Welcome to Catalog Age’s new column, “Catalog Analysis,” which focuses on the often-neglected analytical and measurement side of the catalog business. Each month, this column will discuss a critical business analysis issue. This month: circulation planning.
If catalogers are consistent in planning, forecasting, tracking, and analyzing the outcome of each mailing effort, they will produce better long-term results and improve profitability. While most mailers do carefully plan names to target with their list mailings, they are not as tenacious about forecasting response rates and average order value, which can be broken down by segment and individual source code, and about tracking results against the forecast.
The term “circulation” encompasses both the process of building the mailing schedule for the year (a macro plan) and the details of a specific catalog promotional campaign (a micro plan). This detailed planning is typically done 90-120 days prior to each promotional campaign. “Circulation” is commonly used in the magazine and newspaper industries to describe the building of a subscriber base for a publication. Similarly, in the catalog industry, the term is used to describe the process of building and contacting the customer list throughout the year. Circulation planning includes what you are mailing (the format, the offer, the proposition), to whom you are mailing (prospects, catalog inquiries, buyers), and when you are mailing (the season, the month).
Marketers typically plan two types of mailing events: customer-acquisition or rental-list mailings, to acquire buyers, and customer or house-file mailings that include existing buyers, inquiries, and other names that are “owned” by the mailer.
Customer acquisition Catalogers must be as innovative as possible in ferreting out that unique list or alternative media resource that best suits their company. In other words, the challenge is to find unique sources of new names that will be highly responsive to your catalog or Internet efforts – no easy task.
Historically, catalogs have built their buyer lists through list rentals. The good news about prospecting through list rentals is that the quality of buyers obtained via this media, as opposed to alternative sources of names such as space ads, customer referrals, trade shows, magazines, and newspapers, have been strong in the long term. The bad news is that as the catalog industry has matured, response rates have steadily declined. More catalogs are being mailed, and more mailers are exhausting names through database modeling. Consequently, more catalogers are considering using alternative sources of names.
All told, a number of factors influence catalogers’ customer acquisition practices, including:
* diminished response Nearly every type of rental list (response, circulation, or compiled) is pulling less response than it did five or 10 years ago. A 2% response was once the standard by which catalogers judged their mailings. Now, depending on the type of company and its objectives, acceptable response rates could be less than 1%.
* consumer rebellion More consumers are resisting unsolicited catalogs. In our focus group research, surveyed consumers say that if they get one or two catalogs they’re delighted, but if they get a large number of catalogs they haven’t ordered from – let’s say, 20 – they’ll look only at the ones with which they have some affinity and toss the rest. Consumer and retail catalogs are especially close to “hitting the wall” in terms of overkill, as customers are being inundated with offers.
* high acquisition costs Smart marketers know how much it costs to acquire a customer and how long, on average, it takes for the customer to pay back on the investment. This cost varies dramatically, depending on the type of industry involved. For instance, if the cataloger sells commodity items that need to be replaced regularly, such as office products, perhaps he can afford to spend $100 per book because he is confident he will quickly recover the cost through new orders.
On the other hand, a consumer cataloger might try to break even for the mailing at $10 per customer because the long-term product orders are less of a sure thing, and consequently, it wants to see payback sooner.
Typically, most mailers expect to recover their costs within 12 months. If overall response rates from outside lists are falling, the payback will take longer. Also, the payback timing depends on whether a cataloger uses a one-step process, such as list rental, to acquire a new customer, or a two-step process, such as getting a customer inquiry through a space ad, which would generally take longer.
Customer-acquisition circulation plans The prospect circulation plan charted above shows the details of a hypothetical plan prepared for a prospecting mailing of a women’s apparel catalog. The company consults with two list brokers who identify the following list categories for testing: high-ticket apparel; mid-ticket apparel; plus-size apparel; domestics (towels, sheets, linens, etc.); children’s apparel; business lists; clubs and continuities (Columbia House, the Book of the Month Club); low- and mid-range gifts; and mid- and high-priced gifts.
The circulation plan starts with a broad attempt to identify all of the compatible lists available for rental. Then, working with the list brokers the mailer narrows down his final selection from these choices available.
The plan is to test at least one list from each of the categories; more than one list is tested from the categories from which higher response is anticipated. The lists are split between the two list broker firms and awarded to whichever broker made the initial recommendation. Generally, a mailer chooses these segments based upon his knowledge of who has tested the list and who has used the list on a continued basis. Also, mailers strive to create a balanced mailing, featuring a few lists from each specific category.
The prospect circulation plan worksheet identifies the key lists chosen, their selects, and the quantities available. The column titled Quantity Input Merge/Purged indicates the number of names ultimately tested to mail.
Every list is given a unique source code. When first-time customers respond to that mailing, their permanent database record will carry that source code, called the “original source code,” for their lifetime. For example, the MS10A source code used to identify one list can be broken down as follows:
* MS = shoe cataloger Maryland Square
* 1 = the first selection of the Maryland Square file (six-month buyer hotline)
* 0 = the last digit of the year of the mailing (2000)
* A = the sequence of the mailing during the year (“A” was the first mail drop)
Every list, once selected, includes forecasts of the percentage response, the average order value (AOV), and the sales per catalog. The first forecast for a catalog will be a “best guess,” but that will improve with each edition of the catalog, as the cataloger becomes more experienced and has a sense of what to expect from any given list. This forecast helps the company plan merchandise buying and call center and warehouse staffing, as well as the financial needs for the catalog promotion.
Getting to know your house file The key goal in developing the circulation plan for the customer lists is to maximize their use and to increase sales and profits from them. In developing the house mailing plan, the goal is to avoid the two most common house-file mistakes catalogers make: not contacting customers often enough, and treating all customers indiscriminately rather than targeting the message to customer segments based on past purchase activity.
Remember that lists, including house files, are a perishable asset. The adage “use it or lose it” is most appropriate here, since recency of names is critical. If the names on a list have not purchased in more than 12 months, the file deteriorates dramatically in value. Catalogers must constantly update their database records with recent purchase history and current names and addresses. Business names are especially difficult to maintain, given how frequently employees change jobs and companies are bought, merge, or go out of business. In fact, it is estimated that as many as 80%-90% of business names change in some way in a 12-month period.
Customer hierarchy is especially important to consider when determining how to market to your customer list. Ultimately, to increase profitability, you must convert one-time buyers to two-time buyers, and two-time buyers to advocates, or loyal customers. Two-time buyers and advocates who haven’t purchased in more than 12 months must be reactivated with strategies such as sending a catalog with a dot whack saying, “We miss you and want you back as a preferred customer.” The process of maintaining, updating, and actively promoting the customer file is one of the critical drivers and core competencies of a profitable catalog.
The buyer list inventory It is impossible to plan circulation or mailings without an accurate accounting of how many names are on the buyer file and where they fall in the various RFM (recency, frequency, and monetary) value segments. The house list summary charted at left is critical for understanding the buyer list and segmenting it. Established catalogs usually have a marketing or database staffer produce a report like this monthly or, in the case of large mailers, weekly. The chart shows a breakout of all buyers by:
* recency of purchase In this example, names are broken out as new to the file in the current month; in three-month segments up to six months; in six-month segments in the first year; and in 12-month segments beyond the first year.
* frequency of purchase Here buyers are divided by those who made one purchase and those who made at least two; generally once a person makes a second purchase he becomes a loyal, responsive customer.
* monetary value In this chart, buyers are sorted by those with average orders of less than $50, $50-$100, and more than $100. While some catalogers sort by average order, others use lifetime sales. What’s most important is that the actual dollar breakouts are relevant to your business.
Customer circulation plan components The house list summary compares the numbers at the end of the current month with those of the previous month and of the same month one year prior. These comparisons can help you plan upcoming mailings, judge the number of new buyers being added to the file, and determine whether the customer list is being properly maintained and updated.
Once you have a house list summary, you can develop a customer circulation plan. First, identify the particular season of your mailing – say, fall/holiday – and the mail dates and in-home dates. For years, catalogs considered the mail date of utmost importance and, beyond that, simply hoped the catalog would be delivered in a decent amount of time by the U.S. Postal Service. Today more emphasis is placed on the in-home delivery date, since most printers work closely with the Postal Service to deliver mail directly to bulk mail centers and therefore can ensure that catalogs drop in a two- or three-day window.
Like the prospecting plan charted on page 71, the customer circ plan identifies specific segments of the house list, such as business buyers for 2000. Each segment is assigned a source code, which is typically ink-jetted on the back cover and the order form. Catalogers typically try to build some type of logic into their source code. For instance, in the source code BB10D, “BB” indicates a business buyer; “1″ refers to the first list segment of the buyers (ranging from 1 to 99), “0″ is the mailing year 2000, and “D” is the sequence of the mailing for the year (e.g. “A” for the first mailing, “B” for the second mailing, and so on).
After the list and source code the plan includes:
* selection: a description of the particular list selection or segment being mailed
* quantity available: the total number of names available for this mailing
* final quantity: the final number of names for mailing after the merge/purge process
* forecasted percentage response
* forecasted orders: final quantity times forecasted percentage response
* forecasted AOV
* forecasted sales: forecasted orders times forecasted AOV
* forecasted revenue per catalog mailed: forecasted sales times final quantity mailed or forecasted percentage response times forecasted AOV
Say you’re mailing to the 2000 business-to-business segment of your customer list, and the final quantity of names for the mailing is 2,717. To estimate a forecast, you would then multiply this number by the forecasted response rate of 12%, which gives you an estimated 326 orders. Multiply this by the forecasted AOV of $500 and you would get $163,020 for the total forecast sales. To determine the cost per catalog, divide this by the number of catalogs mailed, 2,717, which equals $60 per catalog.
Circulation planning is imperative for catalog companies that want to grow and prosper. By understanding the mailing and list management process and using a consistent analytical approach to plan, forecast and track results, improved measurement and sales will surely follow.
Next month, we’ll look at the cost of a new customer, whether from a list rental, a space ad or a two-step catalog request program.