Key Performance Indicators: 10 to Track.

What key performance indicators (KPIs) are critical to a catalog business? What can you learn from tracking them? And how can you make changes and implement improvements based on your results? In this article you’ll learn about 10 KPIs that are critical to any catalog business.

KPIs vary by catalog, as each has specific objectives and needs. You may have a KPI of, for example, the gross margin ratio, contribution ratio or net income — whichever best reflect your company’s goals.

When selecting KPIs, choose ones that are quantifiable and therefore can be tracked. For example, a KPI to improve customer service can’t be accurately measured. Pass on the “so what” KPIs that might be measurable but little, if any, corrective action can be taken from them. And don’t try to track too many, either. It isn’t about the number of KPIs you can identify to impress your boss; it’s about the quality of the KPIs critical to your business.

Let’s look at some KPIs common to catalog businesses. I’ll suggest ways to track them so you know if you’re on target or if you must take corrective action. For purposes of this article, I’ll assume you have an annual budget in place and you want to identify ways to measure and track against predetermined objectives. You’ll want to track these KPIs against budget and against the previous year. Please note, however, that tracking against your annual budget often is more important than comparing to last year’s results, because the budget defines where you must be to meet financial objectives.

1. Gross demand. Dollars and orders obviously are an important KPI to measure daily. Measure this against your budget rather than your prior year due to changes you may have made in your plans (e.g., circulation, merchandising).

2. Twelve-month buyer file count. Typically a catalog business will grow by the same percentage as its 12-month housefile increases. For example, if your 12-month buyer file increases by 15 percent, your revenue should increase by about the same percentage. (The reverse of this also is true.) When you focus on growing your 12-month housefile, your business also should grow. The 12-month buyer counts must be tracked on a monthly and annual basis.

Another tip: Compare “like” months. For example, how many 12-month buyers do you have on the file at the end of any given month compared with the same month the previous year? June 2005 should be compared to June 2004. You also should establish a 12-month-buyer count goal for the current year. This goal should tie in with your order/revenue goal. A typical report for tracking 12-month-buyer counts can be found in the chart “Housefile Update Comparison.”

3. Gross margin ratio. Knowing how the gross margin ratio compares to plan also is important to the marketing and circulation folks, because it’s used to determine the break-even point (BEP). If the margin increases to more than the planned ratio, it’ll lower the BEP. But if the ratio is less than plan, the BEP will be higher.

If you don’t make the necessary adjustment, you could continue to mail unprofitable names. The chart “Break-even Point” (below) shows how the BEP can and will be affected by varying the gross margin ratio. In the chart, the original gross margin ratio of 59.5 percent yielded an incremental BEP of $1.08 per catalog mailed. With a decrease in the gross margin ratio to 55 percent, the break-even point increased to $1.17 per book.

4. Customer returns ratio. As with the gross margin ratio, the BEP also is affected by any change in the customer returns ratio, an important KPI to monitor monthly. A return rate for a typical gift catalog is 6 percent. Any variance in either direction from your normal ratio will affect your BEP.

5. Average order value (AOV). Any change in your AOV will result in more or less orders affecting operations. Your AOV must be tracked so adjustments to the weekly order line can be made since staffing and labor dollars are affected.

6. Selling expense to sales ratio, critical to your income statement. The zone for consumer selling expense to sales ratios is in the 25 to 30 percent range. For a business-to-business cataloger, the range is more like 18 to 20 percent of net revenue.

As you increase circulation to less productive names (e.g., prospects, older housefile segments), this ratio will increase. If you over-circulate catalogs, this ratio will increase, and your profits will decrease. Note: This is one way catalog companies get into financial trouble.

7. Number of repeat buyers. These are the customers who make your catalog profitable. Focus your time and marketing dollars testing ways to improve this key ratio. If you can benchmark your current rate of repeat buyers and focus on turning one-time buyers into multibuyers, you’ll see a significant gain in results. Profitability will increase.

8. Revenue per catalog (RPC) mailed, a quantifiable figure that easily can be measured weekly, monthly or yearly. RPC can be an overall measurement that includes the results of all mailings. It also can be measured and tracked per mailing (suggested). Since a great deal of business comes in via the Web, Internet attribution must be included as part of your KPI — both target and actual.

To track RPC, generate a percent complete report weekly, like the one you’ll see in the chart “Percent Complete Report”. Note the RPC by mailing at 100 percent. This figure automatically is adjusted every week depending on the percent complete for the individual drops. You easily can see how the expected RPC at 100 percent compares to the budget and the previous year.

Tracking your RPC is critical to knowing how your mailings are performing. As I’ve noted previously, tracking against your budget is more important than tracking against your prior year, because your RPC likely will go down as you increase circulation from year to year. What’s more, Internet attrition will cause your RPC to decline against the prior year.

9. Call-response time, tracked daily. The standard: 80 percent of all calls should be answered within 20 seconds. The remaining 20 percent of incoming calls should be answered within 1.5 minutes.

The average speed of answer (ASA) also is important; the norm is around 30 seconds. If your ASA is 30 seconds, your call-abandonment rate will be about 5 percent. Although you may have on-hold music and an announcement of daily specials or your commitment to customer service, no one likes being put on hold before placing an order. If you often answer calls in five or more rings and/or have customers wait more than 60 seconds, use an overflow call center service.

10. In-stock position/ backorder rate. Both are critical to customer satisfaction. If 90 percent or more of your items are in stock before your catalogs hit in-home, you’ll be in good shape when the orders start coming in. Then your merchandising team can concentrate on chasing the winners vs. trying to fulfill initial orders. What’s more, your customer satisfaction rate will increase and so will your customer repeat factor.

Conclusion

The 10 KPIs I’ve selected are for example only. Select the ones critical to your particular business, goals and objectives. Don’t try to pick too many, and be sure the KPIs you select can be measured.

Stephen R. Lett is president of Lett Direct, a catalog consulting firm specializing in circulation planning, forecasting and analysis since 1995. He can be reached at (302) 537-0375 or by e-mail via his Web site: www.lettdirect.com.