April 27, 2009

A Modern Catalog Square Inch Analysis (Squinch)

A Modern catalog square inch analysis (called squinch by some) is a different proposition than it was fifteen years ago.

For most of us, we don't have a housefile big enough to truly detect what a catalog drove to the online channel, at an item, department, or division level. So we have to make some assumptions.

Here's one way to approach a modern catalog square inch analysis.

Step 1: Conduct your standard mail/holdout test. If you're under fifty million in annual sales, you'll probably need at least 7,500 folks in your holdout group to get a halfway decent read of online results.

Step 2: At the conclusion of your test (say eight weeks after the in-home date), you'll measure your results as follows:

Catalog Square Inch Analysis Test Results

Current Other Online

Catalog Catalogs Sales Totals
Mail $3.00 $8.00 $6.00 $17.00
Holdout $0.00 $9.00 $4.50 $13.50
Increment $3.00 ($1.00) $1.50 $3.50

Ok, things are going to start getting interesting.

Step 3: Tally the total sales for your catalog, based on your telephone results. Let's assume that number is $2,000,000.

Step 4: Ok, we have to adjust for cannibalization. This catalog, based on the test results, cannibalized other sales by 33% (the dollar lost in the table above divided by the three dollars of incremental sales per customer. So, the $2,000,000 in sales is multiplied by 0.333, yielding $666,667 that will be taken away in Step 6.

Step 5: Now, we have to adjust for the sales we drove online. Based on the test results, we drove an additional $1.50 online, a 50% increase (the $1.50 driven online divided by the $3.00 recorded by the catalog). So, the original $2,000,000 in sales is multiplied by 0.500, yielding $1,000,000 that will be added in Step 6.

Step 6: Let's come up with a final demand number. We take the $2,000,000 telephone sales number, we subtract $666,667 for cannibalization across other catalog phone demand, then we add $1,000,000 of incremental online volume. In total, the catalog drove $2,000,000 - $666,667 + $1,000,000 = $2,333,333.

Step 7: Take $2,333,333 and divide it by the $2,000,000 your systems recorded, yielding a "lift factor" of 1.167.

Now we can calculate a semi-accurate DMPC (demand per thousand pages circulated) for each item. DMPC is a very good measure when doing a square inch analysis.

Step 8: Record the phone sales for an item. Say that amount is $10,000.

Step 9: Multiply that number by the lift factor in Step 7 of 1.167, yielding $11,670.

Step 10: Record the percentage of a page that the item occupied in the catalog. Let's assume an item took up 0.25 of a page.

Step 11: Record the total circulation of the page in the catalog. Let's pretend the number is 750,000.

Step 12: DMPC (Demand per Thousand Pages Circulated) is calculated as:
  • ((Lifted Demand) / (Fraction Of Page * Circulation)) * 1,000.
  • Or ... ((Step 9) / (Step 10 * Step 11)) * 1,000.
  • ($11,670 / (0.25 * 750,000)) * 1,000.
  • = $62.24.
And that's it. Just twelve easy steps. You compare the DMPC of this item against other items. You calculate a "break-even", and compare items against the break-even level.

Big companies have an advantage, in that they can calculate lift at a merchandise division or department level --- there are enough customers in a holdout group to do this. At Nordstrom, we learned that we didn't have to offer Mens merchandise in a catalog ... the very presence of Womens merchandise drove customers online (and into stores) to buy Mens product.

Anyway, that's how we conduct a modern catalog square inch analysis.

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