Why Catalogs Fail

Note from Jim: This is the second and final in a series of articles from fellow consultant Bob Klapprodt. I’ll be back with another column next week.

Why do catalogs fail? The answer is deceptively simple, while the remedy is not. 

Most catalogs fail because they walk away from the basics; they ignore the elementary economic analyses necessary to properly measure and control the business.

The Other Guy’s Model
In the vast majority of American businesses, fixed costs are high and variable costs are low. For example, in the retail arena, companies can increase sales simply by staying open longer. The variable cost may be merely the salary of a clerk for an extra hour. 

By monitoring the top line, you can fairly accurately estimate the impact on the bottom line. To increase profitability, all you need is enough incremental margin to cover low incremental costs.

Our Model
For catalogs, just the opposite is true: Fixed costs are low and variable costs are high. In the most traditional cases, the way to incremental sales is through mailing more catalogs. Mailing includes increased printing and postage costs, the two highest budget lines of a catalog operation. 

I normally provide my clients a model P&L that shows fixed costs should run around 7 percent of net sales, while mailing costs should be in the 30 percent range. Very few consumer catalogs can fit into this idealized model.

The result is that many catalogs lose sight of this and end up overmailing. Incremental margin is far outstripped by incremental costs — and this can happen in a hurry. The bottom line goes from black to red, and the catalog is in trouble. 

The beauty of direct marketing is that when a catalog is growing, you can monitor the pieces of your growth and add circulation to list segments that are performing above average. Your P&L is in the black, and life is good.

Why, then, is it so difficult to cut circ when times are bad? Why is it so difficult to monitor the impact of incremental costs that are necessary to gain incremental sales? The answer is, It’s not if you stick to the basic economic fundamentals. Go find the marketing analyst sitting in the far corner of your office; he/she has the answer. If you don’t have one of these analysts, you’re probably already in trouble and don’t know it … yet.

When times are bad, the normal response is to cut overhead. This is exactly the wrong response. Constantly monitor results at the micro level, understand when incremental costs exceed incremental margin, then react by re-evaluating your circ. Cut it when you have to. Leave your overhead alone unless you’re going out of business.

It’s All in the Analysis
The first thing I do when taking on a new client is I go back through two to three years of history and look for instances when incremental costs are too high to support the incremental margin. I’m constantly amazed by the number of times this happens. This is a very sensitive analysis; it doesn’t take much to turn the numbers red.

If you understand response curves and know how to accurately forecast your results, you don’t have to wait for a mailing response to be complete before you undertake this analysis. I’m a spreadsheet geek, so I build this measurement into all my analyses and can tell early on when things are headed south — and by how much.

How to Measure, What to Measure
If you’re a catalog owner, do the analysis. Do it every week. Constantly measure your incremental sales, and compare them to your incremental costs. And don’t forget the cost of taking and shipping an order; this can make a big difference in the results. Your bottom line will thank you.

4 thoughts on “Why Catalogs Fail

  1. Les Greenspan says:

    I worked with a very smart buyer who always said that when she bought from a catalog she always looked for the less expensive item that would bring her sale up to the amount that justified shipping and handling. If at $50.00 you pay X for s&p and your order is $45.00 she’d look for the $5.00 item that would bring her to the $50.00 and thus would have no s&p attached. Catalogers, I feel, don’t provide those low end items thus losing that smaller extra sale.It’s not rocket science, give the customer the where with all to justify s&p. It is where the profits come from..

  2. morlee griswold says:

    in your example above, what do you consider fixed costs that should account for 7% of the total? Creative? Management salaries? Corporate OH? That seems like a decision for the investment model not a circulation component.

    • Jim Gilbert says:

      Morlee, this response is from Bob Klapprodt, the author of this post…

      “Fixed costs include salaried management, rent and utilities. Catalog creative costs, while fixed, should be included in the variable cost of producing and mailing catalogs for the purposes on analyzing the campaign. The percentages quoted assume an external creative source. If a firm uses an in-house creative function, then these become fixed costs, part of overhead and the percentages need to be adjusted.

      For start-ups, creative costs are high and will distort the P&L. I always evaluate catalog campaigns using roll-out cost assumptions which will give a truer picture of the catalog results.”

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