July 30, 2017

Circulation Theory: Part 6

One more week of Circulation Theory ... if you find this stuff to be too "circa-1991", then why not watch this video about shipping as a competitive advantage (click here).




We have an industry that doesn't want to understand the very thing that allows the industry to be much more profitable and, therefore, able to invest in the future.

What am I talking about? The organic percentage, of course.

The organic percentage is the share of demand that still happens when you stop mailing catalogs.

Every one of you measures your organic percentage (especially if you stopped all email campaigns if you are an e-commerce wizard), right?

Right?

There are two pieces to the organic percentage.

The first piece is inter-catalog cannibalization. Here's how this works. You have three catalogs, mailed April 1, April 22, and May 14. You execute a test - you cut out the April 22 in-home date and measure what happens when you have catalogs mailed on April 1 and May 14 vs. mailing three catalogs.

Let's assume that each catalog costs $0.80 and 40% of sales flow through to profit.

The mail group performs like this:
  • 4/1 = $5.00.
  • 4/22 = $5.00.
  • 5/14 = $5.00.
  • Total Sales = $15.00.
  • Total Profit = $15.00*0.4 - $0.80*3 = $3.60.
The holdout group performs like this:
  • 4/1 = $6.75.
  • 4/22 = $0.00.
  • 5/14 = $6.75.
  • Total Sales = $13.50.
  • Total Profit = $13.50*0.4 - $0.80*2 = $3.80.
Which group generates more profit?

The group mailed two catalogs generates more profit.

And yet, 9 in 10 readers prefer the outcome that is less profitable ... "WE GENERATE MORE SALES IF WE MAIL MORE CATALOGS!!". 

In this case, (6.75 - 5.00 + 6.75 - 5.00) / 5.00 = 70% of the value of the second mailing is organic ... it will happen if that mailing does not exist.

70% of the demand will happen if that catalog is not mailed.

You measure that metric, right?

Tomorrow, we'll talk about the second component of the organic percentage.