|
|
You are here: Home > Our Newsletter Archive > Late Spring 2006
|
In the last issue of the Food-by-Mail Industry Update (FBMIU) we discussed how to perform a simple and quick financial review of your mail order food business. In this issue, we will talk about a few tools you can use to perform list and circulation analysis. When performed and interpreted correctly, list analysis leads to smarter mailing decisions, significantly higher profits, and faster sales growth.
CONTRIBUTION ANALYSIS
One of the first steps in the analysis is to combine information from your summarized P&L (see the last issue of the FBMIU for a discussion on summarizing your profit and loss statement) with the end-of-season key code report you run from your mail order processing system. The number you need to derive from your P&L is what is commonly called the contribution margin (i.e., contribution to overhead , or fixed operating expenses, and profit). Contribution is simply:
Sales – (cost of goods sold + variable operating expenses + marketing expenses).
The formula to calculate your contribution margin is:
Sales x ((cost of goods % of sales + variable operating expense % of sales) – marketing expenses)
The idea is pretty simple: calculate the profit contribution of each marketing effort you are tracking by key code. If the contribution number is positive, you made money mailing to that list (or whatever marketing effort you are analyzing). If the number is negative, you lost money on that marketing effort. I believe the essence of smart circulation management lies in the interpretation of each marketing effort’s contribution number.
INTERPRETING THE DATA
- For each house file segment, compare the contribution per piece mailed to the cost per piece mailed. Then consider testing the following ideas at the individual segment level.
- If the contribution to marketing cost is significantly above your minimum return on investment (ROI) requirements, mail more often to that list segment
- If the number is at or near your lowest acceptable ROI, maintain your current contact frequency.
- If the number is below your ROI target, or the contribution number is negative, there are several things you can do to improve results:
- Cut back on the number of mailings you send to that segment.
- Further refine your segmentation scheme. If you are only using last-purchase date to segment buyers, consider adding other variables such as number of orders, life-to-date sales, or ordering method (i.e., Internet vs. phone buyers) to help “cherry pick” the best names to mail to.
- Use discount and special offers to improve response from poor performing segments.
- If your quantities are large enough, consider using a cooperative data base to help identify buyers in your marginal house file segments who are actively buying from other catalogers.
- Finally, compare the cost of mailing to unprofitable house file names to that of cold rental lists. Run the numbers. You might be better off spending time and money on reactivation efforts instead of going after brand-new names.
Note: be sure to compare the “downstream” revenue and profits from reactivated vs. new buyers before making major changes to your prospecting plans.
- Prospecting programs
- When analyzing prospecting efforts, the first number to study is the cost per new name added. To arrive at this number, divide the contribution number (usually negative when prospecting) by the number of new names you added to your list as a result of the effort (i.e., rental list, space ad, key word buy on search engines, etc.).
- It’s a pretty safe rule of thumb to spend up to the one-year value of a customer to generate a new buyer. In other words, if a new buyer generates $15 in profit contribution within their first year, you are generally safe spending $15 or less to acquire each new customer.
In almost every lifetime value analysis we have done for food mailers, approximately half (46%) of the buyers’ total profit accrues in the first year.
- Assuming you limit prospecting losses to the one-year customer value, you would eliminate all lists, ads and other customer acquisition programs that have a cost-per new name that is above this level.
- Maintain your current usage of lists and media that produce a cost per new name at or around your one-year customer value.
- Expand your use of lists and media that produce new buyers at a cost significantly below your one-year customer value. For example, if you run three ads a year in a publication with a low cost per new name, run bigger adds, or run more frequently. Test similar publications.
By rigorously and consistently applying the list and key code analysis to your entire marketing program each year, you will begin to see your business in a new light, have a better understanding of where to allocate scarce marketing resources and make better marketing decisions. You will see how different prospecting programs impact current earnings and cash flow. And you will have the data in place to help you determine who to mail to, when to mail, and how many pieces to mail each year. The mailing list and key code analysis becomes the starting point for all future mail plans.
In the next issue of the FBMIU we will look at adding more selling power to your catalog.
If you have any questions, would like more information on list and mailing analysis, or want to share a technique you use to better manage your mail order food business, please drop us a line.
Warmest regards,
Tony Cox
President
Catalog Solutions
ABOUT CATALOG SOLUTIONS
Catalog Solutions helps specialty food catalogers and internet marketers grow and make more money by developing, managing and implementing their mail order and online marketing programs. We are the only catalog/internet marketing consulting firm that works exclusively in the specialty food industry. Helping smaller companies or large companies with small mail order or internet divisions is what we do best.
Visit us online at CatalogSolutions.net to download a copy of our free booklet, The Seven Habits of Highly Ineffective Catalogers, and for information on our fully guaranteed introductory program called JumpStart.
|
|
