(Originally published in DM News)
For the past decade at O'Keefe Henry Direct, we have been
successful in providing to our clients analytical expertise in the areas of circulation planning and
product merchandising. We use consistent statistical measures to keep focused on the ultimate
goal of increasing the contribution to overhead and bottom line profit of their business.
Central to our analytical process is the concept of Cost Per New Customer (CPNC).
By subtracting the associated advertising costs (print, paper, postage, lettershop and list rental)
from the gross margin, you are left with the amount that is available for contribution to overhead.
Dividing that amount by the number of new customers provides the CPNC.
The CPNC can be used in a variety of ways to determine success and failure. This tool is
used to evaluate an overall catalog campaign, an individual mailing list, a specific source code,
or even a product in the catalog. This figure will provide you with the optimal measurement
tool for comparison.
Many catalogers leave significant sales and contribution dollars on the table by not optimizing
the contact strategy to their previous buyers. These mailers feel that because they send their
buyer file a book at the beginning of the year and possibly another book as a bounceback in
their product shipment, they have maximized their opportunity with this group. Many times we
have found that even 3,4 or 5 contacts to previous buyers are too light.
Instead, the strategy should be to mail the buyer file until they tell you to stop.
This is especially true with the most recent buyers. Remailing the control book with an
alternative cover or supplemental pages are very efficient ways to present another catalog
to your buyers.
Your recent buyer file contains the key to the success of your business; don't give
them an opportunity to buy from someone else.
An overly simplistic concept for our business comes from the idea that mailing more books will
create more sales. While fundamentally true, the business issue for catalogers is to determine
if they can really afford to mail those additional books.
Since the quantity of the buyer file is relatively fixed, the perceived opportunity to increase
the mail quantity lies with more prospect list names. The rationale behind this decision could be
that SRDS is filled with pages and pages of new lists that may be the right fit for a test.
Another option is to expand on the selections from some of the best lists used in the past.
However, analysis must first be done to determine how much additional contribution this
incremental circulation can generate. Reviewing the historical cost per new customer (CPNC) by
list, the cataloger can see how much they have made or lost on each prospect name sale.
Comparing the CPNC to the projected lifetime value (LTV) of a new customer is an easy way
to determine how long it will take to receive a payback on a specific prospect list investment.
The example below shows that the cost to acquire the names in list A is $20 dollars greater
than what will be generated in LTV. It would be a poor decision to keep list A in the plan since
you will never recoup your original advertising investment. The results from List B show that each
name will generate an additional $5 in contribution and should be kept in the plan.
LIST |
CPNC |
LTV |
A |
$45.00 |
$25.00 |
B |
$15.00 |
$20.00 |
The two situations we often see are that catalogers do not mail successful lists frequently enough or mail prospect lists well beyond what they can afford. While these mailings will generate additional sales dollars, long term they will take profit dollars out of your hands.
By preparing a merchandise analysis of prior books, the cataloger can determine opportunities for growth based on product. This review is required to continually challenge the merchants to find new items to keep the book looking fresh and exciting for previous buyers and to entice new customers. The key area in this analysis is to make sure that each item is assigned the applicable marketing expenses. This allows you to see how much contribution each product in the catalog has generated.
The initial review should look every item in the book and determine how many of them are generating sales. Hopefully, there will be the few spectacular products that show sales and contribution far greater than any others. These are the products that will keep you in the catalog business.
Further reviews of the merchandise need to be prepared to focus on the following areas: by page, product category, product theme, and price point. The recommendations in each of these sections will provide solid direction for future product development efforts.
The merchandise analysis will also point out which items the customer has no interest in purchasing, or at least purchasing from you at a profit. The beauty of this review is that you can finally see based on actual purchase history what your buyers are interested in and what they are not interested in. A focus group on new products might give you a slight indication, but they are never as predictive as actual sales results.
Merchandising future catalogs must be a two-part process. Not only do you need to find new products to keep the book fresh but also you need to eliminate those items that your customers aren't buying.
The worst reason to remove an item from a catalog is because the merchant is tired of seeing it in the book. As long as the customer continues to purchase the item from you at a profit, there is no excuse to take it out of your catalog.
While these four areas are basic and clearly fundamental to the long-term success of any cataloger, our experience shows it can be difficult to stay on top of all four along with the day-to-day concerns of running the business. To be successful, the task of adding new products along with finding new customers must never end.
Listen to the marketplace, as they will tell you nearly everything you need to know. Ultimately, a successful cataloger will mail a book full of good products to those individuals most likely to purchase them; it is that basic, and also that difficult. |
