Measure Cost Per New Customer for a Stronger Profit

Analytical expertise using consistent statistical measures in the areas of circulation planning and product merchandising can keep catalogers focused on the goal of increasing bottom line profit.

Central to the analytical process is the concept of cost per new customer, or CPNC. By subtracting the associated advertising costs (print, paper, postage, lettershop and list rental) from the gross margin, you are left with the amount that is available for contribution to overhead. Dividing that amount by the number of new customers provides the CPNC.

The CPNC can be used in a variety of ways to determine success and failure. This tool is used to evaluate an overall catalog campaign, an individual mailing list, a specific source code or even a product in the catalog. This figure will provide you with the optimal measurement tool for comparison.

More customer mailings. Many catalogers leave significant sales and contribution dollars on the table by not optimizing the contact strategy to previous buyers. These mailers feel that because they send their buyer file a book at the beginning of the year and possibly another book as a bounceback in their product shipment, they have maximized their opportunity with this group. Many times we have found that even three, four or five contacts to previous buyers are too light.

The strategy should be to mail the buyer file until they tell you to stop. This is especially true with the most recent buyers. Remailing the control book with an alternative cover or supplemental pages is an efficient way to present another catalog to your buyers.

Your recent buyer file contains the key to the success of your business; do not give them an opportunity to buy from someone else.

Less prospecting. An overly simplistic concept for our business comes from the idea that mailing more books will create more sales. While fundamentally true, the business issue for catalogers is to determine whether they can really afford to mail those additional books.

Since the quantity of the buyer file is relatively fixed, the perceived opportunity to increase the mail quantity lies with more prospect list names. The rationale behind this decision could be that SRDS is filled with pages and pages of new lists that may be the right fit for a test. Another option is to expand on the selections from some of the best lists used in the past.

However, analysis must first be done to determine how much additional contribution this incremental circulation can generate. Reviewing the historical CPNC by list, the cataloger can see how much it made or lost on each prospect name sale. Comparing the CPNC to the projected lifetime value of a new customer is an easy way to determine how long it will take to receive a payback on a specific prospect list investment.

The two situations we often see are that catalogers do not mail successful lists frequently enough or mail prospect lists well beyond what they can afford. While these mailings will generate additional sales, long term they will take profit out of your hands.

More good products. By preparing a merchandise analysis of prior books, the cataloger can determine opportunities for growth based on product. This review is required to continually challenge the merchants to find new items to keep the book looking fresh and exciting for previous buyers and to entice new customers. The key area in this analysis is to make sure that each item is assigned the applicable marketing expenses. This allows you to see how much contribution each product in the catalog has generated.

The initial review should look at every item in the book and determine how many of them are generating sales. Hopefully, there will be the few spectacular products that show sales and contribution far greater than any others. These are the products that will keep you in the catalog business.

Further reviews of the merchandise need to be prepared to focus on the following areas: by page, product category, product theme and price point. The recommendations in each of these sections will provide solid direction for future product development.

Fewer bad products. The merchandise analysis will also show which items the customer has no interest in purchasing, or at least purchasing from you at a profit. The beauty of this review is that you can finally see based on purchase history what your buyers are interested in and what they are not. A focus group on new products might give you a slight indication, but they are never as predictive as sales results.

Merchandising future catalogs must be a two-part process. Not only do you need to find new products to keep the book fresh but also you need to eliminate those items that your customers are not buying.

The worst reason to remove an item from a catalog is that the merchant is tired of seeing it in the book. As long as customers continue to purchase the item from you at a profit, there is no excuse to take it out of your catalog.

While these four areas are basic to the long-term success of any cataloger, it can be difficult to stay on top of all four along with the daily concerns of running the business. To be successful, the task of adding new products along with finding new customers must never end.

Listen to those in the marketplace, as it will tell you nearly everything you need to know. Ultimately, a successful cataloger will mail a book full of good products to those individuals most likely to purchase them; it is that basic, and also that difficult.

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