In the November issue, we looked at a simple breakeven analysis and how it can help you evaluate your marketing plan and determine where to cut off mailings. The breakeven calculation lets you ascertain which prospect lists and house names (customers and inquiries) are making money. We looked at three levels of breakeven:
-
Level #1: variable cost, or 0%, level. Typically used for prospects, this covers all variable costs, but doesn’t cover overhead or a contribution to profit.
-
Level #2: overhead, or 7%-10%, level (the exact percentage depends on your overhead costs). You would apply this to older-year customers and nonbuyer house names; it covers all variable costs and overhead, but makes no profit contribution.
-
Level #3: fully loaded, or 17%-20% level (again, the exact percentage depends on overhead costs and assumes you are seeking a 10% pretax profit). This level, which should apply to 12-month customers, covers all variable costs, overhead, and a 10% pretax profit contribution.
In our previous discussions on breakeven analysis, we used some key cost assumptions: a $50 average order value; 50% cost of goods; $7.00 net fulfillment costs (after shipping and handling income); variable cost of the catalog in the mail of $0.50 (which includes printing, postage, and database work); and overhead at 10%.
Now we need to discuss two additional costs: the fixed cost of creating the catalog, and prospecting costs — namely list rentals.
Assessing the creative and prospecting expenses
All catalog companies have creative development expenses or fixed creative costs such as catalog design and layout; photography, including the studio, the stylist, film, processing, and the photographer’s time; page production on the computer; and color separations. Fixed creative costs typically include all expenses incurred during the design and production or execution of the pages of the book up to the point where it is turned over to the printer.
Usually catalogers apply the cost of creating the catalog to the customer file — not to prospect mailings, mailings to requesters, or efforts to reactivate older-year customers.
But how do you determine the fixed cost per mailing? Let’s assume these costs to produce a 48-page catalog:
- $1,500 per page for design and photography.
- $500 per page for color separations.
- Total = $2,000 per page, or $96,000 fixed costs, to produce the catalog.
If you are mailing only 100,000 catalogs, this comes to a cost per catalog of $0.96 ($96,000 divided by 100,000).
If you are mailing 500,000 catalogs, the cost is $0.192 ($96,000 divided by 500,000).
And if you are mailing 1 million catalogs, the cost is $0.096 ($96,000 divided by 1,000,000).
What this tells us is that the greater the number of mailings over which the fixed costs can be spread, the lower the per-unit cost the fixed cost becomes.
Moving on to prospecting costs, in the summary assumptions above, we used $0.50 per catalog mailed as the variable cost of putting each catalog in the mail. But list rental can add at least $100/M, or $0.10 a catalog, to the cost of mailing to a prospect name.
In Example A of the chart below, we add $100/M, or $0.10 per book, to the advertising cost. The breakeven then rises from 1.33% at the variable level to 1.6%. Sales per catalog mailed necessary for breakeven increases from $1.19 to $1.42. This is the true prospect breakeven.
Now let’s look at adding in the creative costs. In Example C of the chart, we are assuming that our fixed creative costs are $100,000 and that we are mailing 500,000 pieces, for a fixed creative cost per book of $0.20, and a total cost of $0.70 per catalog mailed. The true breakeven is now 3.55%, and the sales per catalog needed for breakeven increases to $3.16. This is an increase of nearly 40% in response and sales per catalog mailed from the fully loaded breakeven without creative costs.
Some breakeven ground rules
-
When using breakeven analysis, don’t get overly complicated. Start with your basic cost of the catalog in the mail, and as you feel more comfortable, add your list rental and fixed creative costs to help you fine-tune the measurements.
-
Make the breakeven analysis part of each new catalog effort. When planning circulation, ensure that someone has addressed the key costs in the mail as well as other variable costs for the upcoming season.
-
Work with your financial people to be certain that the breakeven costs are accurate. Returns, cancellations, cost of goods, fulfillment and promotion cost in the mail must be updated annually, if not seasonally.
-
Have a post-mortem for each catalog and Web campaign to close the loop as to what was forecast, what the results were, and what accounts for the difference.
Jack Schmid is president of J. Schmid & Associates, a catalog consulting firm in Shawnee Mission, KS.
Breakeven Analysis by Order
| Example A 0% breakeven |
Example B 10% breakeven |
Example C 20% breakeven |
||
|---|---|---|---|---|
| Average unit price | $50.00 | $50.00 | $50.00 | |
| Average units per order | 2 | 2 | 2 | |
| Average order value (AOV) | $100.00 | $100.00 | $100.00 | |
| Cancellations (1%) | $1.00 | $1.00 | $1.00 | |
| Returns (10%) | $10.00 | $10.00 | $10.00 | |
| Net sales per order | $89.00 | $89.00 | $89.00 | |
| Net cost of goods sold (50%) | 50% | 50% | 50% | |
| Net COGS | $44.50 | $44.50 | $44.50 | |
| Fulfillment cost per order | $12.00 | $12.00 | $12.00 | |
| + Shipping and handling income per order | $5.00 | $5.00 | $5.00 | |
| Net fulfillment cost per order | $7.00 | $7.00 | $7.00 | |
| Contribution before promotion, overhead and profit | ||||
| Contribution @ 0% (variable costs only) | $37.50 | $37.50 | $37.50 | |
| ($8.90) | ||||
| Contribution @ 10% (Variable and overhead costs) | $28.60 | |||
| ($17.80) | ||||
| Contribution @ 20% (Variable and overhead and profit) | $19.70 | |||
| Advertising cost per piece | $0.50 | $0.50 | $0.50 | |
| + List rental cost | $0.10 | |||
| + Fixed creative cost (design, photo, color seps.) | $0.20 | |||
| Total cost in the mail | $0.60 | $0.50 | $0.70 | |
| Calculation formula = cost per promotion – in mail contribution | ||||
| Breakeven = 0% (variable level) | 1.33% | |||
| Breakeven sales per catalog | $1.19 | |||
| Breakeven = 0% (variable level + list rental) | 1.60% | |||
| Breakeven sales per catalog | $1.42 | |||
| Breakeven = 10% (variable + overhead level) | 1.75% | |||
| Breakeven sales per catalog | $1.56 | |||
| Breakeven = 20% (variable + fixed creative + overhead + profit) | 3.55% | |||
| Breakeven sales per catalog | $3.16 | |||