The Optimization Story

Your paper / printing / postage partners want you to execute SMARTER, they want you to be more STRATEGIC. The way they figure, if you just improved everything you did, your performance would increase by 20% and that would cover the 20% increase in paper / printing / postage you've experienced the past few years. You'd be fine if you were just smarter.

They'd also still get the $3,000,000 of value transfer I explained yesterday. You'd be back to $0 value, they'd still transfer $3,000,000 of your profit to their net sales line.

That's what they're asking you to do.

You don't operate in their world.

Here is my Catalog Optimization Worksheet. Email me (kevinh@minethatdata.com) and I'll send you this worksheet at no cost, whether you work for a vendor or one of my clients. In this example, the brand mails this catalog segment 15 times per year ... the segment averages $3.50 per book ... 40% of demand flows-through to profit ... the organic percentage via tests is 50% (you measure this, right) ... and 40% of sales flow-through to profit. Here is how optimal profit is calculated based on the number of annual contacts mailed to a customer.

The brand is generating $52.50 demand per 15 catalogs, yielding $9.00 profit.

The brand should generate $46.96 demand per 12 catalogs, yielding $9.18 profit.

When the optimal strategy isn't much different than the current strategy, we leave things alone.

Let's assume your mailing costs in 2027 will increase from $0.80/book to $0.90/book. What does that do to an optimal solution?

The brand would generate $52.50 demand per 15 catalogs, yielding $7.50 profit (not $9.00 prior to ad cost increases).

The brand should optimally generate $40.67 demand per just 9 catalogs, yielding $8.17 profit.

Do you see what is happening?

The direct transfer of funds from your bottom-line to their top-line results in several problems.

1. If you want to keep mailing the same number of times per year, you must transfer $1.50 per customer in this segment from your bottom-line to their top-line ... you are less profitable, their revenue increases. See how that works?
2. The optimal number of catalogs decreases from 12 per year for this segment to 9 per year. This means if you want to manage your business properly to account for increased costs, you have to mail 9 times per year instead of 12 (or 15) if you want an optimal strategy.
3. To achieve an optimal strategy, you lower annual demand from this segment from $46.96 to $40.67.
4. To achieve an optimal strategy, you lower ad cost as well ... meaning the support community gets paid less. This is why they're clamoring for you to be more "strategic" and not cut back.
5. Of course, you will be more "strategic". You will accelerate your twenty-five year transition to digital marketing, out of necessity.

Seriously, if you want the spreadsheet, email me (kevinh@minethatdata.com) ... I'll give it to you for free.

I'll wrap up this diversion in my next post, then it's back to solving actual business problems via merchandising analytics.