Three Years and $3 Million to Break Even

The second break-even point occurs when a cataloger’s housefile has grown large enough for each mailing to generate enough profit to pay for mailing to the housefile and to enough prospects to replace housefile attrition. This is the second break-even point most new catalogers arrive at. Most catalogers choose not to stop at this second break-even point, but instead opt to continue prospecting, at a loss, well past it to grow the housefile.

Of course, the ultimate business goal for most catalogers is to reach the third point on our scale—a point well beyond breakeven. At this level, the catalog business could be considered mature, enjoying healthy economies of scale, with a housefile large enough to pay for substantial prospecting mailings while still dropping a healthy profit to the bottom line.

Why does it take so many years to break even with a catalog?

It’s caused by some simple marketing arithmetic, which goes like this: When you launch a new catalog, you have no prior buyers, so each catalog goes to a prospect. A typical prospect response rate to a moderately sized, reasonably targeted catalog is 1 percent (ie., you mail 100 catalogs, you get one order.) A realistic in-the-mail cost for a moderately sized new catalog is $0.50 (creating, printing, mailing). A typical cost-of-goods percentage is 50 percent, a typical average order size might be $75 and a typical cost to take and fulfill an order is $10 (excluding outbound freight). So from each $75 order, you must subtract $50 in catalog costs (that’s the $0.50 cost of each catalog times the 100 total catalogs you must mail to get one order at a 1-percent response rate), plus $37.50 (50 percent of $75) in cost of goods, plus $10 in telemarketing/fulfillment costs. That totals $97.50 in costs, from which we subtract our $75 in revenue, to arrive at a loss of $22.50 on each order.