Contributions to Profit: The 40-40-20 Rule (Extended Web-only Version)

There’s a rule in direct marketing that states: In order to positively impact the success of a direct marketing business, concentrate 40 percent of your efforts on list analysis and selection, 40 percent on offer (merchandise and promotions), and 20 percent on creative development.

As it plays out in many catalog companies, there’s a disproportionate effort placed on the creative process. Obviously, your creative is the vehicle that reaches the consumer, sets the tone for your brand and your company, and drives the selling process. After all, if you have only one chance to make an impression, your creative has to be perfect, right?

In my career, I’ve seen some super-ugly catalogs, direct mail pieces and even Web sites that’ve been cash cows. And, I’ve seen stunningly beautiful creative jobs sink like stones. There are a couple reasons:

1. It doesn’t matter how beautiful your catalog is; it’s only a sales tool. Your catalog has to be your salesperson. And just like any sales process, it has to provide enough information to allow the reader to make a buying decision. It has to be persuasive, answer objections in advance and make an offer that can’t be turned down. It doesn’t have to be pretty; it just has to sell.

2. The top catalog companies know how to brand, but first, they know how to sell. As a philosophy, they see their catalogs as strategic tools to connect customers and prospects with merchandise.

3. Sell cost-effectively. There’s a fine balance between your catalog cost and overall contribution to profits. The more you spend on catalog creative, the harder it is to break even on your mailings.

Many companies see their creative as their calling cards. But the true experts in catalog marketing know that by banking on “good creative” to drive business, you’re putting the cart before the proverbial horse.

I once had a client who hired a new team of managers from the retail side of its business segment. They immediately decided the catalog looked shabby and needed to be significantly upgraded in look and feel. They nearly doubled their catalog costs to upgrade the brand image. That meant they needed twice as much revenue to break even. The catalog’s loyal customers reacted immediately — many did not order. Prospects also stopped ordering. Why?

My guess is that catalog shoppers are smart — they want economy. So when they received the gussied-up catalogs, which also carried slightly higher pricing, they decided that too much of their money was going into the company’s pockets. In essence, they voted down the new branding efforts with their pocketbooks.

The moral of the story: Understand what drives results for your brand. In this case, the old “shabby” catalog was seen as a cost-effective way for customers and prospects to make their purchases. No creative window dressing was going to change that.

In another instance, a client of mine did an A/B split test to see if better paper affected results in a positive way. When we did a postmortem analysis, what we saw was that while response and sales per catalog mailed were slightly up in a few housefile and prospecting segments, the additional cost of the paper wasn’t covered by the increases in sales.

Bottom Line

Eighty percent of your efforts need to be focused on your merchandise offerings, list analysis and selection. While design meetings and photo shoots may be the “sexy” end of the business, the money quietly is made behind the scenes by crunching numbers. This means you should:

• Analyze customer lifetime value and return on investment per customer acquired, both in total and broken out by customer acquisition media (print vs. online, etc.).

• Develop profit- and loss-driven circulation plans that take into account each catalog mailing, and drill down each housefile segment (based on recency, frequency and monetary value analysis) and each rental list.

• Constantly search for new lists and new list segments to test inside as well as outside your business category.

• Develop break-even analysis for mailing by drop. Do so down to the individual list segment level, and then monitor its performance.

• Analyze merchandise performance as it relates to catalog selling space by doing square inch analysis by page, spread, product segment, price point and, of course, item.

• Manage inventory and develop accurate inventory forecasts that allow you to not over- or under-fill your warehouse.

• Conduct frequent vendor reviews and constantly seek to lower cost of goods sold, operations, and customer acquisition and retention costs by negotiating the best possible arrangements.

Once you’ve built your merchandise and list platform, you’re ready to develop a creative execution plan that can speak to your customers and prospects in a meaningful way (meaningful as defined: generate a response).

Jim Gilbert is president of Gilbert Direct Marketing, a catalog and direct marketing consultancy, and professor of direct marketing at Miami International University of Art and Design. He can be reached at (561) 302-1719 or jimdirect@aol.com.