To prospect for new buyers cost effectively, a catalog company needs to know its break-even point (BEP). I like to express breakeven on a per-catalog-mailed basis—that is, how much gross (or net) revenue must you generate per catalog mailed to hit your desired break-even target?
This becomes your stake in the ground. All outside lists and housefile segments should be evaluated and measured against this break-even criteria.
Two BEPs can be used:
*an incremental (sometimes called variable) breakeven, and
*a fully absorbed BEP.
Mailings to prospects should be evaluated using an incremental BEP analysis. The fully absorbed BEP can be used to determine the effectiveness of mailings to your housefile. The difference between these two is that the incremental or variable breakeven doesn’t include fixed overhead expenses in the calculation, while the fully absorbed break-even calculation does.
Why are two BEPs needed? Can your initial mailings to prospects reach the variable BEP? What should be included in your calculation?
Most catalogers can’t prospect above breakeven on the initial mailing to outside names. Rather, profitability comes in time from repeat business—that is, the customer’s lifetime value. For this reason, it’s important to use two different BEPs to evaluate mailings to prospects versus mailings to your housefile.
All mailings, regardless of whom they go to, can’t be considered incremental. It’s the housefile—the list of your proven
customers—that needs to cover your overhead expenses. Again, prospects can’t be expected to cover overhead expenses, but these expenses are real and need to be absorbed somehow. This is why start-up catalogs see red ink. They don’t have a proven customer list to pay the rent, light bill, salaries, etc. It takes a few years of prospecting at a bottom-line loss to gather enough proven customers on the housefile to absorb overhead expenses.
Steve Lett graduated from Indiana University in 1970 and immediately began his 50-year career in Direct Marketing; mainly catalogs.
Steve spent the first 25 years of his career in executive level positions at both consumer and business-to-business companies. The next 25 years have been with Lett Direct, Inc., the company Steve founded in early 1995. Lett Direct, Inc., is a catalog and internet consulting firm specializing in circulation planning, plan execution, analysis and digital marketing (Google Premier Partner).
Steve has served on the Ethics Committee of the Direct Marketing Association (DMA) and on a number of company boards, both public and private. He served on the Board of the ACMA. He has been the subject of two Harvard Business School case studies. He is the author of a book, Strategic Catalog Marketing. Steve is a past Chairman of both the Catalog Council and Business Mail Council of the DMA. He spent a few years teaching Direct Marketing at Indiana University in Bloomington, Indiana.
You can contact Steve at firstname.lastname@example.org.