Calculating Prospecting Breakeven
Prospecting
What is the true breakeven on a prospecting list?
The first issue is the cost of the catalog that should be attributed to a prospecting list segment. The costs include:
House Prospecting Cost per
Description Circulation Circulation Each
Creative yes no (1)
Printing yes yes $.25
Postage yes yes $.25
List Rental none yes $.06
Merge Purge yes no
Total Cost for Prospect catalog $.56
The second issue is your merchandise margin. The merchandise margin should be the cost of goods sold of the landed cost of the product which is the cost of the merchandise and the cost of the freight to get it to your fulfillment center minus any profit from shipping and handling charges. Overhead to pay for the purchasing department or cost of your handling the merchandise should not be included. If your merchandise margin is 50% then your breakeven is $.56/50% or $1.12 per catalog.
Common wisdom is that you shouldn’t mail prospects below your breakeven because it costs you profits and cash. But what are the short term profit implications if you prospect slightly below breakeven? Some catalogs consider all the prospecting together and aim to keep the average sales per book above breakeven assuming that if the total of all the prospecting is above breakeven, that they’ve broken even on the prospecting. It is more conservative to look at each list segment individually and only mail individual list segments that pull above breakeven.
How long does it take to earn back your lost profits if you mail below breakeven?
Segment Circ $/book Sales Loss
Prospect 1 10m $1.00 $10,000 $10,000-$5,600-$5,000
Prospect 2 10m $.80 $8,000 $8,000-$5,600-$4,000
Breakeven
Buyer $/Book Circ Sales Profit # of Mailings Profit
Prospect 1 $5/book 100 $500 $500-$56-$250 = $194 3 mailings $582
Prospect 1 $15/book 100 $1,500 $1,500-$56-$750 = 1 mailing $694
Prospect 2 $5/book 80 $400 $400-$45-$200= $155 11 mailings $1,705
Prospect 2 $15/book 80 $1,200 $1,200-$45-$600= $555 3 mailings $1,655
What does this analysis show?
If you mail at $1.00/catalog and get a buyer that returns $5/book, you recoup your losses from the prospecting in three mailings. If your buyers return $15/book, you recoup your losses in a single mailing.
If you mail at $.80/book and get a buyer that returns $5/book, you recoup your losses in 11 mailings (basically never). If your buyers return $15/book you recoup your losses in three mailings.
- You can prospect much deeper for a $15/book buyer. The list universe for Horse owners is much greater than the prospecting universe for horse lovers.
- You can effectively prospect in Holiday, Spring and Summer for horse owners. Don’t know how many seasons you can profitably prospect for horse lovers.
- Can afford to offer strong promotional offers to Horse owners to make a first time purchase of a herbal product. Need to test deep discounts to Horse Owners prospects versus the current discount to see the difference in top line versus bottom line sales.