What Would Happen if …
What would happen if you mail down to the breakeven point and stopped there? In other words, eliminate all the R-F-M cells that fall below the incremental breakeven point. This sounds like a financially smart thing to do, but is it? The cold, hard facts are that if you elected this mailing strategy it would put your business on a death spiral that would eventually lead to its demise and be difficult to reverse. Let me explain.
The result of circulating catalogs at or above the incremental breakeven point would eventually reduce the size of your housefile. Over time, there wouldn't be enough buyers, particularly in the zero- to 12-month category, to sustain the business. There wouldn't be enough revenue generated to cover your operating overhead. Drawing a line in the sand at the breakeven point isn't a winning strategy.
Every time you mail, some segments will fall below the breakeven point. In other words, not every R-F-M you mail will achieve breakeven every time you mail. The more marginal names on your housefile might break even in a particular mailing but not necessarily in the next mailing. Some of the names you mail in one drop will fall below breakeven in a subsequent mailing, thus reducing the size of your universe.
Mailing too far below incremental breakeven isn't good either. This is a good way to circulate yourself into the poorhouse. It's the balance of mailing above and below breakeven in every drop that’s important. This includes circulating catalogs to the housefile and to prospects. Again, “balance” is the key word and takeaway.
Let’s look at the rationale. I want to provide an explanation of controlling the principles of my opinion, belief, and practice of a balanced circulation strategy. Everything you mail, some of the R-F-M cells and prospects will fall below breakeven. Therefore, if we eliminate those names falling below breakeven, some of the names we do select to mail that are at or above breakeven will most likely fall below breakeven the next time they're mailed. And on and on. Pretty soon the housefile universe will shrink, and fewer and fewer buyers will qualify to be mailed. The strength of any direct company is the value of the house or buyer file. If it continues to decline, so will your business.
What’s a good circulation strategy? A good balance of circulation above and below breakeven. To determine what’s best for your business, we need to consider the attrition rate of the housefile. For example, what percentage of your customers make repeat purchases the following year? The goal should always be to maintain the number of zero- to 12-month buyers on your housefile from one year to the next. If you want to grow your business, you’ll need to be more aggressive by adding more recent 12-month buyers to your file. And, if growth isn't important, a less aggressive circulation strategy can be adopted.
If you're not sure what your housefile attrition rate is, circulating catalogs 20 percent below the incremental breakeven point is probably a reasonable target. For example, let’s assume breakeven is $1.25 per catalog mailed. Obviously, we want to be sure to mail all the names at or above breakeven. If we want to mail 20 percent below incremental breakeven, we can afford to circulate catalogs to those names generating $1.00 per catalog. This represents a conservative circulation strategy.
When developing a circulation plan, a good approach is to estimate the number of names you will have in every R-F-M segment for every mailing. Make broad assumptions that the universe counts have increased or decreased from the prior year’s universe at the same level your business changed for the same period. Using your company’s own expense ratios and data that you're going to be operating under for this plan, calculate either the revenue per catalog (RPC) breakeven figure or the contribution to profit and overhead each of those segments will achieve. Continue this process segment-by-segment, book-by-book through the house names mailed. Review all of the forecasted data. Here you're looking for two things: segments that should be eliminated and segments where you probably could mail deeper. When you've completed this step, it’s probably also wise to sort this data either by the RPC or the contribution per catalog and make sure that you've eliminated all of the segments you meant to drop.
Here are what we consider to be best practices for mailing below breakeven:
- Consider mailing prospects at a level where you break even after 12 months or 24 months.
- Some of the RPC you're tracking on your buyer segments will come in without the influence of the mailing, especially if you're aggressively promoting on your website, through email, etc. Therefore, you want to be careful not to mail too far below your breakeven.
- For below breakeven buyer segments, create a contact strategy for mailing these segments. This could be once per year, once per season, strongest mailings only, or something else. You want to be careful not to add these segments that fall below breakeven to all mailings. In other words, don't overmail lower performing segments.
- Promotional offers will help reactivate older buyer segments and encourage prospects to place their first order.
- After adding below breakeven segments, does your plan meet your sales and contribution goals? If not, consider sending unselected buyer segments out for modeling and reduce the amount of circulation you're mailing below breakeven. This will allow you to mail only the best names (i.e., those most likely to purchase again) within the segments you're not selecting. Modeling will help maximize performance of your mailings.
So what happens if …
you circulate to the breakeven point every time you mail? You’ll soon be out of business. The size of your housefile will continue to spiral down, leaving fewer and fewer buyers to mail in subsequent drops. Don’t let this happen. Circulate the right balance of customer names above and below incremental breakeven to continue to move your business forward.
Stephen R. Lett is founder and chairman of Lett Direct, Inc., a catalog consulting firm specializing in digital marketing, circulation planning, forecasting and analysis since 1995.
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Steve Lett graduated from Indiana University in 1970 and immediately began his 50-year career in Direct Marketing; mainly catalogs.
Steve spent the first 25 years of his career in executive level positions at both consumer and business-to-business companies. The next 25 years have been with Lett Direct, Inc., the company Steve founded in early 1995. Lett Direct, Inc., is a catalog and internet consulting firm specializing in circulation planning, plan execution, analysis and digital marketing (Google Premier Partner).
Steve has served on the Ethics Committee of the Direct Marketing Association (DMA) and on a number of company boards, both public and private. He served on the Board of the ACMA. He has been the subject of two Harvard Business School case studies. He is the author of a book, Strategic Catalog Marketing. Steve is a past Chairman of both the Catalog Council and Business Mail Council of the DMA. He spent a few years teaching Direct Marketing at Indiana University in Bloomington, Indiana.
You can contact Steve at email@example.com.