It costs money to add new buyers to your housefile. In fact, very few catalogers can prospect at breakeven (which we will define shortly). Therefore, new buyers are added to your housefile at an incremental loss to your bottom line. Prospecting for new buyers must be cost justified based on their lifetime value.
For purposes of definition, it is important to understand the difference between a buyer and a customer. A buyer is someone who has purchased one time only. A customer has made more than one purchase. Obviously, you have to have buyers before you can have customers. While it is important to acquire buyers at the lowest possible cost, it is also important to turn those buyers into customers as soon as possible. Generally, the payback comes when a buyer makes a second purchase.
Step 1—Determine your break-even point. Understanding your break-even point is the first step to knowing how to prospect cost efficiently. There are two different break-even points; incremental and fully absorbed. The incremental break-even point is net sales less cost of goods sold, less direct selling expenses, less variable order processing and fulfillment expenses. A fully absorbed break-even point includes all of the previously mentioned expenses plus all overhead expenses.
The incremental break-even point should be used to evaluate and judge the effectiveness of your prospecting efforts. When prospecting, you are only trying to recover the money you spent out of pocket to acquire new buyers. Obviously, all expenses cannot be incremental in nature. The housefile needs to be large and strong enough to absorb all overhead expenses. In this article, we will focus on the incremental break-even point only as it relates to acquiring new buyers for your file.
A typical pro forma contribution statement appears on page 63. As you can see, this cataloger plans to print a total of 2,164,032, 64-page catalogs, of which 2,061,732 copies will be mailed. The other 102,300 copies will be used to fulfill inquiries and as bounce-backs in out-going orders. These are known as bulk copies.