Measuring Profitability Through Square-Inch Analysis: An Updated Approach

For catalogers, square-inch analysis serves as your scorecard. It’s a tool that tells you how much profit each item and page delivers. Some square-inch analysis is meticulously tabulated with the exact number of catalog pages each item occupied over the span of several catalogs. Other analyses are more casual, with less attention to the exact space allocation and total cost of the page space devoted to each item. But whether the format’s rigorous or relaxed, the data’s precise or just directional, the underlying purpose of square-inch analysis is simply to tell us whether an item is profitable. After all, why sell items that aren’t profitable?

There are exceptions to the rule against selling items that aren’t profitable. Newer products and items whose sales have been increasing (and will, presumably, soon be profitable) are the biggest exceptions. At times, an entire family of products must be sold together, for example. Each individual item in the group may not be profitable. But when sold together, the entire family is profitable.

Some items are seasonal and barely break even in their offseasons — but are quite profitable in season. Some seasonal catalogs need to sell in the offseason just to cover their overheads and keep their staffs working. But the general rule of cataloging is to use square-inch analysis to determine the profitability of each product and to continually prune the product selection so only profitable products are offered.

Calculating the square-inch profitability of an item is straightforward. Follow the steps provided below.
1. Item
2. Amount of page space for the item (1⁄4-page, 1⁄8-page, etc.)
3. Cost of the catalog page (printing, postage, creative and list cost of the catalog divided by the number of pages)
4. Cost of catalog space devoted to the item
5. Sales
6. Margin percentage
7. Margin
8. Catalog cost
9. Profit or amount available for fixed and overhead costs after subtracting catalog cost and cost of goods sold
10. Profit percentage (profit divided by sales).

So the report format that’s used is as follows:
Page/ Item/ Sales/ Margin percentage/ Margin/ Page allocation/ Page cost/ Profit.

The next step is to group the items into product categories to determine which categories rank highest and lowest in terms of sales and profitability.

How can you translate square-inch analysis into planning the number of pages for your next catalog? Catalogers group their products into categories and rank the categories from most to least profitable. The first decision is whether to keep unprofitable pages. The next decision is whether to increase the number of pages that are profitable. Expanding or contracting the number of pages to fit the profitable merchandise is the shorthand method to set the number of pages for a catalog.

Here’s a summary of a product page:
Product category/ Pages/ Sales/ Profit/ Planned pages.

As for the issues that arise in using square-inch analysis to set the number of pages in your catalog, ask yourself the following questions to help optimize your efforts.

1. Are all the items in the catalog profitable? Are the categories profitable?

2. Does the square-inch analysis tell you to cut pages, add pages or maintain the same page count?

3. Are all sales being included in the square-inch analysis or just sales driven by the catalog? If Web sales are a substantial portion of your business, sales may be overstated when calculating catalog square-inch analysis.

4. The best products should get the best real estate. Are you giving your best real estate to the best-selling categories?

5. Are product categories being ranked by sales or profit?

6. Is there a second tier of products that can be profitable when listed on the Web but don’t meet the threshold to be included in the catalog? Are there items or categories that can be included in the catalog seasonally or less often than every catalog?

Catalogs are a simple business. If the list segments you mail and each item of merchandise you sell are above breakeven, your business should prove profitable. Draw the line at lists and merchandise that aren’t profitable. Setting the number of pages in your catalog involves allocating enough real estate to those profitable products. The number of pages should flow from the amount of space needed to merchandise all the profitable items. The steps are simple:
* choose either a rigorous or relaxed square-inch analysis of product;
* sort your product categories into the number of pages needed for each category; and
* prune the weak categories, and increase the merchandise in your best categories.

The result should be the optimum number of pages. Talk with your printer to find the most economical page configurations that fit your needs. Now you’re ready to set your page count and printing bids.

Jim Coogan is president of Catalog Marketing Economics, a Santa Fe, N.M.-based consulting firm focused on catalog circulation planning. You can reach him at (505) 986-9902 or jcoogan@earthlink.net.