Create A Successful Circulation Plan

Circulation planning is the lifeblood of a catalog. A catalog simply can’t exist without it, and a good detailed plan makes for much easier and quicker implementation.

There are two approaches to circulation planning: top-down or bottom-up. We’ll examine the difference. There also can be different goals or objectives. The most common goals are to increase sales, market share, growth and profits. It’s not unusual to have the goal be some combination, such as “increase sales 10 percent while holding profits even with last year as a percent of sales.”

In top-down planning, upper management determines what the desired change will be, compared to the previous year’s performance. If a 10-percent increase in sales is the goal, you have at least two options: You can increase each mailing’s sales by 10 percent across the board; or you can increase some mailings more than 10 percent while decreasing less productive mailings so they average out to an overall 10-percent increase.

In bottom-up planning, the person doing the actual analytical work and creating the circulation plan, usually the marketing or circulation manager, first determines what improvements in sales are possible. This requires a seasoned professional who understands both the individual catalog company’s business and the catalog business as a whole.

A combination of bottom-up and top-down planning works most effectively. To achieve this, upper management informally discusses desired objectives, then the circulation planner works toward them, but is free to determine what is achievable.

Exactly how does the planner plan? For the most part, circulation planning is based on some simple assumptions:

1. Basic measurements—percent response, average order and dollars per book—will be the same for the exact same segment in the same book in the same time frame this year as it was the pervious year. This means your 0-6 month, $100-plus buyers in this year’s Summer One book of 48 pages, mailed the beginning of the third week of May this year will perform the same as the 0-6 month $100-plus buyers in last year’s Summer One book of 48 pages, mailed the beginning of the third week in May.

2. Changes that you make in the merchandising, marketing or creative are quantifiable in terms of a percent change.

3. Outside influences—the economy, direct competition, consumer needs—have not changed.

Of those assumptions, the third can’t be controlled internally. Because nothing ever actually stays the same from one year to the next, you may actually want to use several years’ worth of results to work with, or you may have to be prepared to apply factors of change based on the external changes.

If your results in the previous year deviated considerably from the year just prior to that, and the deviation was not forecast, something in the mix—the merchandise, the offer, outside influences—has changed. You may need to first analyze why this is so. Knowing why any segment deviates from the expectation is vital.

Once you have a basis from which to start, you can then apply factors of change for such things as page counts, density changes, significant changes in merchandise offerings, and so on.

Circulation can’t exist or operate in a vacuum. There is always a relationship with the merchandise and the creative presentation. There are a lot of numbers thrown about as to the importance of each. Some say 40 percent circulation, 40 percent merchandise and 20 percent creative. Others use 50/40/10 or 40/50/10. The truth is that it depends on the specific catalog and the market niche. Each is dependent upon the other. Good circulation for a poorly merchandised catalog won’t get you the desired results. The marketing, merchandising and creative people need to be working together, understanding both the company’s goals and its message.

Most catalogers apply some form of RFM (Recency, Frequency, Monetary Value) evaluation to mail. Some of the larger catalogers use custom-built models almost exclusively. A few combine RFM and custom models. The methods described below can be applied in all cases by just changing the names of the segments and knowing the composition of each.

Circulation planning usually is broken into two planning components: house list and rentals. Let’s start with house list planning.

House List Circulation Planning

Step 1: Take the basic mailing information at the segment level (quantity mailed, orders received, gross sales for the year prior to the one you’re planning) and calculate the performance measurements: percent response, average order and dollars per book. If planning only one season, work from the books mailed in that same season of the prior year. So if you are planning July 2001 to December 2001, use the information from the same books July 2000 to December 2000. If you’re planning from books that aren’t yet 100-percent complete, forecast to completion, and use those numbers.

Step 2: Quantify any changes to your programs, such as page counts, density, promotional offers, etc., in terms of a percentage increase or percentage decrease. Apply these changes to the percentage response and average order as each would affect that measure. Some changes affect either the percent response or the average order while others might affect both.

Step 3: Estimate the number of names you will have in each segment for each mailing, and do the math. Continue to do this for all the data starting with the previous year’s summer book. The challenging part in step one is to estimate the number of names in each segment. To do this, you can make broad assumptions that the name counts have increased or decreased from the counts in the previous year, in the same manner as your business changed for the total last year or during the period from which those names were derived. Or, create a name flow model. I prefer using a name flow model, but to explain how I do it would take another whole article.

Step 4: Using your company’s expense ratios and data, calculate either the revenue-per-catalog break-even figure or the contribution to profit and overhead each segment will achieve. I prefer to use the contribution calculation with a fully-allocated order-taking and fulfillment cost per order.

A word of caution here: Be sure the data you’re working with are statistically reliable. The general standard is plus or minus 5 percent. Not all mailing data are.

If you’re a statistical wizard, calculate statistical reliability from scratch. If you’re not, a good guide is that you need 100 orders to have the data fall within the boundaries of being statistically reliable within 5 percent.

If your data are not statistically reliable, you’d be wise to combine the data into less-detailed segments for planning purposes. I suggest mailing with the most detail you can either handle or want, and join the segments for analysis and planning purposes.

Recency is the strongest predictor of performance; so as long as you keep that in some detail, your planning can be successful.

Continue this process segment by segment, book by book, through the house names mailed. If you’ve had to combine segment detail at this point, and if you plan to break out the detail for mailing purposes, you’ll also need to mark the combined segment in some manner to identify its original contents, as not all of the detail will contain the exact same segments.

Step 5: Review all of the forecasted data for segments that should be eliminated and segments where you probably could mail deeper. I prefer to keep the entire house file in RFM order, so I can see if there are any segments that weren’t mailed last year that might be profitable. You also can rank the segments by revenue per catalog starting with the best or top segments.

Reviewing the detail in a line-by-line manner, I estimate what each of the missing segments would have achieved if mailed under these circumstances using relationships in the fall-off from one recency group or segment to another and add the ones that would have been positive. At the same time, I deduct the segments or parts of segments that shouldn’t have been mailed last year. When I’m subdividing a segment for purposes of mailing, I change the measures and mark what detail I’m planning to mail.

When you’ve completed this step, sort all of these data either by the revenue per catalog or the contribution per catalog. Make sure that you’ve eliminated all of the negative segments.

Cautions

• This process shouldn’t be done for individual books in isolation. The effect of multiple mailings to the same segment needs to be considered before adding that segment to additional mailings as does the removal of a segment from a book that could boost the performance of that same segment in future mailings.

• If your segmentation is a rolling six months or some form thereof, be sure segments you’re eliminating make logical sense from a RFM point of view. This means, don’t eliminate a specific segment in the 13- to 18-month group that you’re mailing in the 19- to 24-month and 25- to 30-month groups. But if your segmentation is set date periods, it could be an acceptable practice.

Rental or Prospecting Circulation Planning

I approach rental planning differently than house list planning. I usually do it for a season at a time rather than as a single book event. There are several steps to this process.

Step 1: Evaluate the rental lists that you’ve mailed to over the past several years by book and by season, and calculate the contribution. To determine list continuations, put all of the list results (revenue per book and percent response) into a pivot table by rental list segment and by book mailed.

Step 2: Extrapolate what those lists would have achieved if mailed in the other same-season books using data obtained from a single list or group of lists consistently across all seasons and all books if you have any. If not, now may be the time to do it for future reference. When you’ve mailed a single list or group of lists consistently across all seasons and all books, you’ll have an excellent gauge by which to judge lists that have been used intermittently or only once, if they were mailed into a different book or time frame.

Step 3: Calculate an “afford” rate. This is a contribution calculation with list costs subtracted, the total of which is then divided by the number of names per 1,000. I frequently use a standard 10,000 quantity-ordered just so I don’t have to carry so much data into a pivot table. The afford rate is the dollar amount you can afford to spend on that list to break even if you use your company’s standard contribution formula. If you already know you can afford to prospect for new customers at some negative dollar figure, include this in the contribution formula, or calculate what it costs per new customer based on the chart you just created.

Knowing if you can afford to prospect for new customers at a loss can be determined by doing a Lifetime Value analysis, (which is the subject of our column next month). If you don’t know what you really can afford to spend to obtain a new customer, either set a number that seems reasonable to you or use breakeven.

Step 4: Depending on the size of the list, allocate the names available to that same book, a different book within the season that could be more profitable, or split the available names among several books.

Step 5: Once the continuations are completed, add in rental test quantities, estimating the results to be equal to the results of the bottom 10 to 25 percent of the continuations, or the average of what you’ve been obtaining in tests during the last few years.

For the final step, combine both the house list work and the rental work by book. Total the quantities, orders, sales and contribution.

This probably is the optimum plan at this point. If what you have is not meeting the basic objectives of your catalog company, change the detail accordingly.

Circulation planning is an analytical process, but don’t forget there’s a lot of art as well as skill to creating an effective plan.

Stephen R. Lett is president of Lett Direct Inc., a catalog consulting firm specializing in circulation planning, forecasting and analysis. He serves on the boards of leading catalog companies and teaches direct marketing at Indiana University. He can be reached at (317) 844-8228 or through the Web site www.lettdirect.com.