A Modern Catalog Square Inch Analysis (Squinch)

A Modern catalog square inch analysis (called squinch by some) is a different proposition than it was fifteen years ago.

For most of us, we don't have a housefile big enough to truly detect what a catalog drove to the online channel, at an item, department, or division level. So we have to make some assumptions.

Here's one way to approach a modern catalog square inch analysis.

Step 1: Conduct your standard mail/holdout test. If you're under fifty million in annual sales, you'll probably need at least 7,500 folks in your holdout group to get a halfway decent read of online results.

Step 2: At the conclusion of your test (say eight weeks after the in-home date), you'll measure your results as follows:

Catalog Square Inch Analysis Test Results
	Current	Other	Online
	Catalog	Catalogs	Sales	Totals
Mail	$3.00	$8.00	$6.00	$17.00
Holdout	$0.00	$9.00	$4.50	$13.50
Increment	$3.00	($1.00)	$1.50	$3.50

Ok, things are going to start getting interesting.

Step 3: Tally the total sales for your catalog, based on your telephone results. Let's assume that number is $2,000,000.

Step 4: Ok, we have to adjust for cannibalization. This catalog, based on the test results, cannibalized other sales by 33% (the dollar lost in the table above divided by the three dollars of incremental sales per customer. So, the $2,000,000 in sales is multiplied by 0.333, yielding $666,667 that will be taken away in Step 6.

Step 5: Now, we have to adjust for the sales we drove online. Based on the test results, we drove an additional $1.50 online, a 50% increase (the $1.50 driven online divided by the $3.00 recorded by the catalog). So, the original $2,000,000 in sales is multiplied by 0.500, yielding $1,000,000 that will be added in Step 6.

Step 6: Let's come up with a final demand number. We take the $2,000,000 telephone sales number, we subtract $666,667 for cannibalization across other catalog phone demand, then we add $1,000,000 of incremental online volume. In total, the catalog drove $2,000,000 - $666,667 + $1,000,000 = $2,333,333.

Step 7: Take $2,333,333 and divide it by the $2,000,000 your systems recorded, yielding a "lift factor" of 1.167.

Now we can calculate a semi-accurate DMPC (demand per thousand pages circulated) for each item. DMPC is a very good measure when doing a square inch analysis.

Step 8: Record the phone sales for an item. Say that amount is $10,000.

Step 9: Multiply that number by the lift factor in Step 7 of 1.167, yielding $11,670.

Step 10: Record the percentage of a page that the item occupied in the catalog. Let's assume an item took up 0.25 of a page.

Step 11: Record the total circulation of the page in the catalog. Let's pretend the number is 750,000.

Step 12: DMPC (Demand per Thousand Pages Circulated) is calculated as:

• ((Lifted Demand) / (Fraction Of Page * Circulation)) * 1,000.
• Or ... ((Step 9) / (Step 10 * Step 11)) * 1,000.
• ($11,670 / (0.25 * 750,000)) * 1,000.
• = $62.24.

And that's it. Just twelve easy steps. You compare the DMPC of this item against other items. You calculate a "break-even", and compare items against the break-even level.

Big companies have an advantage, in that they can calculate lift at a merchandise division or department level --- there are enough customers in a holdout group to do this. At Nordstrom, we learned that we didn't have to offer Mens merchandise in a catalog ... the very presence of Womens merchandise drove customers online (and into stores) to buy Mens product.

Anyway, that's how we conduct a modern catalog square inch analysis.

Your thoughts?

Square Inch Analysis (SQUINCH) and Monthly Item Profitability Reporting

Back in the 1990s, square inch analysis (sometimes labeled as SQUINCH) was the foundation of a successful multichannel catalog program.

Those days are remembered as fondly as we remember $1.30 per gallon gas, new episodes of Seinfeld, and the raging conflict between Bill Clinton and Newt Gingrich.

Back in the 1990s, we'd evaluate each item based on the sales generated in that specific catalog, divided by the space allocated to the item.

Here's a simple example. Assume we circulate a catalog to 1,000,000 individuals. On one page of the catalog, there are three items featured.

• Item #1 = 0.15 page, $1,200 sales.
  
• Item $2 = 0.35 page, $2,200 sales.
• Item $3 = 0.50 page, $3,200 sales.

Looks like Item #3 performed the best, right?

Let's control for the amount of space the item was given.

• Item #1 = $1,200 sales / (0.15 page * 1,000,000 circ / 1,000 pages) = $80.00 DMPC.
  
• Item #2 = $2,200 sales / (0.35 page * 1,000,000 circ / 1,000 pages) = $62.86 DMPC.
  
• Item #3 = $3,200 sales / (0.50 page * 1,000,000 circ / 1,000 pages) = $64.00 DMPC.

DMPC = Demand per Thousand Pages Circulated.

After controlling for the number of pages circulated, Item #1 actually performed the best!

In the 1990s, we'd evaluate every item in the catalog in this manner, giving more space to the items that performed best, limiting space to the items that performed worst.

Now fast forward to 2008. You still mail the catalog to 1,000,000 souls who haven't told a third party opt-out service that they are disgruntled with your activities. What has changed since 1990?

• Sixty percent of your transactions occur online, about half of those transactions are driven by catalog marketing.
  

• You also deliver eight e-mail campaigns during the time when the catalog is active, six of the eight e-mail campaigns offer free shipping, a perk not given to loyal catalog shoppers.

• Ten percent of your marketing budget is allocated to paid search, spread across 2,500 keywords.

• Affiliate marketing and shopping comparison sites contribute to your online sales.

• Portal advertising drives traffic to your site.

• Items featured on blogs account for 2% of your sales.

• Your online merchandise assortment is greater than your catalog merchandise assortment.

• You've learned that catalog marketing and e-mail marketing drive sales to items not featured in either marketing activity.

In other words, square inch analysis only tells you part of the story about the performance of an item.

Increasingly, I see multichannel wizards attempting to perform Monthly Item Profitability Reports. In other words, every item a multichannel brand sells is evaluated on the basis of the monthly profit generated across all advertising activities. Here's a sample Monthly Item Profitability Report.

MONTHLY ITEM PROFITABILITY REPORT
Items Sold		500
Average Price Per Item Sold		$39.99
Telephone Demand, Total		$8,000
Online Demand, Total		$12,000
Monthly Demand		$20,000
Final Fulfillment	94.0%	$18,800
Return Rate	20.0%	$3,760
Net Sales	75.2%	$15,040
Gross Margin	55.0%	$8,272
Less Catalog Marketing		$1,850
Less E-Mail Marketing		$50
Less Paid Search Marketing		$400
Less Affiliate Marketing		$275
Less Shopping Comp. Mktg		$225
Less Portal Advertising Exp.		$315
Total Advertising Expense		$3,115
Pick/Pack/Ship Expense	11.5%	$1,730
Variable Operating Profit		$3,427
Profit, % of Net Sales		22.8%
Ad to Sales Ratio		20.7%

Notice that all demand generated by an item is included in the report. Similarly, advertising expense by advertising channel is allocated to each item.

This isn't an easy thing to do, and quite honestly, few multichannel companies have the database infrastructure to conduct item-level profit and loss statements on a fluid and automated basis. Regardless, this is the direction our industry is taking, and it is a necessary step if we want to truly offer a profitable multichannel merchandise assortment.

Your thoughts? Who is doing this well? Have you made different decisions as a result of conducting an analysis of this nature?