Everyone is talking about how to mail smarter. But no one seems to be talking about something just as important: Reallocating marketing expense from higher ad cost channels to lower ad cost channels as a way of improving ROI.
Ten years ago, most catalogers were very adept at switching between using full catalogs, slim jims, postcards, and direct mail pieces, depending on the performance of housefile segments. It is interesting to see, though, how this best practice isn’t used as seamlessly between print and e-marketing programs.
At most companies, start-up e-marketing programs were given minimal budgets. Because of the silo mentality between the print and Internet marketing groups, the classic reprioritization of spend that drove the DM business for years was never used. Each silo spent its budget with no consideration of the marginal cost or profitability of an order from the other programs.
In today’s environment, effective reallocation of spend across all channels may be the most effective way to mail smarter.
If you look at the way most companies keep score, you’ll see how poor reporting tends to perpetuate the silo mentality, thereby concealing great opportunities. Breaking down the profit and loss statement by channel can tell you if you’re overspending on catalogs, mailing too much at less than profitable contribution levels or under-investing in Web programs.
A great way to mail smarter is to cut back on segments in your catalog selection where the marginal marketing cost of the segment is greater than the marginal marketing cost in any online channel. Those budgeted marketing dollars should be reallocated online, resulting in supercharged demand and contribution growth.
E-commerce programs have wildly different ad costs—from virtually nothing in natural search to what is perceived as a very high cost in paid search. But when you are comparing the marginal costs of these programs to marginal catalog segment cost, they are very reasonable.
The marginal expense in catalogs is more than double that of paid search. So even though paid search is perceived as a high cost program, it is a bargain when you consider what you are paying in marginal catalog segments. A progressive company that really studies its marginal costs will find enormous opportunities. Here are a few ideas to consider:
- Many companies are reluctant to bid for the best terms due to the high cost per order. However if you compare the cost of a paid term to the marginal cost of your worst catalog segments, paid search might start to look like a bargain.
- E-mails have a very low marketing cost—usually a 2% to 4% cost per order. What if you sent an e-mail with a nice promotion to marginal segments or customers you want to reactivate? Even with a 10% discount, the CPO would be much less than marginal catalog segments.
- Companies usually view natural search as free, but of course it isn’t since you need developers or semi-technical staff to manage your site so that your rankings are always improving. Progressive companies are considering reallocating expense from marginal catalog segments to the staff needed to drive natural search.
In companies where resources are constrained, effective reallocation can also supercharge your results with the same use of cash due to the leverage you get from lower marginal cost programs.
If you are spending $1 million in catalog costs at the highest marginal level – let’s say 45% in this example – that will generate $2.2 million in sales. If you can re-channel those same dollars to a lower cost program – say, paid search at a marginal cost of 25% – demand skyrockets to $4 million, an increase of over 80% in demand with the same out-of-pocket expense. If you rigorously study your marginal costs in each channel, the opportunities to spend differently and more profitably should become apparent.
Larry Marmon is a partner with San Rafael, CA-based catalog consultancy Lenser.