Fundamentals of Prospecting at Breakeven, Part 1 of 2
In the first of a two-part series, this week I’ll look at how catalogers should calculate breakeven when prospecting for new customers.
The basic circulation model for catalog businesses is to prospect for new customers at or above breakeven. You profit from mailing your buyers, but if you prospect below breakeven, you can bleed that profit right away — and it’s difficult to recapture in later years. If you set the bar too high above breakeven for new customer prospecting, you effectively diminish the influx and growth of new buyers while negatively impacting your profitability. You limit the potential universe of catalog buyers.
If you have the business rule to mail down to where you’re breaking even on prospecting, you’ll maximize the acquisition of new buyers without losing profitability. And new catalog buyers are the lifeblood of your business!
Your breakeven calculation can be simple. Most catalogers calculate breakeven using this formula: sales per catalog needed to cover the actual cost of mailing your catalog divided by your merchandise margin. For example, if your catalog costs 60 cents per catalog to mail and your merchandise margin is 50 percent, then you break even when the catalog sells an average of $1.20 per catalog mailed. If you mail 10,000 catalogs at $1.20 per catalog, your sales are $12,000. Sales multiplied by your merchandise margin of 50 percent leaves $6,000 to pay for 10,000 catalogs at 60 cents apiece.
After you pay your merchandise and catalog costs, you’ve broken even. And the simplest breakeven calculation is your catalog cost divided by your merchandise margin equals the sales per catalog (or sales per book) needed to break even.
Your catalog cost is the cost to put your catalog in the mail plus all your creative, printing, paper, postage, list rentals and merge/purge costs.