Three Years and $3 Million to Break Even
And that represents a pretty typical picture of a cataloger who has just achieved the second kind of breakeven. How many years and dollars did this cataloger have to invest to get there? The total cost is easy to calculate: We saw above that we were losing $22.50 on each order from a prospect, and we saw that this loss could be viewed as our cost to add a new buyer to our housefile. So adding 15,000 new buyers to your housefile will cost you $22.50 x 15,000 = $337,500. And to get those 15,000 prospect orders, you’ll need to have mailed a grand total of approximately 1.5 million total catalogs (at a 1-percent response rate).
Doesn’t that show that you can achieve breakeven on a total investment much lower than $3 million?
Yes. In the real world I find that new catalogers who do everything reasonably well can achieve profitability in year three or four, on a total investment of around $500,000.
If all I need is 15,000 prior buyers on my housefile to achieve breakeven, why spend three years acquiring them? Why not get them all at once with a single huge prospect mailing in my first year?
That’s theoretically possible, but risky in the real world, since you would be gambling everything on your first catalog. First catalogs are seldom optimized in terms of presentation, product line, offer, list selection or operations. It usually takes several seasons to wring all the misconceptions and errors out of a new catalog program. So it makes more sense to begin, not with a huge initial mailing designed to get 15,000 buyers in one swoop, but with a test program large enough to be statistically significant, yet small enough to conserve cash and avoid bankruptcy during the learning process.
I want to break your rule of thumb and achieve profitability on all mailings, including my first. How can I do this?