August 01, 2017

Circulation Theory: Part 8

Let's assume that we have three customers, of equal customer quality.
  1. The first customer is a call-center customer ... s/he receives catalogs and buys over the phone. 20% of what this customer spends is organic, 80% is catalog-driven.
  2. The second customer is an e-commerce customer ... 50% of demand is catalog-driven, 50% is organic.
  3. The third customer is a mobile customer ... 20% of demand is catalog driven, 80% is organic.
We mail a catalog to each customer, and each customer generates (via matchback algorithms) $3.00 because of the catalog. 40% of demand flows-through to profit, and the catalog costs $0.80.

If you believe your matchback reporting, each segment is profitable ... $3.00 * 0.40 - $0.80 = $0.40 profit.

So you'll keep mailing each customer.

And that's not the right thing to do.

Customer #1:
  • 20% is organic, 80% is catalog driven.
  • ($3.00 * 0.80) * 0.40 - $0.80 = $0.16 profit.
Customer #2:
  • 50% is organic, 50% is catalog driven.
  • ($3.00 * 0.50) * 0.40 - $0.80 = ($0.20) ... a loss.
Customer #3:
  • 80% is organic, 20% is catalog driven.
  • ($3.00 * 0.20) * 0.40 - $0.80 = ($0.56) ... a loss.
Clearly, Customer #2 and Customer #3 are not generating profit. 

But we keep mailing Customer #2 and Customer #3.

This is why our ad-to-sales ratios have skyrocketed.

This is why we don't have enough money to invest in anything else.

This is why our brands keep being gobbled up by catalog holding companies.

Tomorrow, I'll talk about what can be done, especially with Customer #2.