What’s Your Catalog’s Financial Objective?

BY: JIM COOGAN

Seems like a very basic question.  When you ask a circulation manager what is the catalog’s financial objective, there are several possible answers.

1. Objective can be maximum profit, or


2. Maximum growth, or


3. A blend of growth and profit What do catalog circulation managers typically say? 

The three most common answers are “Top management wants both maximum growth and maximum profit.” Or “The goals are the same as last year.” Or “I don’t know.”   Many managers don’t know that that their financial objective is a choice that they make, either consciously or unconsciously, as they do their annual budgeting and planning.  You can choose to optimize either profits or growth.  Knowing how to decide your catalog’s financial objective is a vital part of a circulation manager’s job.  Here are the issues that surround defining your financial objective.             The first issue most circulation manager’s address is the rules for prospecting.  The two most common prospecting guidelines are

1. To prospect by planning for each list segment mailed to perform above breakeven or


2. To prospect so that the average of all lists mailed is above breakeven. 

Planning for each list to perform above breakeven is more conservative while planning for the average of all lists to be above breakeven is more aggressive.  There are more prospecting planning issues including:

• How frequently to prospect 


• Whether to prospect in all seasons or only in the best seasons. 


• How often to prospect to the same lists 


• Should you prospects with all the available web names? 


• How aggressively to mail the older, marginal segments of the house file. 


• How to define “breakeven”  Should creative costs be included in the catalog costs and should variable costs of fulfilling the order be included? 


• What will be the result if you prospect using the same business rules used this year? 


• What will be the result if you loosen up or tighten up the financial criteria for prospecting?            

The second issue is understanding the financial implications if circulation is geared toward generating the maximum profit possible.  How much can profit be increased in the short term?  What tactics are used to maximize profitability? 

• Do little or no prospecting or only prospect to proven lists that consistently deliver well above breakeven. 


• No housefile segments mailed below breakeven 


• Less frequent mailings for marginal house file segments 


• Fewer mailings in the less response seasons. 


• Reducing the number of pages and products 


• Actually increasing the contacts with the best house buyer segments at the risk of long term list fatigue. 

Look at the sensitivity of your catalog’s business model.  What is the range of profitability you could expect between a maximum profitability strategy and your current strategy?  What is the range of growth that’s possible between a maximum growth strategy and a conservative strategy limiting the search for new customers to proven, highly profitable prospecting methods and lists?  What are the current financial results that are resulting from the circulation strategy and tactics you have now?  You should be able to say, for example, that your current strategy will deliver 15% growth and 5% net profit before tax and that the maximum profitability you could achieve next year would be 8% net but that would mean growth would slow from 15% to 3%.  And that your maximum growth strategy would yield sales growth of 25% at the expense of cutting profitability to 1%.  If you know the sensitivity of your business model, you’ll be able to lead the planning process and get the best outcome, whether it’s maximum sales or maximum profits. Why change your financial goals?  If you’re a start-up you may need to scale the business and get big fast to capture market share and realize the economies of scale necessary to make the business viable.   If you’re a mail order business that’s been climbing the hockey stick of growth, you need to know when you’ll hit the growth plateau.  High growth cycles almost always come to an end and you’d better plan for it.  What are warning signs that growth is going to slow and you’d better plan for slower growth and higher profitability?  When you are mailing all the prospects you can as often as you can mail them and the house file is mailed as frequently as possible and your merchandise mix is established and mature, your sales are probably going to reach a plateau.  What do you do when your growth is going to slow?  Don’t make the classic mistake of trying to continue to grow at the same pace at the expense of your profit margins.  Look ahead to slower growth and look for ways to increase profitability.               

If you are preparing to sell the business, you need to show the ability to increase your profits and the ability to continue to grow, even if it’s at a slower pace.  Buyers typically prefer to see a company’s ability to increase their profit margins and will pay the greatest premium for companies that show the ability to increase profits over companies that can only demonstrate the ability to grow top line sales.            

Your job as a circulation manager is to define the financial objectives for your direct marketing business.  Find out what top management wants!  When top management says they want both maximum sales and maximum profits, define the alternatives.  You can’t achieve both maximum growth and maximum profitability, so defining the different scenarios and managing top management’s expectations is a big part of a circulation manager’s job in the annual planning process.