Postage Increase Brings a New Prospecting Breakeven

Jul 02, 2007 1:45 PM  By

The fallout from the postal rate hike is now rippling through catalog circulation plans. The higher postage means that the breakeven on prospecting for new customers has increased, and cataloger’s proven universes of profitable prospecting names have decreased significantly.

With the postage increase averaging $.10/catalog, a business with 50% merchandise margin is facing an increase in their prospecting breakeven of $.20/catalog in sales. If a cataloger had a breakeven of $.90/book, its breakeven in sales per catalog just increased to $1.10/book. What does this mean when prospecting for new customers? All those prospecting names that historically responded between $.90/catalog and $1.10/catalog just went from profitable to unprofitable. Since most catalogers have the basic business rule of only prospecting above breakeven, that circulation that became unprofitable will be stripped out of a mailer’s future circulation plans.

Why the delay between the announcement of the postage increase and catalogers tightening up their circulation plans? For some, the huge increase only became tangible when they had to write that first postage check. Catalogers sorted through their options to buffer the postage increase (cut paper weight and trim size, look for better comail and mail-pool opportunities, go with stronger list hygiene, hope for a temporary rollback, etc.) and realized these options weren’t an answer to the immediate bottom line profit hit.

If you mail prospecting circulation below breakeven, your bottom line suffers. If your net profit was 3% and your catalog cost was 20% of sales, and postage makes up 35% of your catalog cost (or 6% of sales), your postage going up 37% means your net just dropped from 3% to less than 1%. Many catalogers are looking from projecting a profit to projecting a loss based on the postage increase; for most mailers it represents a 2% to 5% decline in their net profit percentage.

Calculate the impact on profitability quickly:

  1. Catalog cost as a percentage of sales (includes postage, printing, paper, lists, merge and creative costs
  2. Calculate postage cost as a percentage of your catalog cost and as a percentage of sales
  3. Estimate the postage increase, assuming a 37% increase in postage cost
  4. Determine the effect on your bottom line

The formula for calculating the decrease in net income is: Catalog cost as a % of sales x postage as % of catalog cost x postage increase = % decrease in net income. The calculation of your net income after the potage increase is: Your old net income % of sales minus the decrease in net income = Your new net income after the postage increase – if you maintain the same circulation plan.

So bottom line – and I really do mean bottom line – catalog merchants must cut out marginal prospecting circulation. Catalogers need to identify the portion of its prospecting circulation that’s gone from profitable to unprofitable and stop mailing those names.

Jim Coogan is president of Santa Fe, NM-based consultancy Catalog Marketing Economics.