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.
What about acquiring new customers to your business using channels other than mailing them a catalog? Such methods include natural or paid search, affiliate marketing, space advertising in magazines or retail events. Apply the same rule of thumb with acquiring new customers above breakeven. Just make sure you aren’t holding your catalog circulation prospecting at breakeven and subsidizing another channel by prospecting for new customers on the Web at a loss, for example. If you know your breakeven for each channel used in prospecting for new customers, you’ll be able to manage each channel to the same financial standard; that is, acquiring as many new customers as you can at or above the break-even cost of acquiring them.
If you prospect for new customers by mailing down to your breakeven and you mail the total universe of prospecting customers who’ll respond above breakeven, you’ll maximize your acquisition of new customers at a profit. The key is to know your breakeven by knowing your catalog costs and your merchandise margin. If you manage your prospecting, you’ll have a growing and profitable catalog business.
Jim Coogan is president of Catalog Marketing Economics, a Santa Fe, N.M.-based consulting firm focused on catalog circulation planning. You can reach him at (505) 986-9902 or jcoogan@earthlink.net .
- People:
- Jim Coogan
- Places:
- Santa Fe, N.M.