Fundamentals of Prospecting at Breakeven, Part 2 of 2
In part two of this two-part series on customer acquisition and the value of prospecting above breakeven, this week I’ll look at how catalog costs and merchandise margins affect your prospecting ability.
(To review part 1, click here.)
Some catalogers use an alternative breakeven, which includes the variable costs of fulfilling each order. These are costs incurred taking and fulfilling orders, including phone costs, call-center wages and wide-area telephone service (WATS) costs. Then factor in the cost of wages and shipping to pick, pack and ship orders, less any revenue collected for shipping.
For example, if a catalog breaks even at $1.20/catalog, mailing 10,000 catalogs with a $100 average order breaks even with 120 orders. If the cost to take and ship each order is $6/order, then you need to cover $720 in variable costs to be at breakeven. If your margin is 50 percent or $6,000, then that margin is reduced by $720 to $5,280, or 44 percent — or $720/$12,000 in sales equals 6 percent. So margin is 50 percent less 6 percent — or 44 percent.
Breakeven with variable costs included is 60 cents/catalog cost divided by margin of 44 percent, or $1.36 rather than $1.20/book. To calculate this more conservative breakeven, take your net variable costs of fulfilling orders (variable costs less any shipping and handling revenue) as a percentage of sales and subtract that from your merchandise margin.
Some catalogers want to look at breakeven on prospecting more conservatively; they want to add some fixed overhead and increase the prospecting breakeven. This approach is often counterproductive, because you end up not mailing some prospecting lists that would have covered merchandise and catalog costs while throwing off cash to cover fixed overhead. When you set the prospecting threshold too high, you may well lower your total profitability.