Diminishing Returns, The Square Root Rule, and Page Counts

One of the least understood issues in cataloging is knowing how many pages to have in each catalog. Let's apply the square root rule to this concept.

Assume that last year you mailed a 100 page catalog to 1,000,000 customers, generating $5,000,000 demand via phone, mail and website. Demand was converted to profit at a rate of 35%, and the catalog cost $800,000 to mail. Profit = $5,000,000 * 0.35 - $800,000 = $950,000. Mmmmm .... profit!

The table below simulates what might have happened at different page counts.

Circulation = 1,000,000 Customers
	Square
Pages	Root	Demand	Profit
60	0.775	$3,872,983	$875,544
80	0.894	$4,472,136	$925,248
100	1.000	$5,000,000	$950,000
120	1.095	$5,477,226	$957,029
140	1.183	$5,916,080	$950,628

If you're wondering, the square root function is calculated as (simulated pages / actual pages) ^ 0.5. At 60 pages, the value is 0.775.

Notice that peak profit occurs at a simulated page count of 120. If enough merchandise is available, at an appropriate presentation density, your page count could increase.

Folks, this stuff is about to become really important. In a few years, the ecological pressures (i.e. cutting down too many trees) on catalogers will be significant enough that intimate knowledge of appropriate page counts will have to be standard knowledge.

As you can see, this isn't rocket science. Combining page counts with circ depth (which can also be simulated in a similar manner), one can develop a circ plan for a catalog in about ninety seconds. An entire year's worth of catalogs can be "simulated" in a half our or an hour. Historically, our industry chose not to take the "simulation" route in figuring out how to configure a catalog.

Of course, you'll want to do the real work required to manage a circulation plan, including file forecasting, housefile vs. acquisition, and RFM profitability. But this is where your work starts.

Next up: A worksheet for combining circ depth and page count.

Multichannel Catalog Merchandising Strategy

The art of cataloging changed during the past ten years.

We used to market our catalogs to a target audience. We put the best merchandise in our catalogs. We sent the catalogs to our target audience. We measured results. We carried the best merchandise forward. We carried the best new merchandise forward. We capitalized on runners, we killed dogs.

Multichannel cataloging is different. Though we merchandise and market to our target audience, we have no control over which channel the target audience chooses to respond in.

Multichannel retailers run demographic profiles of the customers who respond to various products. For instance, assume we manage circulation at J. Crew. We advertise this Montauk Tote in our catalog.

In the telephone channel, we observe a DMPC (Demand per Thousand Pages Circulated) of $50.00. We're happy with this, because the outcome exceeds our profitability expectations.

Online, we notice that this item has a below-average conversion rate, a below-average "demand per visitor" metric.

Given the combination of the metrics, we elect to carry this item forward next season.

Still, something nags us about the performance of the item. So, we decide to look at the demographics of the customers who purchased the item, by channel.

• Catalog Customers Who Responded Via Telephone: Age = 53, Income = $63,000.
• Catalog Customers Who Responded Online: Age = 49, Income = $70,000.
• Online Responders Who Did Not Receive A Catalog: Age = 46, Income = $66,000.

Can you see the challenge we face?

This item worked in the telephone channel. Our online-based analysis says this item performed below average. Our demographic profile suggests different audiences are responding, by channel.

Our challenge is to decide the role of catalog advertising.

If we want a profitable telephone channel, we run this item next year.

If we want to drive online sales, we don't run this item next year.

If we want to maximize multichannel sales, we run this item next year, but we may need to reduce circulation, or mail the catalog to a different audience. Eventually, we will mail catalogs only to customers who shop via telephone and web --- a limited audience.

Darwinian-style evolution of catalog advertising suggests that catalogs will either be constructed to maximize telephone sales, or will be mailed only to a limited audience that shops via both the telephone and online channels (or shops both direct and retail channels for companies who sell via retail). We're already heading in one of those two directions, most of us just don't know it, yet.

We're not going to get thought leadership from a Management Consulting firm on this topic. The answer does not appear in a $279 report from Forrester Research. The answer is not evident in a statistic that says "multichannel customers are worth 'x' times as much as single channel customers".

Multichannel CEOs and CMOs: I don't think there's a right or wrong answer, here. We simply have to decide what we want our multichannel catalog advertising to accomplish, and accept the consequences of our decision.