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catalogue customers. It’s like the 1990s and response rates are great. But in my opinion, their days are numbered. They have to develop a broader exposure online and need to do it quickly before their traditional sources of names are no longer able to sustain their growth.
There is a danger in relying too much on any one source of new customers – in today’s privacy-fueled environment, all sources are susceptible to being eliminated. However, I believe that long term, you have greater potential for acquiring new customers online than you do through traditional catalogue prospecting.
Should You Mail Them All? Here is another way of looking at the same issue. We recently ran a test for a client where we identified an attribute that one group of buyers had present, while another group did not. The attribute – which I can’t identify – is something which can be grown/enhanced among their customers by the client if they so desired.
The client has a high average order, and a very healthy response rate, especially during the pandemic. The response rate for the names mailed with the attribute was 140 per cent higher than those names without the attribute.
That’s not important. The reason is that if you think about it, you can create two test segments in any mailing, where you could get a 140 per cent difference in response between the two. Put all of your 1X web buyers up against your 6X+ Catalogue buyers and you’ll probably see similar results.
But here is what’s important. Even though the response rate for these groups of names are dramatically different, and the average order is 10 per cent higher for the names that had the attribute, there is only an 18 per cent difference in profitability per order between the two groups.
How could the response rate be so much better for one group, but the profitability per order between the two groups be so close? The reason is that most of the cost of sales are variable – as sales increases, the costs increase at a similar rate. The only fixed cost – the cost of the catalogue in the mail as a percent of gross margin – is relatively low for both groups (3 per cent for one and 8 per cent for the other). Consequently, because of the high average order and healthy gross margin, the profitability per name for each group is close. In this scenario, it makes sense to continue mailing both groups, even with the disparity in response.
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Below is a different scenario, with a significantly lower average order and response rates. Now the cost of printing the catalogues has jumped to 21 per cent of gross margin for the group with the attribute and 56 per cent of net sales for the group without it, creating a 190 per cent difference in profit per customer.
Yes, it is still worth mailing both groups, but if the mailer needs to reduce expenses because of perceived risks in response, it is easier to justify cutting the segment of names without the attribute in this instance.
My point is that many factors go into reading the results of a holdout test, or even a test measuring the difference of including an attribute. Many of you have shared with me that you created the hold-out and mail groups equally and conducted the “mailing” portion of the test correctly. But then you discovered a series of biases in how results were being measured, that seem to always favor the catalog. Having accurate costs (preferably by season) and knowing the difference between variable and fixed costs is critical in this analysis. And once you prove the results of a holdout test, continuing measuring them. This is not a once-and- done process. Your long-term survivability depends on it.
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