How to Determine Your Catalog’s Financial Objective

Oct 16, 2006 9:17 PM  By

A catalog can have one of several financial objectives: maximum profit, maximum growth, or a blend of growth and profit.

But when circulation managers are asked about their catalogs’ financial objectives, what do they typically say? The three most common answers are “Top management wants both maximum growth and maximum profit,” “The goals are the same as last year,” or “I don’t know.”

Many managers don’t know that financial objective is a choice they make, either consciously or unconsciously, as they do their annual budgeting and planning. Knowing how to decide your catalog’s financial objective is a vital part of a circulation manager’s job.

When defining their financial objective, the first issue most circulation managers address are the rules for prospecting. Most managers follow one of two prospecting guidelines: to prospect by planning for each list segment mailed to perform above breakeven, or to prospect so that the average of all lists mailed is above breakeven. Planning for each list to perform above breakeven is more conservative, while planning for the average of all lists to be above breakeven is more aggressive.

Other prospecting planning issues include:

  • How frequently to prospect
  • Whether to prospect in all seasons or only in the best seasons
  • How often to prospect to the same lists
  • Whether to prospect to all the available Web names
  • How aggressively to mail the older, marginal segments of the house file.
  • How to define “breakeven”
  • What will be the result if you loosen up or tighten up the financial criteria for prospecting.

The second issue is to understand the financial implications if circulation is geared toward generating the maximum profit possible. How much can profit be increased in the short term? What tactics are used to maximize profitability?

  • Do little or no prospecting or only prospect to proven lists that consistently deliver well above breakeven.
  • Do not mail to any house file segments below breakeven.
  • Mail less frequently to marginal house file segments.
  • Send fewer mailings in the less response seasons.
  • Reduce the number of pages and products.
  • Increase the number of contacts with the best house buyer segments at the risk of long-term list fatigue.

Look at the sensitivity of your catalog’s business model. What is the range of profitability you could expect between a maximum profitability strategy and your current strategy? What is the range of growth possible between a maximum growth strategy and a conservative strategy limiting the search for new customers to proven, highly profitable prospecting methods and lists? What are the financial results from your current circulation strategy and tactics?

You should be able to say, for example, that your current strategy will deliver 15% growth and 5% net profit before tax; that the maximum profitability you could achieve next year would be 8% net but that would mean growth would slow from 15% to 3%; and that your maximum growth strategy would yield sales growth of 25% at the expense of cutting profitability to 1%. If you know the sensitivity of your business model, you’ll be able to lead the planning process and get the best outcome, whether it’s maximum sales or maximum profits.

If you’re a start-up you may need to scale the business and get big fast to capture market share and realize the economies of scale necessary to make the business viable.

If you’re a mail order business that’s been climbing the hockey stick of growth, you need to know when you’ll hit the growth plateau. High-growth cycles almost always come to an end, and you’d better plan for it. When you are mailing all the prospects you can as often as you can and your house file as frequently as possible and your merchandise mix is established and mature, your sales are probably going to reach a plateau. Don’t make the classic mistake of trying to continue to grow at the same pace at the expense of your profit margins. Look ahead to slower growth, and look for ways to increase profitability.

If you are preparing to sell the business, you need to show the ability to increase your profits while continuing to grow, even if it’s at a slower pace. Buyers typically will pay the greatest premium for companies that show the ability to increase profits rather than for companies that can demonstrate only the ability to grow sales.

Your job as a circulation manager is to define the financial objectives for your direct marketing business. When top management says it wants both maximum sales and maximum profits, define the alternatives. You can’t achieve maximum growth and maximum profitability simultaneously, so defining the different scenarios and managing top management’s expectations is a big part of your job in the annual planning process.

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