Print-Plus: Focus on an Incremental Break-Even Point
There's a cost associated with acquiring new buyers through print media. Marketers who rely heavily on catalogs need to invest in converting prospects to buyers (one-time purchasers) and buyers to customers (two-time or more purchasers). How much you're willing to pay for new buyers depends on what you can afford, how fast you want to grow and the lifetime values of the buyers acquired.
Overspending to acquire a new buyer and trying to grow too fast won't work. But not investing in growing your housefile can negatively impact business, too. That's why you should calculate an incremental break-even point and measure list results against this benchmark.
Print Break-Even Points
The incremental break-even point is defined as follows: Gross Sales less Refunds = Net Sales; Net Sales less Cost of Goods Sold = Gross Profit Margin; Gross Profit Margin less Direct Selling Expenses = Incremental Break-Even Point.
Calculating requires the following information:
- catalog costs, in the mail;
- customer cancel/refund ratio; and
- gross margin ratio.
And this formula:
catalog cost / ((1-cancel percentage) * gross margin percentage) = break-even point
Example: $.65 / (.95%*60%) = $1.14.
Some catalog mailers won't prospect below the incremental break-even point. They want to be certain all of their prospect lists — not just the average of the prospect lists used — perform at breakeven or above. This philosophy can severely limit growth, however, because you're unlikely to find enough lists that perform above breakeven to sustain the desired level of growth — or even maintain the same sales from year to year. Catalog mailers need to invest in acquiring new buyers, and this can only be accomplished by mailing below the incremental break-even point.
The chart below shows how prospect lists should be ranked based on revenue per catalog (RPC). NextAction (now DataLogix) is close to the $1.14 incremental break-even point; Z-24 falls short. This data can be used to improve models and forecast future results.
Online marketing often leads to a positive profit contribution and overhead on initial purchases if you don't overspend on keywords. But it's tough to gain enough new buyers online to grow housefiles. The lifetime value of a web buyer often isn't as great as a print buyer.
There's a certain attrition rate on any housefile. Print and online customers stop buying due to the economy, poor service, "older" customers passing on, etc. If nothing else, replace those customers with fresh buyers so your 12-month file doesn't decline. To grow, print and online prospecting must exceed that attrition rate.
Assume that 50 percent of a typical customer file will purchase again next year. This means, at a minimum, you need to replace the 50 percent that won't so the active housefile doesn't decline. This includes a combination of adding new buyers and bringing older buyers on the housefile into the 12-month category.
If you want to grow, the percent of "new to files" has to be even higher than your attrition rate. You'll need to mail below the incremental break-even point to find them. New buyers are the lifeblood of any catalog company, and you need to be willing to invest initially to acquire them. But invest wisely.
Stephen R. Lett is president of the catalog consulting firm Lett Direct (firstname.lastname@example.org).