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.
When calculated correctly, you can set contribution targets for each mailing and have instant performance indicators to be compared to your financial plan. By adding this statistic to your performance spreadsheets, you can track and review the P&L monthly, weekly or even daily. This provides much needed reaction time to adjust future plans, and in a whole new set of ways.
When you realize that marketing contribution per order (MCO) can be improved by virtually anything that goes on in a catalog business, you take the marketing department to a whole new level. Along with finding that right list, you can make a substantial improvement by being proactive on the cost side. While you're always interested in the cost of printing, the price of paper, the negotiation of list rental charges and other mailing costs, you're now much more aware of the impact of costs involving shipping materials and delivery costs.
By using MCO as a prime measurement factor, you can turn an entire organization into a profit-conscious, cost-efficient machine. Increases in sales and decreases in costs are immediately apparent and measurable. You can even do what-if scenarios to determine the financial impact of things like using new technology or reorganizing the fulfillment center to improve efficiency.
Measurement and control is the essence of cataloging. It's even more important in today’s business climate. It’s vital that you use the right measurement statistics.
Bob Klapprodt is a consultant at Bob Klapprodt Direct, a catalog and direct marketing consulting firm. He can be reached at email@example.com.
Jim Gilbert is President of Gilbert Direct Marketing Inc., a full-service catalog and direct marketing agency. His LinkedIn profile can be viewed at www.linkedin.com/in/jimwgilbert. You can e-mail him at firstname.lastname@example.org or follow him on Twitter at www.twitter.com/gilbertdirect, or read his blog at gilbertdirectmarketing.wordpress.com/.