Learn to Prospect Efficiently

It costs money to add new buyers to your housefile. In fact, very few catalogers can prospect at breakeven (which we will define shortly). Therefore, new buyers are added to your housefile at an incremental loss to your bottom line. Prospecting for new buyers must be cost justified based on their lifetime value.

For purposes of definition, it is important to understand the difference between a buyer and a customer. A buyer is someone who has purchased one time only. A customer has made more than one purchase. Obviously, you have to have buyers before you can have customers. While it is important to acquire buyers at the lowest possible cost, it is also important to turn those buyers into customers as soon as possible. Generally, the payback comes when a buyer makes a second purchase.

Step 1—Determine your break-even point. Understanding your break-even point is the first step to knowing how to prospect cost efficiently. There are two different break-even points; incremental and fully absorbed. The incremental break-even point is net sales less cost of goods sold, less direct selling expenses, less variable order processing and fulfillment expenses. A fully absorbed break-even point includes all of the previously mentioned expenses plus all overhead expenses.

The incremental break-even point should be used to evaluate and judge the effectiveness of your prospecting efforts. When prospecting, you are only trying to recover the money you spent out of pocket to acquire new buyers. Obviously, all expenses cannot be incremental in nature. The housefile needs to be large and strong enough to absorb all overhead expenses. In this article, we will focus on the incremental break-even point only as it relates to acquiring new buyers for your file.

A typical pro forma contribution statement appears on page 63. As you can see, this cataloger plans to print a total of 2,164,032, 64-page catalogs, of which 2,061,732 copies will be mailed. The other 102,300 copies will be used to fulfill inquiries and as bounce-backs in out-going orders. These are known as bulk copies.

In order to calculate the incremental break-even point, you need to know the following:

1. Total direct selling expenses (printing, paper, lists, postage, etc.)

2. Gross margin ratio

3. Returns and allowances ratio

4.Variable order processing and fulfillment expense.

As you can see on page 62, the direct selling expenses are estimated to be $1,337,204, or $0.618 per catalog mailed. The gross margin ratio is 53.3 percent, and returns and allowances are 3.5 percent of net sales. The variable order processing and fulfillment expenses are $8.41 per order.

If we spend $1,337,204 on direct selling expenses, gross sales need to be $3,515,116 or $1.62 per catalog mailed to break even. We need to generate 56,242 orders, in our example.

To determine our break-even point, we start by dividing the direct selling expenses plus the variable operating expenses by the gross margin percentage. This gives us our net sales goal.

We then add returns and allowances to the net sales figure to determine the gross sales amount needed to achieve breakeven. Next, we simply divide the gross sales needed by the number of catalogs printed to get our revenue-per-catalog breakeven. Any amount above $1.62 per catalog represents an incremental profit or positive contribution to profit and overhead. Any amount below $1.62 is a loss.

It is going to get even costlier to acquire new buyers due to the fact that your break-even point has and will continue to go up. Let’s assume your incremental break-even point (defined as net sales less cost of goods sold, less direct selling expenses) was $1 per catalog mailed in January of this year. With paper price increases and the proposed postage rate increase in early 2001, your break-even point will increase to $1.12 (or more) within this one-year period. Let’s look at the facts.

On April 1, 2000, no. 5 coated paper increased about $3 cwt. (per hundred weight) or about 7 percent. Since April 1, 1999, no. 5 coated paper has increased about 20 percent from approximately $37 cwt. to $45 cwt. At the same time, no. 3 grade paper prices have gone up about 15 percent since April 1999. This represents a 12-percent cost increase from your printer (assuming paper represents 60 percent of the catalog costs from the printer). Your costs may be increasing even more because it is anticipated that there will be a $3 cwt. paper price increase on Oct. 1, 2000.

Step 2—Know when to prospect. For example, seasonal differences must be taken into consideration. The revenue per catalog mailed peaks during the holiday season for many consumer catalog companies. Therefore, let’s say our results represent 100 percent during the holidays, per the chart below. This chart points out the typical variations you can expect by season when prospecting.

RESULT BY SEASON FOR PROSPECT LISTS

RANGE

FROM TO

Holiday 100% 100%

Fall 85% 90%

Spring 80% 85%

Summer 65% 70%

If we prospect during the summer, our results are going to be 65 percent to 70 percent of what they will be during the holidays. It will cost more to acquire new buyers during the summer season (or spring or fall) than it will during the holiday season. This is especially true considering break-even points tend to be less during the holidays due to economies of scale. More books are being printed during the holidays, therefore the unit cost per book will tend to be less. The lower the unit cost per catalog mailed, the lower the break-even point.

You might conclude from this that you should only prospect during the holiday season. In other words, it is better to go fishing when the fish are biting! While this is true in principle, it is to your advantage to prospect all year. At least the top 20 percent of the outside lists you use during the holidays should be mailed throughout the year. You may also find the lifetime value of a buyer generated during the “off” season better than the lifetime value of a buyer generated during the holidays. The holiday buyer is most likely a gift shopper, whereas a buyer generated during the summer or spring season is probably buying for himself. Don’t be quick to look at only the initial results.

Step 3—Know what to do to get the most out of your prospecting campaigns. There are several different techniques you can use to increase your revenue per catalog. A few suggestions are as follows:

Promotional Offers can be used to increase the revenue per catalog mailed during the slower seasons. During the spring and summer months, test various promotional offers designed to increase the response rate from your prospecting efforts. The four offers I would test are:

1. Free freight (with a minimum order size to qualify).

2. A dollar amount off the order, i.e., “$10 off your order of $99 or more!”

3. A percentage off, i.e., “The more you buy, the more you save!”

4. Free gift with order.

Always set a dollar amount to qualify for the offer and always state an expiration date. This limits your liability and causes consumers to act now.

Outside List Optimization will identify all of the single purchasers (one-time-only buyers) who will be put into a separate group. Within this group, a mailer may elect to mail them all under separate key codes or may choose to eliminate the bottom 10 percent altogether in order to lift response. (Please see “Outside List Optimization … Does It Pay?” in Catalog Success, June 2000).

Cross Member Modeling can also be done. A cross member model is when another member of the Abacus Alliance allows its list to be optimized on a “net name” basis. This, too, can increase your revenue per catalog.

Effective prospecting is strategic—it takes work. Know your break-even point and what you can do to increase your results. Selecting the “right” lists is not enough. Knowing when and how to mail is the secret to prospecting cost efficiently.Stephen R. Lett is president of Lett Direct Inc., a catalog consulting firm specializing in circulation planning, forecasting and analysis. Lett is also on the faculty at Indiana University, where he teaches direct marketing at the MBA level. He can be reached at (317) 844-8228 or by e-mail at slett@lettdirect.com.