## July 31, 2012

### The Catalog Analytics Challenge

You think you know a little something about catalog marketing and analytics?  Take this quiz, and find out for yourself.  You may just find out that you're the best qualified candidate for a job at a major retail brand!

Question #1:  You mailed a catalog to 1,000,000 households, and generated \$4,000,000 in sales.  Your CFO wants to "grow the brand".  She asks you what would have happened if you had mailed 1,333,333 households.  If you mailed 1,333,333 households, what is the total amount of net sales you would have generated?

1. \$4,618,744.
2. \$5,333,333.
3. \$6,000,000.
Question #2:  Your catalog was 96 pages, and generated \$4,000,000 in sales.  Your CFO wants to "grow the brand".  Next year, she wants your catalog to total 128 pages.  If you hold circulation constant, what is your forecast for total sales generated by a 128 page catalog?
1. \$4,618,744.
2. \$5,333,333.
3. \$6,000,000.
Question #3:  Online, your average order value is about \$100.  When a customer orders from a 124 page catalog over the phone, the customer generates a \$110 average order value.  If you offered a new, 180 page catalog, what is the average order value you would forecast?
1. \$115.
2. \$160.
3. \$165.
Question #4:  If you want to learn the true amount of sales generated by a catalog, you should ...
1. Measure total sales generated at your call center.
2. Match back all online orders generated by customers mailed the catalog over a three week period of time to the catalog you mailed, sum those orders to call center orders attributed to the keycode on the back of the catalog.
3. Execute a mail/holdout test, subtracting the difference between the mailed group and the holdout group.
Question #5:  You mail 1,000,000 catalogs, generating \$4,000,000 in sales.  40% of sales flow-through to profit, prior to subtracting catalog marketing costs.  The catalog costs \$1,000,000 to send to customers.  How much profit did you generate by mailing the catalog?
1. \$250,000.
2. \$600,000.
3. \$3,000,000.
Question #6:  Assume you mail a monthly catalog, three catalogs total per quarter.  In the quarter, a customer generates \$12.00 demand from catalog marketing, and \$12.00 independent of catalog marketing.  You decide to add one catalog to the catalog stream.  How much total demand (catalog + online) will a customer generate in the quarter with one four catalogs mailed instead of three catalog mailed?
1. \$16.00.
2. \$25.86.
3. \$28.00.
Question #7:  Your CFO demands that a newly acquired customer pay you back within twelve months.  A newly acquired customer generates \$15.00 profit in the first twelve months.  40% of the demand generated by a newly acquired customer flows-through to profit, prior to catalog marketing costs.  An individual catalog costs \$1.00 to mail.  Assuming that the response rate is 2%, and assuming that the average order value is \$100, can you generate enough profit in the first twelve months to offset the profit lost in the initial order?
1. Yes.
2. No.
Question #8:  In Question #7, how much profit did you lose, per respondent, on the initial order?
1. \$6.00.
2. \$9.00.
3. \$10.00.
Question #9:  Your annual repurchase rate is just 28%, meaning that a measly 28% of last year's customers will purchase again this year.  Still, you generate EBITDA of 15%, meaning that 15% of all sales convert to profit, after subtracting all expenses.  Is your business a failure?
1. Yes.
2. No.
Question #10:  When you do not offer 20% off of your order, you generate a response rate of 5%, an average order value of \$100, a cost to mail the catalog of \$1.00, and 40% of demand flows through to profit.  When you do offer 20% off of your order, you generate a response rate of 6% and an average order value of \$110.  Which strategy is more profitable?
1. A non-promotional strategy.
2. A promotional strategy.
Question #11:  You possess 2,000,000 twelve month buyers.  40% of your twelve month buyer file will repurchase last year.  How many new+reactivated customers do you need to satisfy your CFO's request to grow the twelve month buyer file by 10% next year?
1. 800,000.
2. 1,200,000.
3. 1,400,000.
Question #12:  Using the statistics in Question #11, how many new+reactivated customers do you need to satisfy your CFO's request to grow the twelve month buyer file by 10% next year, assuming you are able to increase your annual repurchase rate from 40% to 45%?
1. 1,300,000.
2. 1,400,000.
3. 1,500,000.
4. 1,600,000.
Question #13:  A customer generates a \$130 average order value, purchasing 3 items per order.  What is the average price per item purchased?
1. \$36.27.
2. \$40.18.
3. \$43.33.
• Question #1 = 1.  You use the square root rule to approximate sales.
• Question #2 = 1.  You can also use the square root rule to approximate sales here!
• Question #3 = 1.  AOV is unlikely to increase significantly with more pages, given the online AOV.
• Question #4 = 3.  Mail/Holdout tests consistently deliver better results than those generated by matchback algorithms.
• Question #5 = \$600,000:  \$4,000,000 * 0.40 - \$1,000,000.
• Question #6 = 2.  There will be cannibalization, meaning that you can't assume that the fourth catalog will generate what the first three catalogs generate.  That rules out answer three.  Answer one makes no sense whatsoever, leaving only answer two as a reasonable answer.
• Question #7 = 1, Yes.  (0.02*100*0.4 - \$1.00)/(0.02) = Lose \$10 up-front, generate \$15 profit in the next year, net = +\$5.00.
• Question #8 = 3 ... You lose \$10.00 up-front (see Question #7 above).
• Question #9 = 2 ... No, your business is not a failure.  The repurchase rate is irrelevant.  Customer loyalty is irrelevant, it's your management of customer loyalty that matters most.  If your catalog business is generating 15% EBITDA, you are a highly successful business leader.
• Question #10 = 1 ... the non-promotional strategy is far more profitable ... non-promotional = (0.05*100*0.4 - 1.00 = 1.00 profit) ... promotional strategy = (0.06*110*0.4 - 1.00 - 0.06*110*0.20 = 0.32 profit).
• Question #11 = 3 ... you need 1,400,000 new+reactivated buyers.  Work backwards.  You need 2,200,000 to satisfy your CFO.  You have 2,000,000 twelve-month buyers who repurchase at a 40% rate, meaning that 800,000 will purchase again.  2,200,000 - 800,000 = 1,400,000.
• Question #12 = 1 ... you need 1,300,000 new+reactivated buyers.  Work backwards.  You need 2,200,000 to satisfy your CFO.  You have 2,000,000 twelve-month buyers who repurchase at a 45% rate, meaning that 900,000 will repurchase again.  2,200,000 - 900,000 = 1,300,000.
• Question #13 = 3 ... 130 / 3 = 43.33.

1. The real world doesn't work exactly like this - but nice math questions - and yes I did very well :)

@JRMigs

2. So question #2, more pages means more revenue? Maybe.

3. More pages means more sales, it doesn't mean more profit.

4. Very confusing but the ideas you’ve shared here are fantastic and no doubt so great and it may be realistic
in some way.

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