Catalogers’ Profits Are Being Squeezed, Part 2 of 2

In the second installment of this two-part series that takes a look at the financial and industry pressures catalogers are under, and what they can do to survive and prosper, this week I outline three factors pressuring catalog response rates and profitability. I’ll also provide a few tips to help you maintain profitability in this difficult environment.

(For part 1, click here.)

The catalog business is coping with the following factors, which are putting pressure on circulation response rates and profitability:

* An economic downturn that has slowed discretionary spending.

* The cost squeeze caused by major increases in postage and paper. These costs aren’t being offset by catalogers when they cut circ because the break-even hurdle of prospecting is too high.

* Web buyers are flooding into catalogers’ buyer files, and Web buyers typically are less responsive to frequent follow-up catalogs.

While catalogers are confronted with the challenges of cutting circ and sheltering profitability during a downturn, the industry doesn’t seem to have reacted to the hidden challenges of higher prospecting break-even costs and the dilution of their housefiles from the influx of Web buyers. Therefore, profits will almost inevitably decay.

Course of Action
What actions can catalogers take to preserve profitability? Try the following two steps.

1. Determine new break-even sales per book. Calculate all costs for printing, paper and postage, and recalculate your breakeven based on these current costs. Don’t mail prospects or housefile segments below breakeven. If you mail below breakeven, your profits will decline.

2. Flag Web buyers, and segment them to avoid mailing those below breakeven. Don’t just react to the economic slowdown by arbitrarily cutting circ. Know and understand which lists can be mailed above breakeven. Plan your circ based on historical results for each list in light of higher break-even costs.

Cut Circ or Segment
To the surprise of no one, many catalogers will report lower profits in 2008. The combined effect of the widely recognized economic slowdown added to the much more hidden and subtle effect of rising costs and the flood of less responsive Web buyers into catalogers’ buyer files means catalogers must cut circ or segment their Web buyers and only mail those buyers performing above breakeven.

If not, short-term profits will suffer as catalogers try to meet their top-line sales targets. It’s a difficult choice to make between top-line sales or bottom-line profits. And as the Abacus study referenced in part 1 showed, circ quantity is holding steady, indicating catalogers who are focused on maintaining top-line sales will see their profits decline.

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.