Contribution analysis is one of the foundations for many of the other types of analyses (list response, customer lifetime value, and square-inch analysis, to name just a few) that successful catalogers use to better understand how to profitably grow their businesses.
One of the first steps in a contribution analysis is to combine information from your profit and loss statement with the end-of-season key code report you run from your mail order processing system. The number you need to derive from your P&L is what is commonly called the contribution margin (contribution to overhead or fixed operating expenses and profit).
Contribution is simply:
Sales – (cost of goods sold + variable operating expenses + marketing expenses).
The formula to calculate your contribution margin is:
Sales x ((cost of goods % of sales + variable operating expense % of sales) – marketing expenses)
The idea is pretty simple: Calculate the profit contribution of each marketing effort you are tracking by key code. If the contribution number is positive, you made money mailing to that list (or whatever marketing effort you are analyzing). If the number is negative, you lost money on that marketing effort. I believe the essence of smart circulation management lies in the interpretation of each marketing effort’s contribution number.
Interpreting the data
- For each house file segment, compare the contribution per piece mailed to the cost per piece mailed. Then consider testing the following ideas at the individual segment level:
- If the contribution to marketing cost is significantly above your minimum return-on-investment requirements, mail more often to that list segment.
- If the number is at or near your lowest acceptable ROI, maintain your current contact frequency.
- If the number is below your ROI target or the contribution number is negative, there are several things you can do to improve results:
- Cut back on the number of mailings you send to that segment.
- Further refine your segmentation scheme. If you are using only last purchase date to segment buyers, consider adding other variables such as number of orders, life-to-date sales, or ordering channel to help cherry-pick the best names to mail to. .
- Use discounts and other special offers to improve response from poor-performing segments. .
- If your quantities are large enough, consider using a cooperative database to help identify buyers in your marginal house file segments who are actively buying from other catalogers.
- Finally, compare the cost of mailing to unprofitable house file names against the cost of rental lists. Run the numbers. You might be better off spending time and money on reactivation efforts instead of going after brand-new names.
Note: Be sure to compare the “downstream” revenue and profits from reactivated vs. new buyers before making major changes to your prospecting plans.
Tony Cox is founder of Richardson, TX-based catalog consultancy Catalog Solutions.