The Analytics of Determining Proper Page Count
by Stephen Lett
I taught Direct Marketing at Indiana University for several years and I always told my students to write down “merchandising” if they did not know the answer to a question to receive 50% credit. I wanted these smart, second year MBA students to know the importance of merchandising. Product selection (and circulation) determines the success of any catalog/Internet business. Knowing how many pages to circulate is my topic this month. I want to review some basic criteria to use to determine proper page count. I also want to review the economics of adding pages to a catalog and why this can be a successful strategy especially in these difficult economic times. Adding pages and selling more products to your existing customers is always a good strategy. Why? Because of the favorable relationship between the cost for the pages vs. the actual return. Pages generate a high ROI (Return on Investment). The cost to increase pages is approximately one-half the percent increase in the page count. For example, to increase page count from 52 to 60 pages (+8 pages) yields a 15.4% increase in the number of square inches of selling space. Yet, the cost increase is only approximately half that amount. Adding pages means maintaining the proper page density. It does not mean that you should devote more space to the items being added. Nor does it mean that you should give more space to existing products simply to fill more pages. For the economics to work, proper density must be maintained as page count is increased. If you typically put eight items on a page, maintain that same density, for example. The idea of creating a smaller prospect book full of best selling pickup items is appealing. You might think it saves money and in theory has little if any impact on performance.
However, in practice, this is usually not the case. You might feel a catalog that consists of best sellers perform so well that it counteracts the fall off due to a lower page count. It might at first. However, prospects will tire of seeing pickups. When prospecting, you are selecting many of the same names repeatedly. In fact, if you are actively mailing prospects, there will be a percent of those that see your catalog as often as your housefile sees it. Therefore, the importance of introducing new items to stimulate sales holds true. Whether you are considering a smaller version of your catalog, including new and pickup items, or a “best of” book, you can use the rule of thumb (in reverse) that you will recognize half the percent increase in pages, in increased sales (if you increase your page count by 10%, you will see an increase in sales of roughly 5%). Just as if you add pages you will improve performance, if you reduce pages your performance will decline. The impact of lower prospect performance carries through to future mailings. Over a twelve-month period with a mailing frequency of 6 times per year, the impact of mailing a 48 page vs. an 80-page catalog, for example, on initial mailing is even more apparent. Here are my five-point checklist for determining catalog page count:
- Break the product line into product categories.
- Determine the number of products available in each category.
- Review the number of products within preset price ranges to uncover any price point gaps.
- Profile the 10 best products to use as a screening guide to help know what to add.
- Profile the 10 worst products to know the types of items you should avoid.
Use square inch analysis to know what items you should retain, drop or add to the catalog. In a properly merchandised catalog, the 1/3, 1/3, 1/3 rule will apply. This means that approximately 1/3 of the items will always be the winners, 1/3 of the products will sell close to your square inch breakeven criteria and 1/3 of the items will be the losers. These items will need to be replaced with new products. This means that even aside from the decision to add pages, about 30% of the products in a typical hard goods (i.e., gifts) will be replaced each print cycle. If less than 30% of the pages lose money, consideration should be given to adding more pages. Add 8 pages, do your square inch analysis and determine if you should add another 8 pages next time. Also, keep in mind that if more than 30% of the pages lose money, you might want to consider reducing the page count by 8 pages. It is a matter of proper balance and to be careful that you do not have too many under performing items as a percentage of the total number of unique products in the catalog.
Through this type of analysis, pay attention to products that are being carried over to appear in the next book. Knowing when to drop an item is critical. Products that are repeated in a catalog will tend to have a revenue drop-off approximately 20% each time. If the decrease is more than this, consideration should be given to replacing the item. Let’s look at the economics of adding pages to a catalog. Pages are a good deal; one of the few bargains left in this business! Additional pages (i.e., good quality merchandise) increase the response rate and the revenue per catalog mailed. Overall, the economics of adding pages and more merchandise to your catalog can help grow a catalog business. The chart below details the total cost (including printing, paper and postage) and the cost per page for the five different page count combinations shown here. This chart also shows the percent increase in selling space and the percent increase in costs using the 52-page catalog as our base for comparison. For example, going to a 68-page catalog (from 52 pages) increases the amount of selling space by 31% at a cost increase of only 5.5%. Again, the economics are in favor of adding pages.
|LETT Direct, Inc.||CATALOG ECONOMICS*|
|Date: 08-05-08||EXHIBIT A|
|Total Cost (Approx.)||$202,000||$205,000||$208,000||$211,000||$213,000|
|Cost Per Page||$4,154||$3,929||$3,867||$3,750||$3,647|
|Percent increase in Space||-------||7.7%||15.4%||23.1%||30.8%|
|Percent increase in Costs||-------||1.9%||7.4%||11.1%||14.8%|
|* Trim size 8 x 10.50 and based on 400M catalogs co-mailed. Paper is a combination of 40 lb., cover and 34 lb., body.|
|* The chart is more favorable due to the piece rate limit moving up to 4.0 ounces. All of our page count options now mail at the postal minimum rate.|
With respect to the merchandising of a catalog, it is important to know the APO (Average Price Offered) and APS (Average Price Sold) of the products being offered. If, for example, the APS were $31.00 this would be an indication that this catalog is selling lots of items in the $10.00 to $30.00 range. Too much selling space may be allocated to higher ticket items that may not be turning as quickly. This catalog has an opportunity to add more items in the $30.00 to $45.00 price point range to increase the revenue per catalog mailed. When analyzing the average units sold, we normally see approximately 60% to 65% of the units sold falling below the average and 35% to 40% that are above the average. It is important to use square inch analysis sorted based on price point ranges to know how the book is assorted. A review of price points vs. profitability is recommended. If our APS is $31.00 and our average order size is $73.91 this means the average number of line items per order is 2.38 which could be high for a gift oriented catalog. The data also suggests that we might be “over assorted” at the low end of the price point scale, i.e., items selling for less than $20. This is the type of analysis that must be done to establish product search and selection criteria. The number of merchandise offers (as opposed to the number of SKU’s) in a catalog is what drives the revenue. An offer is defined as a product. A SKU could be a different color, size, etc. Again, look at offers not items. I like to see a minimum of 250 (300 is even better) different offers in a catalog. Average order is a function of the lowest priced items; not the highest price. For example, eliminating items that retail for less than $20 will increase the average order size. What’s more, it is difficult to make money on items that retail for less than $20 considering fulfillment cost. Again, that is why the distribution of offers by price point is important. We also need to consider that the life-time-value of a low-ticket buyer is usually very poor. They do not tend to be loyal buyers and the repeat factor is low. Do your homework and take the time to do square inch analysis for every catalog to determine the proper page count. Adding page is a matter of “bottom-up” analysis. And remember, the economics are in favor of adding pages depending on merchandise availability if you maintain the same product density on which your analysis was based. Proper merchandising and the right page count are critical to the success of any catalog.
The biggest danger in cutting pages is the potential shrinkage of your housefile due to lower performance rates. Therefore, if you cut pages, you would have to increase the overall amount of prospecting to maintain the level of new buyers being brought onto the file. To do this, you would have to mail lower performing prospects which will bring down your overall performance rates even further. If you do decide to mail a smaller prospect catalog, be sure to create a reliable test and try to gage long term impact of your decision.