Catalogers’ Profits Are Being Squeezed. Part 1 of 2
In the first part of this two-part series examining the financial and industry pressures catalogers are currently under, and what they can do to survive and prosper, this week I look at several trends and factors that have led to the shaky ground that catalogers now stand on.
Catalogers’ profits are under severe pressure. And the reason isn’t just because of the slowdown in the economy.
In its 2008 Trend Report, Abacus, a division of the marketing services firm Epsilon, points to a profit squeeze. The trend for direct mail circ shows that “despite the postal increase in 2007, direct mail circulation remains steady with a 1 percent decline over the prior year in prospecting volume.” The report also reveals that between 2006 and 2007:
* circ was down 1 percent;
* response rates were down 1 percent; and
* average sale was up 2 percent and $/book was up 1 percent.
But the cost of postage increased dramatically (in some cases over 25 percent) and paper prices continue to rise at alarming rates. Paper typically accounts for half of the total printing cost. If a catalog’s circ remains steady year over year and response rates remain stable, but costs increase dramatically, isn’t a decline in profitability inevitable?
The Abacus study points outs some shifts in circ from prospecting to deeper housefile penetration. The result of this shift was a 2 percent increase in prospecting performance. But a 2 percent increase in performance doesn’t come close to making up the profits lost by the increases in postage and paper.
A look at the circ trends for the first quarter of 2008 shows a shift toward deeper housefile penetration at the expense of new customer acquisition. “Circulation volume has decreased 7 percent in Q1 2008 compared to Q1 2007 with volume cuts in prospecting,” the Abacus report states. The report points outs that a decline in prospecting will inevitably lead to a shrinking house buyer file, thus making it harder for catalogs to achieve their annual revenue goals. While this long-term perspective is true — cutting prospecting inevitably slows sales in the long term — catalogers face the immediate issue of declining profits. The relatively small cuts in circ mean profit margins are being squeezed.
There’s another hidden trend that’s putting pressure on response rates. Catalog house buyer files are getting a larger proportion of Web buyers. And Web buyers aren’t as receptive to frequent catalog mailings. These Web buyers are not being segmented very rigorously by catalog companies, co-op databases or list managers maintaining list rental files. The inevitable effect of adding large pools of Web buyers is that response rates will decline.
Next week in the final part of this two-part series on the financial and industry pressures catalogers are currently facing, and what they can do to survive and prosper, I outline three factors pressuring catalog response rates and profitability, as well as provide several tips to help catalogers maintain profitability in this difficult environment.
Jim Coogan is president of Catalog Marketing Economics, a Santa Fe, N.M.-based consulting firm focused on catalog circulation planning. You can reach him at (505) 986-9902 or jcoogan@earthlink.net.
