Give peace a chance

Jan 01, 1999 10:30 PM  By

Some of the ugliest meetings I’ve ever attended have included managers from the retail promotions and the catalog circulation departments. They’re like cats and dogs. Oil and vinegar. Politicians and the truth. They just don’t mix well. In battles between catalog and retail, the bipolarity of their objectives creates a challenge-and a dilemma. Catalog circulation managers are paid to create mailing plans that maximize catalog profitability within the framework of specific marketing objectives. When results exceed expectations, circulation managers see accolades, bonuses, and promotions. When performance falls short of ex-pectations, their lives are nothing less than miserable.

Enter the corporate decision to employ retail as part of the growth strategy. As the stores open, catalog revenue and efficiencies generally decline as mailings drive business into the stores. Catalog profitability (the difference between sales per book and in-the-mail cost per book) declines. Circulation managers cry, “We’ve got to stop mailing catalogs into the retail areas-it’s killing profitability.”

Now it gets ugly. The retail division head, whose management is compensated largely based on increases in same-store sales, charges in, screaming “Don’t even think about cutting catalog circulation around my stores!”

Top management knows the catalogs are driving retail, and also that customers should be able to shop from all channels. Who cares where the dollars come from? The challenge is determining which division should pay for the catalog costs. But how?

There is, in fact, an equitable way of allocating the charges. The key is to define the catalog’s role in the emerging catalog/retail entity and to isolate its effect on retail volume.

To do so, you need to measure the effect and real costs of mailing catalogs into areas also served by stores, and charge the retail division the difference between catalog gross margin contribution and variable cost breakeven. If the costs are justified, retail should fund catalog mailings into retail zones.

To measure the incremental retail business attributable to the catalog, you need to devise a controlled test that isolates the single variable of catalog mailings.

In a select group of at least six stores, flag half of the retail and catalog customers on your files who are intended for catalog delivery with specific key codes. Mail these customers on their usual schedule over the test period.

Then take an identical cell of catalog and retail customers, and suppress these names from all catalog mailings over the test period. The test period should last at least three months.

If you are capturing retail customer names and addresses, you can easily measure the retail revenue generated by customers in each cell group-those receiving catalogs and those suppressed-at the end of the test period. This isolates the purchase differences between the two groups. In theory, the only difference between the groups is that one cell received catalogs and the other did not. As a result, any incremental retail sales brought in by the groups could be attributed only to the presence of the catalog, or lack thereof.

If your stores are not capturing customer names and addresses, you can apply a reverse credit card append to the entire retail file during the test period and match the names against the test and control panels. This won’t capture all your customers, since many pay by check or cash, and some banks do not participate in the reverse credit card append process, but the loss of names should be equal and random between the two groups.

Now you must determine the net incremental profits generated by the catalog into the retail areas and deduct any net costs from the catalog mailings in order to define an appropriate charge to the retail division. This will leave the retail side empowered to make an informed decision as to whether catalog distribution is a viable and efficient store traffic builder.

Here’s a test scenario. Each cell contains 10,000 names; sales per book in the retail areas are $0.50, variable costs per catalog are $0.60, gross margin is 50%, and the book is mailed two times over the test period. (See chart above.)As you can see from the chart, it is clearly in the best interest of the enterprise to mail into retail areas. After all costs are accounted for, the company gained $13,000 gross margin dollars, or $0.65 per catalog.

The catalog group, however, “lost” $0.35 per book distributed into the retail areas. But because every catalog distributed into the retail zones is generating $0.65 in net incremental gross margin, the retail division can easily afford to subsidize that amount out of its promotional budget.

The bottom line is that you have ways of developing circulation plans around stores that serve all masters. No more philosophical arguments about how to mail in retail zones. No more vague assumptions concerning the allocation of retail promotional dollars for catalog mailings. It all becomes clear. At last, peace is within your grasp.