Catalog Profitability

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One of the challenges catalogers have to manage is determining the right circulation depth, and the right page count in a catalog.

Circulation depth is pretty easy to determine, once the number of pages are assigned. A straight forward calculation of sales and profit determine the right number of households to circulate to.

Page count presents more challenges. Merchants like to add pages, offering the customer more merchandise to purchase. Creative folks occasionally want to reduce density, adding pages that are less dense, easier to read.

More pages = more cost.

Are more pages better?

In the example at the top of this page, last year's catalog had 80 pages, and was mailed to 1.5 million households. The catalog drove $7,000,000 demand through the telephone and online channels.

When planning this year's catalog, the analyst builds a relationship between pages and demand. As pages increase, demand increases, but at an ever decreasing rate. Therefore, demand is maximized by sending as many pages as possible to as many households as possible.

Using a straight forward profit calculation, notice where profit is maximized. Based on last year's results, profit is maximized by sending a smaller catalog to as many households as is possible.

Here's a fundamental truth in catalog marketing:

• Increased Circulation Depth > Increased Pages

In other words, given the choice between adding pages to a catalog, or mailing a smaller catalog to as many households as possible, try to mail a smaller catalog to as many households as possible.

You can clearly see this when evaluating circulation plans. Businesses that like to mail catalogs with many pages tend to have shallow circulation, tend to be unable to do a lot of prospecting.

Businesses that are parsimonious with pages tend to circulate to many households, have robust prospecting programs, and a healthier housefile.

Three Ways To Increase E-Mail Sales

Businesses with customers who purchase fewer than three times a year seldom benefit from trigger-based e-mail marketing campaigns (with the notable exception of shopping cart prompts, which often work well).

There are at least three key factors that can be managed, to grow e-mail sales.

Factor #1 = Incremental List Size, Managed By Contact Frequency

Factor #2 = Incremental Demand Per Contact, Managed By Contact Frequency

Factor #3 = Demand Per E-Mail, Managed By Number Of Targeted Versions


Incremental list size is ultimately determined by the number of e-mail campaigns sent per week. When a customer is contacted too often, too many customers unsubscribe, driving down the total size of the e-mail list. Strategically, management may choose to execute "x" campaigns per week. Mathematically, the number of e-mail contacts per week can be determined by the number that still cause a healthy increase in the number of valid names available to be e-mailed. In the table below, you'll see that two e-mails per week are optimal, as the e-mail list continues to grow.

Incremental demand per contact is also important. As you increase e-mail frequency, you will decrease the performance of any one e-mail contact. Increased frequency will probably cause cannibalization between e-mail campaigns. The table below shows that the combination of unsubs and performance dictate two e-mail campaigns per week.

Targeted versions of an e-mail are important as well. Few retailers have the ability to dynamically create unique e-mail campaigns for each customer. As a result, management creates "x" versions of an e-mail campaign, offering different merchandise in each version. The analytics team decide which version of an e-mail campaign the customer receives, on the basis of past purchase behavior, stated customer preferences, clickstream history, and other factors. From a staffing standpoint, it could be a challenge to produce numerous versions.

In the table below, I assume that a company managed one version of an e-mail, one time per week, to the entire e-mail file. This strategy yielded $20,700 of demand per week.

Going from one campaign a week to two campaigns per week kept the file size increasing, reduced volume per e-mail, but resulted in $30,030 of demand per week. Clearly, this is a better strategy than sending just one e-mail campaign per week.

Going from one version per campaign to nine versions per campaign drove $40,040 of demand per week. Assuming this strategy can be managed with existing staff at minimal cost, this strategy could work.

Notice that the combination of list size (dictated by frequency), demand per contact (dictated by frequency), and version contribution cause a doubling in e-mail volume, on a weekly basis.

Catalogers have long mastered this type of analysis, assigning profitability to each strategy. With e-mail, profitability is not as big an issue, so if one can avoid the fixed costs associated with incremental staffing, a move to moderate frequency with increased versions can yield a significant increase in e-mail sales.

Obviously, there are many ways to increase e-mail volume. These three basic strategies almost guarantee a positive return on investment.

No Targeting Strategy
Contacts	List	New	Unsubs	Net	$ per	Weekly	Total
per Week	Size	Subs	& Invalids	Names	E-Mail	Demand	Demand
1	100000	1000	650	100350	$0.20	$0.20	$20,070
2	100000	1000	900	100100	$0.15	$0.30	$30,030
3	100000	1000	1150	99850	$0.12	$0.36	$35,946
With Targeting Strategy: 2 Contacts Per Week
Targeted	List	New	Unsubs	Net	$ per	Weekly	Total
Versions	Size	Subs	& Invalids	Names	E-Mail	Demand	Demand
1	100000	1000	900	100100	$0.15	$0.30	$30,030
5	100000	1000	900	100100	$0.18	$0.36	$36,036
9	100000	1000	900	100100	$0.20	$0.40	$40,040

Return On Investment When Business Is Good

If you're one of the lucky folks managing online or catalog marketing at a company that is "winning", you have an interesting opportunity.

Let's say that this profit and loss statement represented what you expected to happen in April.

Demand	$100,000
Net Sales	$85,000
Gross Margin	$42,500
Less Marketing Cost	$25,000
Less Fulfillment Expense	$10,200
Operating Profit	$7,300
% of Net Sales	8.6%
Ad to Sales Ratio	29.4%
Average Order Size	$85.00
Number of Purchasers	1,176
Cost Per Purchaser	$21.25
Profit Per Purchaser	$6.21

You expected to generate $7,300 profit, and 1,176 new customers.

You execute this marketing plan, and observe these actual results for the month of April:

Demand	$115,000
Net Sales	$97,750
Gross Margin	$48,875
Less Marketing Cost	$25,000
Less Fulfillment Expense	$11,730
Operating Profit	$12,145
% of Net Sales	12.4%
Ad to Sales Ratio	25.6%
Average Order Size	$85.00
Number of Purchasers	1,353
Cost Per Purchaser	$18.48
Profit Per Purchaser	$8.98

Courtesy of the magic of your merchandising team, customers loved what you offered them, spending 15% more than expected.

Here's the challenge. If you believe that during the month of May you will see similar results, you can pocket a similar level of sales and profit.

Or, you can increase your advertising, and acquire more names, while still generating the same level of profit you promised to your CFO. This example shows what could happen, if you boosted your advertising spend:

Demand	$143,635
Net Sales	$122,090
Gross Margin	$61,045
Less Marketing Cost	$39,000
Less Fulfillment Expense	$14,651
Operating Profit	$7,394
% of Net Sales	6.1%
Ad to Sales Ratio	31.9%
Average Order Size	$85.00
Number of Purchasers	1,690
Cost Per Purchaser	$23.08
Profit Per Purchaser	$4.38

This is one of those unique mysteries that complicate the lives of those of us who manage profit and loss statements for online or catalog channels.

Choice number one allows us to pocket an additional five thousand dollars of profit.

Choice number two allows us to achieve our budgeted profit, but grows the top-line by an additional $28,000, and adds an additional 337 customers that contribute to future sales and profit.

I've always advocated spending more money when times are good, and spending more money when times are bad (to liquidate merchandise, but not at liquidation prices) --- holding to the marketing budget when business is close to plan.

What would you do? Would you pocket the profit today, or, would you spend more to acquire more customers, customers that deliver future sales and profit? Your thoughts?

Is An Item Profitable?

So many of us in multichannel retailing are asked to quantify how individual marketing activities perform.

We measure the effectiveness of an e-mail campaign. We prove that catalogs and direct mail drive business to the online channel.

Congratulations, we demonstrated that advertising works! Maybe.

Now it is time for us to measure how advertising influences the sales of individual items. I don't sense that our industry is doing the best job of measuring the profitability of an individual item, after factoring in the effect of advertising.

At the end of this post, I include a template for measuring the overall profitability of a specific item. In this case, we advertise the item through catalogs, through e-mail campaigns, and through online advertising (search, portals). During the course of an eight week period of time, we total the sales of the item, both online and over the phone. We also sum all advertising of that item.

What follows is a multichannel profit and loss statement for an item. This exercise should be replicated for every item sold by your business. Yeah, that's a lot of work. But how else are you going to know what sells, what sells because it is advertised, and what doesn't drive profit?

Quite honestly, the advent of the online channel has reduced our industry's zeal to understand the profitability of items. In catalog, it is easy to measure profitability. We need to have a passion for understanding which items truly work, across all channels.

Here, then, is a mocked-up template for the multichannel profitability of a single item. If you work for a business that also has a retail channel, simply add an additional section to the template for the retail channel.

Multichannel Merchandise Profit And Loss
Catalog Metrics
Catalogs Mailed		1,000,000
Total Pages in Catalog		124
Total Book Cost	$1.00	$1,000,000
Percent of Page Allocated		33.0%
Cost To Advertise This Item		$2,661
Total Responses		225
Response Rate		0.02%
Response per 000 Pages		0.07%
Units per Order		1.15
Total Units Sold		259
Price per Unit		$65.00
Total Demand		$16,819
Fulfillment Rate	88.0%	$14,801
Return Rate	25.0%	$3,700
Net Sales	66.0%	$11,100
Online Metrics
Total Visits To The Website		1,483,005
Total Visits, This Item		4,593
Total Website Cost, Non Adv.		$800,000
Cost Allocated To This Item		$2,478
Placed In Shopping Cart	25.0%	1,148
Total Responses	55.0%	632
Units per Order		1.08
Total Units Sold		682
Price per Unit		$65.00
Total Demand		$44,334
Fulfillment Rate	94.0%	$41,674
Return Rate	25.0%	$10,418
Net Sales	70.5%	$31,255
Multichannel Profit And Loss Statement
Multichannel Net Sales		$42,356
Gross Profit	48.0%	$20,331
Less: Book Cost		$2,661
Less: Website Cost		$2,478
Less: E-Mail Cost		$1,500
Less: Online Marketing Cost		$3,550
Less: Pick, Pack, Ship	11.5%	$4,871
Variable Operating Profit		$5,271
Profit as a % of Net Sales		12.4%