With today’s cost structure and lower response rates, it is highly unlikely that you can prospect above the incremental breakeven point. How much you are willing to pay for a new buyer depends on what you can afford to spend and how fast you want to grow. Overspending to acquire a new buyer and trying to grow too fast can lead to financial ruin. On the other hand, not investing in growing your house file can stunt your business.
By incremental breakeven point, we mean all direct costs without overhead expense. The formula is:
— Cost of goods sold
— Direct selling expenses
— Variable order processing costs
Fixed overhead expenses that are in place regardless of how much prospecting you do should not be included in our breakeven formula with regard to buyer acquisition programs. It is the house file that needs to cover all fixed overhead expenses. This is why start-up catalogs struggle; they do not have a house file to leverage. The time of year you prospect affects your economics. For this reason, it is important to prospect with full knowledge and understanding of what it takes to maximize your results. To get the most out of your prospecting, you might want to follow these suggestions:
1. Prospect the heaviest and mail prospect tests in your strongest drops. It is important to test lists and to prospect during your “best” season or period in order to maximize response rates.
2. Prospect when you have the cash flow to do so. But prospect wisely and not beyond your means.
3. Prospect when you have a new product offer. It is always best to expose prospects to a “new” merchandising offering, especially if they have seen an older one.
4. Prospect when your core continuations have new names for you to mail. These names are sure to be winners.
5. Resist the temptation to prospect in your slower seasons. Prospect when you can achieve maximum results. Your results in the off periods will be 20%-40% less than what you will experience during your best periods.
At a minimum you should be willing to prospect to a level that will enable you to maintain your current level of sales. If you want to grow beyond that level, the amount of prospecting you do will need to increase. Again, view this as an investment in the future of your company. Sacrificing the long-term growth and good of your company for short-term profit is not wise. Be just as concerned about the change in your 12-month buyer file from one period to another as you would be about the results shown on your income statement.
Stephen R. Lett is the president of Bethany Beach, DE-based Lett Direct, a catalog consulting firm specializing in circulation planning, forecasting, and analysis.