say you mailed a 124 page catalog once every four weeks. For a below-average housefile buyer, your productivity in 2011 looked like this:
  • Demand per Book = $2.20.
  • Profit Factor = 35%.
  • Cost of Mailing = $0.72.
  • Profit = $0.05.
But in 2016, the life of the catalog is shrinking ... the catalog is only 80% as productive as it was back in 2011. Here's what your profit and loss statement looks like:
  • Demand per Book = $1.76.
  • Profit Factor = 35%.
  • Cost of Mailing = $0.72.
  • Profit = ($0.10).
You have two choices.
  • Do not mail this customer in 2016.
  • Find a vehicle that will cause this customer to become profitable.
So, you develop a 64 page concept. The numbers change.
  • Demand per Book = $1.35.
  • Profit Factor = 35%.
  • Cost of Mailing = $0.45.
  • Profit = $0.02.
In our example, we generate 77% of the demand on 52% of the pages. Often, the percentage is between 80% and 90%, but we'll go with the lower number.

Simple math drives the decision for us. We have no choice but to head to a smaller page count.

But wait, there's a problem. You, over there, the one who looks like the CFO. What is your question/comment?
  • "The smaller catalog generates less demand. I don't like that. Mail more often, so that I do not lose sales.
You will respond by mailing two sixty-four page catalogs instead of one larger catalog.

This is how you will protect your profit and loss statement while protecting demand, in response to a shrinking life of a catalog.

Now, let's move ahead a couple of years. If the life of a catalog shrinks again, and you lose another 10% of your productivity, then the numbers change.
  • Demand per Book = $1.22.
  • Profit Factor = 35%.
  • Cost of Mailing = $0.45.
  • Profit = ($0.02).
Once again, we have a problem. And we cannot keep shrinking the size of the catalog down to zero (or could we) ... a cataloger loves to mail catalogs, so the cataloger is going to find ways to ... wait for it ... wait for it ... to keep mailing catalogs!!!!!

More on that topic, tomorrow.