Use Contribution-Based Marketing for True Measurement

Note from Jim: This week I bring you a guest column from fellow consultant and friend Bob Klapprodt. I've always found Bob’s analysis and circulation strategies to be right on the number. Enjoy!

For years, catalogers have used dollars per book as their main statistic for measuring catalog performance. As a tool for measuring gross or net demand, it's held up well, allowing catalogers to compare list segments and the overall results of different catalogs. But as every businessman knows, generating demand is only part of the puzzle.

Going a step further, calculating cost per acquisition (CPA) by incorporating catalog costs helps you understand the relationship between sales demand and the costs required to stimulate that demand. Many of the most successful catalogs use CPA as a regular way of doing business.

CPA can do a better job of evaluating the true performance of customer results vs. prospecting results, which have different cost structures. You can even better evaluate the use of co-op databases, which have different results and different costs. You'd expect customers to achieve a positive CPA (or “profit”) and prospects to generate a negative or true CPA.

The formula for calculating CPA is as follows:
net demand - cost of goods - mailing costs / number of orders.

You now have a very useful tool for differentiating performance across list segments where the mailing costs can be significantly different. This will allow you to construct a much more effective circulation plan than just using dollars per book.

Unfortunately, while a useful tool, a CPA statistic doesn't measure everything on the cost side of the equation. You need to look at the marketing contribution to develop a measurement standard that accurately reflects the full P&L impact of the results of your circulation strategy.

Marketing contribution is defined as net demand minus costs of goods minus mailing costs minus variable fulfillment costs. By adding the costs to take and ship an order, you create a statistic that accurately reflects the true profitability of any circulation plan and all of its components. The full name of this measurement is marketing contribution to overhead and profits.