March 30, 2008

Part 1: What If Catalog Prospecting Stopped Because Of Do Not Mail Legislation?

Alan talks about third party opt-out services in the catalog industry, wondering what would happen if catalog prospecting were illegal?

So let's run a simulation and find out! Because I was part of the elimination of a catalog division at Nordstrom, I've experienced what happens when you aren't allowed to do catalog prospecting anymore. I took the metrics and customer behavior obtained in that painful multi-year experience, and plugged them into a simulation model that analyzes a $30,000,000 multichannel cataloger.

We know that when do-
not-call legislation was enacted, marketers could not market to folks if their last purchase was more than eighteen months ago, or if the household had not purchased previously. We'll go with that assumption for catalog marketing in this simulation.

Here's the profit and loss statement of a multichannel cataloger, assuming catalog prospecting is allowed, and assuming that catalog prospecting is not allowed.

Click on the image to enlarge it.

As catalogers know, there are four primary sources of revenue generation. Demand is generated from catalogs, over the phone or mailed to the brand by the consumer. Demand is generated from catalogs over the internet. Demand is generated from online marketing. Finally, demand is organically generated online (the least well understood aspect of demand generation for catalogers).

If catalog prospecting were stopped, the cataloger is starved of a significant source of future revenue. A considerable amount of unprofitable prospecting is offset by future profitable sales generated by the new customers. In total, this brand sees demand from catalog marketing decrease by about fifty percent. Variable catalog marketing expense decreases by seventy percent, because catalogs are no longer mailed to 13+ month recency buyers and prospects. However, the fixed costs associated with producing catalogs remains constant, eating up any profit increase.

A very small amount of phone business transfers to the online/organic channel. But for the most part, these customers buy because catalogs are mailed to them, so they stop buying when catalogs are no longer mailed.

Key Issues, Year One:

Phone demand decreases by fifty percent. This means half of the call center staff must be laid off.

Total demand decreases by one-third. This means one third of the fulfillment center staff must be laid off.

The online marketing budget is doubled, in an attempt to grow the brand. With luck, this investment is at break-even. In many cases, this will accelerate losses. We assume break-even in this case.

Total profit decreases by one-third, restricting the ability of the cataloger to make capital investments or make any kind of investment.

The fixed costs associated with producing catalogs (about $1,000,000 per year in this simulation) are about to play a major role in squelching the profitability of this brand. Catalog prospecting allows the catalog to spread out fixed costs across a much larger customer base.

After one year, the cataloger has been hobbled. Management will part ways with at least a third of the employees. Sales and profit decrease by a third.

In Part 2 of this series, we'll see what happens to the cataloger in year two and year three. I'm sorry to say that the story doesn't improve for a little while. But there is hope as we look to years four and five.

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