The Importance of Your Incremental Breakeven Point

by Stephen Lett

There is a cost associated with acquiring a new buyer through print media. Catalogers need to invest in converting prospects to buyers (one-time purchasers) and buyers to customers (two and more time purchasers). How much you are willing to pay for a new buyer depends on what you can afford to spend, how fast you want to grow and the life-time-value of the buyers being acquired. Over spending to acquire a new buyer and trying to grow too fast will bleed red ink. However, not investing in growing your housefile can have a negative effect on your business too. That is why it is important to calculate an incremental breakeven point and to measure list results against this benchmark. The incremental breakeven point is defined as follows:

  • Gross Sales less Refunds = Net Sales
  • Net Sales less Cost-of-Goods Sold = Gross Profit Margin
  • Gross Profit Margin less Direct Selling Expenses = Incremental Breakeven.

In order to calculate the incremental breakeven point, the following information is needed:

  • Catalog Costs (In-the-mail)
  • Customer Cancel/Refund Ratio
  • Gross Margin Ratio

For example, with a catalog cost of $.65 in-the-mail, 5% cancel/refund ratio and a 60% gross margin ratio, the incremental breakeven point is $1.14 per catalog mailed. This is determined as follows:

  • = catalog cost / ((1-cancel %) * gross margin %) = BEP
    • Example: $.65 / (.95%*60%) = $1.14

Some catalogers feel they do not want to prospect below the incremental breakeven point. These catalogers want to be certain that all of the prospect lists (not just the average of the prospect list used) perform at least at breakeven or above. This philosophy can severally limit growth. That’s because it is unlikely you can find enough “good” lists which perform above breakeven to sustain a desired level of growth or to even maintain same sales from one year to the next. Catalogers need to be willing to invest in acquiring new buyers and this can only be accomplished by mailing below the incremental breakeven point. Shown below is an example of how prospect lists should be ranked based on their RPC (Revenue per Catalog). Next Action is close to the $1.14 incremental breakeven point while Z-24 falls short. This data can be used to improve the models and to forecast future results.

   

NET

ORDERS

GROSS

AVG.

%

 
DESCRIPTION

SELECTION

MAILED

RECEIVED

DEMAND

SALE

RESP.

RPC

Abacus Abacus One model

99,903

2,277

$142,196

$62.45

2.28%

$1.42

I-Behavior Control Nucleus - Ethnic Technologies Overlay

45,094

975

$58,304

$59.80

2.16%

$1.29

Next Action Segment #1

38,596

705

$42,642

$60.48

1.83%

$1.10

Z-24 Database RFM Custom Profile Top segment

47,304

468

$33,642

$71.88

0.99%

$0.71

  Totals

230,897

4,425

$276,784

$62.55

1.92%

$1.20

Online marketing often results in a positive contribution to profit & overhead on the initial purchase as long as you don’t over spend for key words. However, it is difficult for many catalogers to generate enough new buyers on-line to grow their file. What’s more, the life-time-value of a web based buyer is often not as great as a print buyer. There is a certain attrition rate on any housefile. Print and on-line customers stop buying for any number of reasons. Economic conditions, poor service, “older” customers pass-on, they found the item they wanted, etc., impact the buying decision. At a minimum, it is important to replace those customers with fresh buyers so that your 0-12 month file does not decline. If you want to grow, the amount of prospecting, print and on-line you do needs to exceed your normal house file attrition rate.  For example, let’s assume that 50% of a typical customer file will purchase again next year. This means that at a minimum, we need to replace the 50% who do not purchase so that the active housefile does not decline. This includes a combination of adding new buyers and bringing the “older” buyers on the housefile into the 0 –12 month category. If you want to grow the percent of new-to-files has to be even higher than our normal attrition rate. Most likely you will need to mail below the incremental breakeven point in order to grow.

New buyers are the lifeblood of any catalog company and you need to be willing to investment spend initially to acquire them. But invest wisely and be careful not to over mail or over spend. I believe in the multi-channel approach. It’s not the web vs. the catalog or vice versa. It is about growing a profitable multi-channel business. Generate all the new buyers you can from both channels. Apply the incremental breakeven point to your print and on-line marketing.