A primary question for catalogers is how deep is their prospecting universe. Catalogers need to know how deeply and frequently they can prospect above breakeven for new customers.
Knowing your catalog’s profitable prospecting universe is necessary and important because the business model for catalog marketing is really pretty simple: prospect for new customers at or above breakeven and make the lion’s share of your profits from mailing to your buyer file. Therefore, mailing your prospecting universe all the way down to breakeven is the key to maximizing top-line sales and bottom-line profits.
The first step is understanding your breakeven. Catalog breakeven is typically defined as your catalog’s in-the-mail cost (i.e., all costs of printing and mailing your catalog) divided by your merchandise margin (or, more conservatively, your merchandise margin less your variable selling costs of taking and fulfilling an order). For example, a catalog with a cost of 60 cents per catalog in the mail and a merchandise margin of 50 cents has a break-even point of $1.20 per catalog. The business issue is to prospect as deeply and frequently as possible into the mailing lists that will respond above breakeven.
How do you test into your proven prospecting universe to determine how deeply you can prospect above your breakeven? Consider the following tips:
1. Use depth testing with established mailing lists or cooperative database models that have been proven profitable in the past. If you have a proven profitable universe of names from a cooperative database model or an individual catalog or publication mailing list, the challenge is how to test deeply. Depth testing usually involves taking a small but significant sample of names from the deeper segments and measuring the response in comparison to the proven segments. For example, if you have a proven universe in one list of 100,000 names, you might take a 10,000 name sample from segments of 50,000 names. Then test 10,000 of the names from 100,000 to 150,000, another 10,000 names from the segment of 150,000 to 200,000 names and so on.
2. Cooperative databases can provide some good data on depth testing by backtesting mailings that have been completed and measuring how completed mailings would have responded if deeper segments had been mailed. The advantage of backtesting is that it's almost free and therefore much cheaper than spending on testing new or marginal mailing lists or model segments. The disadvantage of backtesting at the cooperative databases is that you can get good directional data about how deeply you can mail but you can’t predict actual results unless you put live tests in the mail.
3. Depth testing with vertical lists involves simply going deeper in terms of the list’s recency, frequency or monetary (RFM) segments. For example, if a mailing list has been profitable mailing zero to 12-month buyers, the next step may be to test into the 13-month to 24-month buyers and measure the difference in response. Your list broker will be able to guide you in choosing which RFM segment to test. Typically testing would take lower dollar value (say $50 buyers when you had been taking $100-plus buyers), recency testing (going back to older buyer selects), or merchandise category or demographic selects.
4. There may be the opportunity to simply mail your best prospects more frequently. If you're mailing your best prospects two or three times a year or season, consider mailing them an additional contact.
5. Know the impact of promotional offers on your prospects. Often the most efficient way to increase prospecting response is to simply sweeten your offer to new customers.
6. Work with the cooperative databases and your list broker. Explain to them your breakeven, your historical results, and the organization’s budget and investment thinking about prospecting around breakeven.
Results can be improved either by testing to find a larger prospecting universe or by finding ways to suppress poor-responding segments. If you have a list that's responding below breakeven, look for ways to drop some unprofitable names inside that segment. Consider suppressing the “singles” and just mailing the “multibuyers,” or look to suppress some ZIP codes or geographic areas that may underperform. You can also test other demographic characteristics that can be identified and suppressed.
Communication with the providers of prospecting names is the key. List providers welcome the dialogue because their interest is in finding ways to increase your profitable prospecting universe. Growing your profitable prospecting universe is a vital piece of growing top-line revenue and bottom-line profits. Know your current prospecting universe, and make growing that a top priority for your business.
Jim Coogan is the founder and president of Catalog Marketing Economics, a consulting firm focused on catalog circulation planning.