Variable, Not Fixed Costs
During the past 10 years, the catalog industry has continued to evolve in dynamic ways.
For example, if you’re like most of your colleagues, you’re struggling to find incremental names to mail. You’ve seen cooperative databases take the prospecting market by storm, accounting for millions of names rented every year. And you’re trying to more efficiently integrate e-commerce into your marketing and communications plans, especially since the Internet accounts for 20 percent to 50 percent of demand and orders for many catalogers.
Despite these marked changes in how you accept orders and acquire customers, one thing remains the same: how to correctly calculate a break-even demand per catalog. In this article, I’ll discuss how to calculate a break-even demand per catalog and the variables included in such a calculation. If you correctly calculate break-even demand per catalog, you’ll be able to identify many incremental names to mail in these challenging times.
To Get Started
You’ll need a couple of key variables to complete this calculation:
* gross-to-net margin, defined as the percentage of each demand dollar kept by the consumer (net sales);
* gross merchandise margin, defined as the percentage of each dollar of net sales that remains after deducting your cost of goods sold; and
* operations costs reflects the remaining costs, and includes the cost to fulfill an order; cost for the phone call; costs to pick, pack and ship orders; and any other customer service or variable administrative expenses incurred with each incremental order.
You must then subtract your operations cost from the gross merchandise margin to get a combined margin, the gross merchandise/operations margin, as they’re both represented as a percentage of net sales.
Fixed vs. Variable Costs
The key element in this discussion involves catalog costs and how you treat them to get to your break-even demand per catalog. A correct analysis of break-even demand per catalog focuses only on variable catalog costs and not fixed catalog costs. Mailers must separate their catalog costs into two categories: