Making a Plan: How to Develop Three-year Projections

It’s only a matter of time before your CFO figures out that you have more influence over his financial plan than he does. But when that moment arrives, your CFO will ask you for a plan that projects sales for the next three years or so.

Smart catalog companies handle financial planning as a partnership between the marketing and financial staffs. Mailing is your key revenue-generating activity. Mail quantity, frequency, response rate and average order value (AOV) are the essential numbers for projecting sales. Consider each factor:
◆ Your mail quantity determines marketing expense;
◆ Your sales level helps project the company’s cost of goods; and
◆ Your number of orders helps project your variable fulfillment costs.

Once you tally up the balance sheet, you’ll find that mail quantity drives more than 70 percent of expenses for many B-to-B catalogers.

If you already develop an annual contact strategy that outlines mail quantities by both house and prospect quantities, you’re ahead of the game. Take your strategy and run top-line projections for your housefile and prospecting quantities. When you use accurate historic metrics for response and AOV, you have a solid projection of your orders and sales for your first year.

Projecting Housefile Growth
Your order quantity from this year’s prospecting is a good start for projecting the number of new customers for next year. Add your historic numbers from reactivation, search engine marketing, pay-per-click advertising and other sources, and be sure to include attrition.

But what happens to the housefile for your lower RFM segments?

Each of these segments has a growth rate — positive or negative. By comparing the counts of each segment over the previous year or two, you can estimate this growth percentage and project a reasonable count for each segment. To simplify this process, many marketers use blended counts, such as the 12-month file, 13-24-month file and so on. On a spreadsheet, try the following:

1. Add in each segment’s response rate to your AOV and the number of times you expect to mail it. If seasonality plays a role in your response rates, you may have to run two, three or more sets of parallel numbers. With these figures, you have a first pass at your sales and orders from your housefile.

2. Based on the formulae and projections you’ve just created, repeat the process to develop a plan for the next two years. This spreadsheet is your template for your three-year plan.

If you calculate your projections to flow from cell to cell in your spreadsheet, you’ll see that your housefile grows with more prospecting and declines with less.

Fill That Bucket
3. Any cataloger’s housefile essentially is a leaky bucket. Regardless of your best efforts, some customers will migrate down the recency scale into reactivation and finally into segments that aren’t profitable to mail. If you never prospect, your file likely would shrink to a fraction of its current size. To grow a company, fill the top of the bucket with names faster than they leak out of the bottom. This is why prospecting is essential.

4. Based on your successful prospecting, calculate your known prospect universe count. This number indicates the total number of proven prospects available to you. Multiply each list count by the number of times you expect to mail it every year to calculate the number of prospect pieces from continuations.

Keep in mind that it’s difficult to know what kind of growth or decline your prospecting continuation counts will see in the future. But the history of these files will give you an indication of this. If you see steadily growing counts, project growth based on that percentage. If you see a decline, you’ll want to take that trend into account. Once you enter your continuation count into your spreadsheet, you have a reasonable financial projection of what’s possible based on known factors.

Opportunity for Faster Growth
5. Compare your projections to your company goal. If the numbers far exceed your target, it’s possible you have an opportunity to grow faster than your current trajectory. Of course, this growth likely will require an investment greater than the one you’re currently making. Bracketing your plan into conservative, moderate and aggressive versions is a helpful way to see the potential risks and rewards for different tactics.

6. If your projections aren’t meeting targets, rethink one or more aspects of your company’s strategy through a process called “gap analysis.” That’s taking the gap between your projections and your target, then analyzing and determining how to close it. B-to-B mailers often don’t mail key housefile segments often enough. So test your current contact strategy to see if you’re maximizing those contacts. It’s also possible to be too conservative on prospecting by not testing enough new lists.

7. On the other hand, the company goal may be unrealistic based on the size of your marketing niche. If this is the case, consider opening new markets for existing products, launching a new catalog or possibly even making a corporate acquisition.

Above all, resist the urge to increase AOVs or response based on the need to get your financial planning finished.

Proof Through Testing
You can improve response with better lists, offers, creative and product. But increasing your projections without proof from in-the-mail tests can end in disappointment. Use your known metrics and stick by them.

Most mailers need to complete their financial plan about three months before their fiscal year. The logistics of ordering paper for your first mailing often determines the due date for your financial plan. Consult with your printer for the last date of change for your first print quantity.

8. Use the same scheduling process for your financial planning as you would for production and marketing. Work backwards from your due date, giving enough time for additional list research and running scenarios. Usually two or three drafts are sufficient to complete your plan.

By beginning this process, you take the initiative to plan both your success and your company’s.

George Hague is a senior marketing strategist at J. Schmid & Assoc., a full-service catalog consulting agency in Mission, Kan. Reach him at (913) 236-8988 or georgeh@jschmid.com.