Cannibalization in Catalog Mailings

In a recent post, I talked about measuring the incremental value of the catalogs sent by independent business units, during my tenure at Lands' End.

The topic of cannibalization is easily illustrated in the catalog world. Let's assume a cataloger had two mailings last February. This February, the multichannel retailer wanted to execute three catalog mailings. Each mailing is sent to 500,000 customers. The circulation director executes a test. One segment of customers receives all three catalogs, while another identical segment of customers receives just two catalogs.

The segment that received two catalogs performed as follows (results grossed-up to full circulation of 500,000).

• Catalog #1 = $4,000,000 demand via the telephone and online channel.
• Catalog #2 = Not Mailed
• Catalog #3 = $4,000,000 demand via the telephone and online channel.
• Total Demand = $8,000,000. Total Book Cost = $1,000,000. Demand to Profit Rate = 25%. Net Profit = $8,000,000*0.25 - $1,000,000 = $1,000,000.

The segment that received three catalogs performed as follows (results grossed-up to full circulation of 500,000).

• Catalog #1 = $3,200,000 demand via the telephone and online channel.
• Catalog #2 = $3,200,000 demand via the telephone and online channel.
• Catalog #3 = $3,200,000 demand via the telephone and online channel.
• Total Demand = $9,600,000. Total Book Cost = $1,500,000. Demand to Profit Rate= 25%. Net Profit = $9,600,000*0.25 - $1,500,000 = $900,000.

Testing of this nature is important. In the two-book scenario, we get less demand, but we actually get more profit. In the three-book scenario, demand increases in total. However, not enough demand is actually generated to cover the cost of the additional mailing.

Multichannel merchants seldom have the reporting available to measure this phenomenon. Your SAS programmers can measure this for you.

In this case, the additional catalog deflated performance of surrounding catalogs by twenty percent. The two original catalogs lost $1,600,000 volume due to the addition of the third catalog.

On an incremental basis, the third catalog is generating $1,600,000 / $3,200,000 = 50% incremental volume. Half of the volume is truly additive, half is cannibalized from surrounding mailings.

The profit and loss statement for the incremental catalog looks like this:

• Catalog #2 = $1,600,000 incremental demand via the telephone and online channel.
• Total Demand = $1,600,000. Total Book Cost = $500,000. Demand to Profit Rate = 25%. Net Profit = $1,600,000*0.25 - $500,000 = ($100,000).

The reporting that the finance folks see does not illustrate this fact. Finance reporting illustrates three catalogs that generated $3,200,000 each, with each book driving $300,000 profit.

This is the bridge that you have to cross. You have to somehow convince folks that your reporting is the 'real' story, that the second catalog is truly unprofitable. This is not an easy bridge to cross.

When building a catalog contact strategy, you have several important questions to ask yourself.

• What is the purpose of the catalog? To drive telephone sales? To drive online sales? To acquire new customers? To increase profit? To simply advertise your brand? You catalog strategy must be executed on the basis of your objectives. If you want to simply advertise your brand, go ahead and take a lot of risks --- but don't expect great sales results to happen.
  
• Are you willing to lose money, in the short-term, to build a customer file that generates profit long-term? In the example above, you do get $1.6 million of incremental volume, volume that helps build a customer file that drives future profit.
• How many catalogs should you mail? Do you have the right tests in place to understand the right number of mailings? How many mailings should be sent, by customer segment?
• Do your catalogs truly drive online sales, or does you matchback vendor overstate the importance of catalog? This question is very important. The statement "60% of our online sales come from customers who received a catalog" is meaningless. The statement "Catalogs drive 20% of total online volume" is meaningful. We hear the first statement quoted all the time. We seldom hear the second statement --- that statement is the important one.