Spend to Grow
Therefore, if your goal is to break even after one year on the investment you initially make to acquire a new buyer, you can afford to invest up to $12.14 to acquire a new buyer in the first example. The year after the initial investment, your contribution to profit and overhead is a positive $8.15 per buyer. If you consider lifetime value, then the contribution in year two, three and beyond would be even greater. The point is, new buyers are the lifeblood of any catalog company, and you need to be willing to invest to acquire them.
Then be sure to know what your contribution to profit is — the amount of money left over to contribute to overhead expenses after you deduct for customer returns, cost of goods sold, direct selling expenses (e.g., paper, printing, postage, list costs) and variable order processing costs. Follow this formula:
gross sales - returns = net sales - cost of goods sold - direct selling expenses - variable order processing costs = contribution
Know Attrition Rate
A positive contribution to profit and overhead exists when there are excess funds available after this formula has been applied. A negative contribution to profit and overhead occurs when there’s a shortfall.
To figure out how many new buyers you need to generate a year, know your housefile attrition rate and desired growth factor as determined by management. For example, for the Acme Catalog Co., assume its housefile (buyers only) totals 164,286. Also assume that 60 percent of this file will make a repeat purchase during the next 12 months. This means that 64,714, or 40 percent of this file, need to be replaced simply to maintain the same file size (before any growth factor). Take a look at the second chart (below).
At an overall 2.12 percent average response, a total of 3.1 million prospect names need to be mailed to generate the 65,714 new buyers needed to maintain the file size. To grow by a factor of 10 percent, the company would need to mail 3.6 million catalogs to prospects. This is based on a slightly lower overall response rate of 2 percent, due to the increase in quantity.