How to Determine Your Catalog’s Break-even Point

To prospect for new buyers cost effectively, a catalog company needs to know its break-even point (BEP). I like to express breakeven on a per-catalog-mailed basis—that is, how much gross (or net) revenue must you generate per catalog mailed to hit your desired break-even target?

This becomes your stake in the ground. All outside lists and housefile segments should be evaluated and measured against this break-even criteria.

Two BEPs

Two BEPs can be used:
*an incremental (sometimes called variable) breakeven, and
*a fully absorbed BEP.

Mailings to prospects should be evaluated using an incremental BEP analysis. The fully absorbed BEP can be used to determine the effectiveness of mailings to your housefile. The difference between these two is that the incremental or variable breakeven doesn’t include fixed overhead expenses in the calculation, while the fully absorbed break-even calculation does.

Why are two BEPs needed? Can your initial mailings to prospects reach the variable BEP? What should be included in your calculation?

Most catalogers can’t prospect above breakeven on the initial mailing to outside names. Rather, profitability comes in time from repeat business—that is, the customer’s lifetime value. For this reason, it’s important to use two different BEPs to evaluate mailings to prospects versus mailings to your housefile.

All mailings, regardless of whom they go to, can’t be considered incremental. It’s the housefile—the list of your proven

customers—that needs to cover your overhead expenses. Again, prospects can’t be expected to cover overhead expenses, but these expenses are real and need to be absorbed somehow. This is why start-up catalogs see red ink. They don’t have a proven customer list to pay the rent, light bill, salaries, etc. It takes a few years of prospecting at a bottom-line loss to gather enough proven customers on the housefile to absorb overhead expenses.

The following calculation will help determine your incremental BEP:
1.Take your net sales and subtract cost of goods sold
2. Subtract direct selling expenses.
3. Subtrat variable order-processing costs.

The resulting number is your BEP.

A fully-absorbed BEP is calculated the same way as the incremental BEP, with one significant exception: All fixed overhead expenses should also be included as part of your total costs. Our focus this month is on the value of the incremental BEP. We’ll also look at the line-item expenses to be included in your costs.

In a Perfect World

The desired goal is to prospect above the incremental BEP. By doing this, the gross profit dollars generated from your prospect mailings would equal (or exceed) the amount spent on mailings (including your variable order-

processing costs) to prospects. Note: Few catalogs can mail to prospects above the incremental BEP. While some lists will perform above the incremental BEP, it’s unlikely your overall mailing results will be greater than this.

That means it costs you nothing out-of-pocket to acquire a new buyer, which is highly unlikely. The cost of printing and mailing catalogs today, combined with lower industry response rates overall, makes it difficult to prospect above breakeven and still grow your business.

Limiting the amount of prospecting you do to those outside lists that are greater than the incremental BEP will obviously limit your growth. The lists that perform at or above the incremental BEP will be few. Typically, these are the lists with limited universes available for rollout or continuation. Again, an investment is required to grow your housefile.

Too much prospecting will result in a bottom-line loss on your income statement. Limiting the amount of prospecting you do isn’t good either, as it may stifle your growth. Maintaining the proper balance between mailings both to current customers and prospects is key to good circulation planning. The size and performance of your housefile and knowing how long it takes to recover your investment from acquiring a new buyer will help you know how much prospecting you can afford to do.

For every mailing campaign, I like to prepare a pro forma contribution statement. This is not an income statement, because overhead expenses haven’t been included. This report has two purposes. The first is to determine the revenue per catalog needed to achieve breakeven. Secondly, this report is used to determine the amount of contribution dollars any given mailing campaign will generate toward profit and overhead at 100-percent complete.

Consider a fictitious pro forma contribution statement for a company we’ll call the Acme Catalog Co. This example is based on a 64-page gift catalog business with an average order size of $62. If we want to print a total of 1,357,104 catalogs (per our bottom-up circulation plan), here’s what we need to know to calculate the incremental BEP:

* direct selling expenses—cost per catalog of 58.5 cents as shown;
* returns and allowances ratio—shown at 6 percent of net sales;
* cost of goods ratio—shown as 45 percent of net sales;
* variable cost to process an order—shown at $5 per order, or 8.55 percent, of net sales.

Based on quotes we’ve received in our example, we know it’ll cost $793,814 to print the desired number of catalogs. When we divide this number by the gross-margin percentage less the variable order-

processing cost ratio, we get the net-sales figure we need to achieve breakeven. Our formula looks like this:

Direct selling expenses/(Gross margin percentage minus variable order-processing ratio) = Net sales.

Next, we determine our returns and allowance figure by multiplying net sales by our returns ratio of 6 percent in our example. This gives the gross revenue needed to achieve breakeven.

The Acme Catalog Co. must generate net sales of $1.26 per catalog printed and mailed to break even. On a gross-revenue basis, Acme needs $1.33 per book.

Our circulation plan shows that we can expect this mailing campaign to generate $2,795,635 in net sales, which amounts to $2.06 per catalog. Our direct selling expenses remain the same at $793,814, as does our cost-of-goods and returns-and-allowances ratios. This mailing campaign is forecast to produce a $504,804, or 18.06 percent, contribution to profit and overhead.

Will the Mailing Be Profitable?

Will this mailing to customers and prospects be profitable? Yes, as long as Acme’s overhead expenses don’t exceed the amount of contribution this mailing is expected to generate. When we consider the contribution expected from list-rental income and the net gain from shipping and handling revenue, The Acme Catalog Co. is expected to show a healthy bottom line.

Behind any pro forma contribution statement is a detailed and comprehensive catalog-circulation plan. We don’t start with the pro forma; rather, we end with it. Before beginning any mailing campaign, you must know your BEP. Knowing how much revenue per catalog you need to achieve breakeven is critical to your success. Not knowing this is like being lost at sea.

It’s imperative to prepare a bottom-up forecast that determines your catalog’s expected sales against your incremental breakeven. You may need to adjust your circulation numbers to maximize your contribution to profit and overhead. Recognize that the more prospecting you do, the less contribution you’ll see. It’s also not advisable to under-prospect.

Squeezing every dollar of contribution you can from your mailing will reduce the number of buyers you add to your file. Such a decision would represent short-term thinking that can hurt your business in the long run.

Remember, maintaining the proper balance between mailings to your housefile and mailings to prospects is the right strategy for good circulation planning.

Stephen R. Lett is president of Lett Direct, a catalog consulting firm specializing in marketing, circulation planning, forecasting and analysis. He can be reached at (317) 844-8228 or by e-mail at slett@lettdirect.com.