Catalog Analysis: Ouch! Viewing a Hit to the Bottom Line

It’s a fact that most catalogers are continually striving to improve profitability. And with today’s ever-increasing costs, it behooves us all to understand how catalog creative expenses — both the fixed cost of creating the promotion, and the variable cost of printing and mailing the catalog — can affect a company’s financials. Two expenses figure prominently in determining a cataloger’s finances: the cost of goods, and advertising and promotion. Let’s discuss how controlling both fixed and variable creative expenses can improve a catalog’s fiscal health.

The chart “Breakeven Analysis by Order” (at right) looks at two breakeven observations with a $75 and $100 average order value (AOV) for a hypothetical catalog. Looking at column A, this marketer has a solid cost of goods (40%), and its cost in the mail for its 36-page catalog is well controlled at $0.50 per book for printing, paper, postage, and mailing. The variable breakeven is quite competitive at $1.04 (for a $75 AOV) and less than $1.00 ($0.98) for the $100 AOV.

Now comes an increase in postage and paper, which drives up the variable cost in the mail by 10%, taking the in-mail cost to $0.55 per catalog. What happens to the breakeven? In column B, the $75 AOV’s breakeven goes up to $1.15 sales per catalog mailed. For the $100 AOV, it increases to $1.08 sales per catalog.

While this doesn’t sound like much, every part of the marketing program has been hurt by the cost increase. Look at the bottom line of the breakeven. It shows that the 20% breakeven, which allocates an additional 10% for overhead (G&A) expenses and 10% for profit, has increased from $1.78 to $1.96 sales per catalog mailed for the $75 AOV and from $1.61 to $1.77 sales per catalog mailed for the $100 AOV.

Look at another way, to maintain a fully loaded breakeven at $1.78, the catalog will need to increase its AOV from $75 to $100. Such a dramatic hike in AOV is highly unlikely to happen!

We can conclude that unless remedial steps are taken to reduce the variable cost of the catalog in the mail, both front-end and back-end marketing will suffer. The cataloger cannot prospect as widely as previously, and even customer mailings will be less profitable.

Creative costs and the catalog financial model

Let’s look at another financial observation — this time a typical catalog financial model.

The “Catalog Financial Model” chart directly to the right looks a hypothetical catalog’s financials and profit-and-loss statement (P&L) for a promotion campaign. The left side of the chart shows the financial model advertising cost at 27% of sales; the contribution to overhead (G&A) and profit is 20%.

This particular campaign generated $2 million in gross sales and $1.78 million in net sales. This is a solid promotion campaign — excellent top line and controlled costs to produce a planned 20% contribution.

Look what happens when higher advertising costs (such as increased postage or printing and paper expenses) go into effect. If we don’t control the cost of the catalog in the mail or find savings in printing and postage, the bottom line is going to wither proportionately. In the example on the right side of the chart, advertising goes up and profit contribution goes down by $89,000. This amounts to a 25% reduction in the bottom line from the original financial model. Significant? Absolutely!

These examples show us that any increase in costs — whether they are variable expenses such as postage, printing, or paper, or fixed creative costs such as design, photography, or color separations — will directly reduce profitability. As these examples show, even a seemingly small increase in costs can have huge ramifications.


Jack Schmid is president of J. Schmid & Associates, a Shawnee Mission, KS-based direct marketing and catalog agency and consulting firm.

BREAKEVEN ANALYSIS BY ORDER

The impact of a 10% postage and paper increase

A
Results before 10% increase
B
Results after 10% increase
AVERAGE ORDER VALUE (AOV) $75.00 $100.00 $75.00 $100.00
Cancellations = 1% $0.75 $1.00 $0.75 $1.00
Returns = 10% $7.50 $10.00 $7.50 $10.00
NET SALES PER ORDER $66.75 $89.00 $66.75 $89.00
Cost of goods = 40% $26.70 $35.60 $26.70 $35.60
Fulfillment cost per order = $15 $15.00 $15.00 $15.00 $15.00
+ Fulfillment income per order = $7 $7.00 $7.00 $7.00 $7.00
Net fulfillment cost per order $8.00 $8.00 $8.00 $8.00
CONTRIBUTION (before promotion, overhead and profit)
Contribution @ 0% (variable) $32.05 $45.40 $32.05 $45.40
Contribution @ 20% (variable) $18.70 $27.60 $18.70 $27.60
COST PER PROMOTION – IN MAIL $0.50 $0.50 $0.55 $0.55
CONCLUSION
Breakeven = cost per promotion-in mail contribution
BREAKEVEN = 0% (Variable level) 1.56% 1.10% 1.72% 1.21%
Sales per catalog $1.04 $0.98 $1.15 $1.08
BREAKEVEN = 20% (Variable+ overhead + profit level) 2.67% 1.81% 2.94% 1.99%
Sales per catalog $1.78 $1.61 $1.96 $1.77

CATALOG FINANCIAL MODEL

Catalog financial model $000 % Catalog financial model with 5% advertising increase $000 %
Gross sales 106% $2,000 106% $2,000
Cancellations 1% $20 1% $20
Returns 10% $200 10% $200
Net sales 100% $1,780 100.0% 100% $1,780 100.0%
Cost of goods 40% $712 40.0% 40% $712 40.0%
Gross margin 60% 1,068 60.0% 60% 1,068 60.0%
Fulfillment expense 20% $356 20.0% 20% $356 20.0%
+ Fulfillment income 7% $125 7% $125
Net fulfillment cost 13% $231 13.0% 13% $231 13.0%
Advertising cost 27% $481 27.0% 32% $570 32.0%
Contribution to overhead and profit 20% $356 20.0% 15% $267 15.0%
Overhead (G&A) 10% $178 10.0% 10% $178 10.0%
Net profit contribution 10% $178 10.0% 5% $89 5.0%

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