December 18, 2019

What Happens When The Organic Percentage Increases??

In our simulation yesterday, we learned that when the organic percentage is low, there's virtually no reason to cut back on catalog mailings ... simply because most of what you are mailing (under low merchandise productivity conditions) produces tepid results that don't move the profit needle. This is the problem with struggling low-organic-percentage catalog brands ... you don't solve the problem by saving ad-cost expenses. You need merchandise productivity and new customers (at a low cost) to get out of the mess.

What happens when the organic percentage is considerably higher ... representative of a modern catalog brand? Well, the story changes.

Here is the base case.

And here is the "optimal" solution for a brand with the same exact dynamics and a 48% organic percentage.

Well, that's a spicy outcome, don't you think?

The optimal solution happens when you cut back by 70% ... that's a whopper of a figure!

Here's five-year housefile demand, ad-cost, and profit by level of ad-cost expense.

You lose a third of housefile demand over five years, but profit increases by $1.5 million dollars ...a meaningful amount.

So here's the magic solution for a struggling catalog brand.
  • A low organic percentage brand cannot solve profit problems by cutting ad cost. Solutions require immediate improvements in merchandise productivity coupled with increased new customer counts at a low cost. That's unlikely to happen.
  • An average organic percentage brand can make meaningful changes by dramatically cutting back on ad cost, simply because so much demand will happen regardless of catalog mailings. This brand "buys time", often a year or two, so that merchandise productivity and customer acquisition issues can be "solved".
In other words, if a catalog brand does a great job of "modernizing" the customer, the catalog brand has more options to improve profitability when merchandise productivity suffers.

Does that make sense to you??

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