Catalog Spotlight: A Savings Plan
Catalogers are finally seeing some cost relief with the expiration of the exigent postage increase on April 10, as well as softening paper prices. Aggressive work over the past two years by the American Catalog Mailers Association (ACMA) in challenging the ceiling of the exigency rate before the postal regulator and in a U.S. Court of Appeals suit helped put catalogers in the favorable position they’re in today. Consider the following:
- postage costs have decreased about 4.3 percent; and
- paper costs are sliding down — most catalogers saw 4 percent to 8 percent savings in the fourth quarter of 2015.
How do you translate these cost savings into a new prospecting break-even benchmark? And how does that lower breakeven translate into a quantifiably larger prospecting universe?
Start by calculating your new catalog cost and translating that cost into a new break-even cost for prospecting and housefile circulation. Your catalog cost includes printing, paper and postage (the three “P’s”), as well as list and creative costs. Therefore, to calculate your new catalog cost, factor in the revised postage and paper costs as illustrated in the chart below. The combination of postage and paper cost savings drives your catalog cost from 68 cents per catalog to 65 cents per catalog.
The next step is to calculate your new breakeven. Let’s say your merchandise margin (i.e., cost of goods sold) is 50 percent. Therefore, your breakeven was $1.36 per catalog in sales. With the lower costs for postage and paper, your new breakeven is $1.30 per catalog in sales.
The most common business model for catalogers is to prospect using all rental names expected to respond above breakeven. Therefore, the previous prospecting and housefile universe comprised all prospecting lists and housefile segments that would have responded above $1.36/catalog. The new universe includes those names that would respond between $1.30 and $1.36 per catalog.
If you keep pretty precise records of historical response rates (you should), you can make a pretty educated guess of how much incremental prospecting and housefile universe names just became available. Circulation managers need to review their prospecting results and drive the discussion of how these cost decreases have increased the catalog circulation universe as a result of lower break-even costs.
Be prepared for top management to ask questions, including the following:
- What if we keep circulation the same and simply drop those cost savings to the bottom line?
- What will be the impact of these cost savings on profitability?
Point out from this example that a 68 cents to 65 cents catalog cost reduction is a 4.5 percent catalog cost reduction. If catalog costs represent 30 percent of top-line revenue, then these catalog costs (at .045 percent x .30) would increase the bottom line by 1.35 percent. Not a bad day’s work!
It’s simple math, and having the discussion of a larger circulation universe elevates the issue that costs have gone down and catalogers can either use those new costs to increase revenue or deposit those savings straight to the bottom line.
Jim Coogan is the founder and president of Catalog Marketing Economics, a consulting firm focused on catalog circulation planning.
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