Getting The Most From Outside Lists

by Stephen Lett

It is expensive to prospect for new buyers. Therefore, it is important to prospect as cost efficiently as possible. Prospecting is critical to the long-term success of any catalog business. How much prospecting you do depends on how fast you want to grow your customer file. Too much prospecting will most negatively impact your bottom line. Too little prospecting is not good either. It is important to maintain a balance between mailings to your house file and mailings to prospects. There is a certain attrition rate with any house file. That’s why it is important to prospect to the level where you are at least replacing the customers who have decided not to buy for one reason or another. This month, I’d like to review a few of the basic and proven ways to get the most from outside prospect lists.

I would like to clear up one common misunderstanding and that is, most catalog companies do not make money prospecting initially. Most prospecting is done at an incremental loss (we will define incremental later). It is not until those first time buyers you just acquired make a second purchase that we go from red ink to black ink. Think of prospecting as making an investment in your business. Catalog companies find themselves having cash flow problems when they try to prospect too aggressively.

Over twenty years ago, I heard an experienced cataloger define a buyer vs. a customer.  They said a buyer is someone who purchases one time. A customer is someone who purchases more than once. I believe this is so true. We need buyers before we can create customers who will make repeat purchases and pay the overhead expenses of the company. Generating new buyers cost effectively is our focus this month.

Effective prospecting must be evaluated based on incremental expenses, not fully absorbed.  In other words, the results from prospecting cannot be expected to cover overhead expenses. Results from mailings to the house file must cover the overhead expenses. Obviously, all mailings cannot be considered incremental. Rent, wages, utilities, etc., must somehow get paid. But again, the house file needs to be large and strong enough to cover these expenses. When prospecting, we should only try to recover our out-of-pocket expenses, i.e., our incremental expenses. This will be difficult to do.

BREAKEVEN ANALYSIS
Actual Quantity Printed: 1,000,000    
Page Count: 64    
    BEP *
ANALYSIS
BEP
RATIOS
Gross Sales (excluding Shipping & Handling Revenue)   $1,405,972 103.65%
Less: Returns & Allowances   $49,511 3.65%
Net Sales   $1,356,461 100.00%
       
Less:      
Cost of Goods Sold   $576,496 42.50%
       
Gross Profit Est. as of $779,965 57.50%
  06/30/02    
Less Direct Selling Expenses:      
1). Catalog design, photography and production $0.077 $76,800 5.66%
2). Printing and Paper $0.210 $210,000 15.48%
3). Postage (as of 06-30-02 increase) $0.270 $270,000 19.90%
4). Rented Lists - Outside Lists (500M) $0.110 $55,000 4.05%
5). Rented Lists - Databases (300M) $0.070 $21,000 1.55%
6). Merge/Purge $0.006 $6,000 0.44%
7). Order Form $0.014 $14,000 1.03%
8). Ink-Jet and Mailing $0.010 $10,000 0.74%
Total - Direct Selling Expenses $0.663 $662,800 48.86%
       
Less Operating Expenses      
1). Incremental cost to process an order. COST TO    
  PROCESS    
  AN ORDER    
Total - Operating Expenses (Incremental) $5.00 $117,165 8.64%
       
Total S.G. & A.   $779,965 57.50%
       
Contribution to Corporate Overhead Expenses   $0 0.00%
       
Order Forecast   23,433  
Average Order Size   $60.00  
Gross Revenue Per Catalog
* Breakeven Point
  $1.41  

Please refer to the Breakeven Analysis chart which shows that we need to generate $1.41 per catalog mailed in order to achieve incremental breakeven. In our example, we have included returns & allowances, cost of goods sold, direct selling expenses and variable order processing costs of $5.00 per order. This analysis is based on mailing a 64-page catalog, (weighing 3.9 ounces) to 1.0 million prospects.

In this example, our goal is to generate $1.41 per catalog from our prospecting. While this is a good goal, it will be very difficult to achieve overall. Some of our better performing lists will generate more than $1.41 per book mailed but to achieve this as an average is most unlikely. Therefore, we have to “investment spend” in order to grow our business and to protect our future. How low we go below our goal depends, of course, on the financial strength of our company and on just how fast we wish to grow.

Obviously, we want to do everything possible to improve or to increase the revenue per catalog mailed. Improving the performance of the outside lists we use will help us achieve (or come closer) to our desired revenue per catalog goal. So, what can we do to improve the revenue per catalog mailed? How can we get more revenue from every single catalog we mail to every outside list we use? Ten proven strategies to improving your revenue per catalog are as follows:

  1. Start by using proven direct response lists– Product affinity is the most important factor when determining which specific lists to use. Be sure to select lists, which are synergic with your offer, i.e., home décor vs. home décor, for example. Be careful using subscriber and/or compiled lists (unless you are selling business-to-business). For consumer mailers, subscriber and compiled lists need to be optimized prior to mailing. You will get your best results from proven mail order buyer lists whose product offering is compatible with yours.
  2. Select the most recent prospects to mail– Selecting prospect names based on the date of their last purchase, i.e., their recency of purchase, will yield the best results. We know that someone who purchased within the past 3 to 6 months, for example, is a better prospect than someone who purchased over one year ago. The more recent their last purchase, the better they will be as a prospect.
  3. Select Abacus Extranet Names– If you transfer your buyer file to Abacus daily via their Extranet program, you are entitled to mail Extranet names on their database. These are the most recent names available for mailing on the Abacus Alliance cooperative database. Point #2 above applies here too. These very recent mail order buyers profiled, selected and modeled by Abacus should perform at or above your “best” lists and list segments.
  4. Use other selects such as monetary value (dollars)– This will help you match the dollar ranges prospects typically spend in relation to your typical average order size. Let’s assume your average order size is $65. By using a dollar select and eliminating the small dollar purchasers, you will most likely see an increase in the revenue per catalog mailed. If you do not request a dollar select for the list you are renting, you will get a cross section of small and large dollar buyers.
  5. Always start with a small, test quantity– Keep in mind that a minimum of 100 responses is needed to properly read the results. Therefore, if your typical response rate to prospects is 1.0%, you should mail (net) 10,000 names. The lower your rate of response, the higher the quantity of names you will want to test mail. This is important when you decide to rollout a particular list. There is a greater likelihood that the results will hold-up if your initial mailing is structured properly and assuming you have enough responses.
  6. Pyramid the quantity on subsequent tests– By this we mean to increase the quantity of any one-list cautiously. If you test 10,000 names with a great deal of success, mail 20,000 names the next time. Assuming the results hold-up, then go to 40,000 and pyramid up from there. Resist the temptation to take too many names of any given list based on the results of the initial test.
  7. Use cooperative databasesUse ALL of the coops. Yes, there will be overlap but each coop will identify names worth mailing based on their modeling that another coop might not find.  SUGGESTION: Let the model do the work to select the variables. The computer model knows best!
  8. Use marginal list optimizationThis will improve performance and thus increase the revenue per catalog mailed.  There are two ways to use list optimization: selection and suppression. Usually both techniques use 10% to 20% of a given file.

SELECTION
This method is used for pre-merge lists. With this technique, you can use a compiled or subscriber file to capture affinity, then, use optimization to select the top 10% to 20% of the known catalog buyers. Example: For a golfing catalog, you might request 100,000 active subscriber names to optimize. For this universe, you can select the “best” 20,000 (20% of the gross input) to mail (the best catalog buyers).

SUPPRESSION
This method is used post-merge to identify and suppress the rental singles. After the merge, you can optimize the rental singles and suppress the worst scoring 10% to 20%. This method should yield a 5% to 15% (or higher) lift. (It is always good to mail a 5,000 to 10,000 back-test cell to monitor the suppression results in order to measure the exact lift you achieve.)

  1. Exchange whenever possible - This will reduce your outside list cost and help to lower your incremental breakeven point. By reducing your variable or incremental breakeven, your revenue per catalog mailed goal will also come down. A greater number of names will qualify for mailing as a result. CAUTION: Don’t exchange names with firms whose list is marginal for your offer. List exchanges for the sake of list exchanges are not good!
  2. Keep good track of who is using your list– Keep good records and pay attention to which companies continue to use your list. Chances are, their list will also work for your offer. This will provide insight into which lists are likely to work for you. It reduces the risk and can help you maximize your revenue per catalog mailed.

As good circulation and marketing people, we know increasing the revenue per catalog mailed is a good thing to do. Absolutely. At the same time you are trying to increase the revenue per book, look at what can be done to reduce your in-the-mail catalog costs. The lower your direct selling expenses, i.e., your catalog costs, the lower your incremental breakeven point. And, the lower your incremental breakeven point, the more prospecting you can afford to do. Mail smart. Mail cautiously. Mail with confidence. And, watch your revenue per catalog increase!