PROFITABLE PROSPECTING

Strategic prospecting can help you cut promotion costs, increase your response rates, and improve the future value of your customers

Postage is increasing! Paper prices are going up! Operating costs are rising fast! Margins are falling! And response rates are flat! We repeat this mantra in three- or four-year cycles, ending with the cry, “How can our industry survive?” Fortunately, the catalog industry has managed to survive each successive cost squeeze, and many mailers have even thrived during the past several years. Some of this is due, of course, to the growth of the Internet as a source of additional business and cost savings. But this alone can’t explain how our industry has prospered in the face of such rapidly escalating costs. n Our survival has everything to do with how well we take control of what I call the pressure points of our businesses: sales, operating margins, and circulation strategies. Any successful strategy for growth has to include a growing prospecting effort. A successful prospecting program will continually maximize sales, improve operating margins, and increase circulation efficiency. These factors, in turn, combine to minimize customer acquisition costs and allow you to increase your prospecting circulation, and thus let you continue to grow your customer file. Catalogers that have been most successful during the years have been those able to make the most of their performance in all three areas.

When it comes to prospecting efficiency, three factors go into the equation: sales from the acquisition mailing, costs associated with the mailing, and the future contributions that can be expected from the new customers acquired. The most efficient prospecting strategy will increase acquisition sales; minimize costs, such as design, print, paper, postage, lists, and service bureau fees; and make maximum use of the future contribution from these new buyers.

To every thing there is a season To get the most out of your prospecting dollars, you should understand your catalog’s seasonality curve and prospect most aggressively and deeply in your best seasons, when response rate is the highest. In general, for consumer mailers, particularly gifts catalogers, seasonality follows a pattern of increasing response as you get closer to Christmas and Chanukah, and decreasing response as you get further away from these holidays. For general merchandise mailers, holiday (October through early December) is typically the best; fall (July through September) generally performs at about 80% of holiday; spring (January through early March) performs at about 70% of holiday; and summer (mid-March through June) at about 60% of holiday. This means that a list that produces a 2.5% response in the holiday season should respond at 2% in fall, 1.75% in spring, and 1.5% in summer.

But apparel offers in categories such as swimwear are typically stronger in spring and summer. And a catalog selling thermal underwear is most likely to do better in fall and winter. Home decor and furnishings catalogs are typically strongest at holiday time, but they have a fairly steady performance throughout spring, summer, and fall. Business-to-business catalog mailers have seasonality patterns unique to their industries, which are typically unaffected by the holiday season.

Once you have determined your catalog’s ideal prospecting strategy based on its seasonality, you must then consider your specific objectives. The decision to expand your circulation depends on your company’s financial objectives and operating ratios, and on how aggressively your company is already prospecting; if you now prospect cautiously, you may have more room to expand.

Below, a few guidelines for prospecting in your best season:

* Circulate more deeply in your best lists.

* Use more lists in your best list categories.

* Add circulation in your secondary list categories.

* Test more aggressively in all categories.

* Test new list categories.

* Test new media categories (for instance, space advertising, alterative response media, e-mail lists).

In your marginal seasons, you should continue prospecting, because the customers you gain during these times are likely to be among your best customers. But it’s also important to conserve resources in less productive seasons, because you will get fewer customers, and therefore have higher expenses per customer. Though a list may perform acceptably during the holiday season, its spring response may not justify including the list in your spring plan.

During slower, off-peak seasons, you should:

* Concentrate on your best lists.

* Tighten up on list selections: use higher dollar selects, tighter recency or higher frequencies.

* Limit (but don’t eliminate) testing new list categories. For example, a general merchandise cataloger might think twice before testing apparel lists in an off-season.

* Be conservative in testing new media, such as package insert programs or space advertising.

* Continue to aggressively test lists within your best categories. These categories are more likely to bring a high-enough response rate to offset prospecting costs in your off-season.

Affinity and beyond In general, the original source of the names is a major predictor of how successful a list will be. For example, a list of catalog buyers will generally perform better than a list of names originally sourced from TV offers.

List affinity is the other key predictor of outside list performance; the closer the affinity, the better the list will perform. In certain circumstances, a noncatalog list with the right affinity can equal or even outperform a catalog list with a lower affinity level. For example, a catalog with a strong environmental theme can often do very well with fundraising lists in the environmental area. Consider this type of opportunity when evaluating a list’s potential.

Next to the merchandise offer itself, list selection is the most important tool for improving response rates. We all know the importance of RFM (recency, frequency, monetary value), but there are other variables that can also have a profound impact on sales – products purchased and gender key among them.

Typically the tighter the selection in these areas, the more you’ll pay. For example, if the base cost for a list is $90/M, you might pay an additional $20/M to select, or target, only those people who have made purchases of more than $120. Or you might pay an additional $40/M to target the customers who bought sweaters. Overall, list selections can add up to 40% to the total rental cost.

The increased sales that are to be expected from a targeted list will typically more than offset the additional costs. But you may not need to use selects at all, depending on your market. For example, it may not make sense for a mid-ticket apparel cataloger with an average order of $40 to pay for buyers with higher average orders, since such upscale customers would not respond to a lower-end offer anyway.

Multibuyers, or names that appear on more than one outside list, are another key to improving your catalog’s prospecting results. For one, multibuyers typically perform much better than other rented names, because they are frequent catalog shoppers who have purchased from multiple catalogs. What’s more, you’re entitled to mail them as many times as you’ve paid for them. If you’ve paid separately for the same name that appears on the Eddie Bauer, J. Crew, and Lands’ End lists, you are entitled to mail that name three times. So it makes sense to plan to remail these names as often as possible during your catalog’s season. This can mean a significant reduction in list rental costs, as well as a big performance boost for your prospecting efforts.

Calculating a customer’s future contributions Most mailers are focused on the initial performance of their prospecting campaigns. They can easily report on whether one list or one campaign is profitable, breakeven, or below breakeven. Not enough, however, are focused on the future contribution that new customers provide to a business; this concept, often referred to as lifetime value, is daunting to many catalogers.

But there is a much more conservative measure, which I call one-year value, that can estimate the contribution that each new customer brings to your business within his or her first year. This value is easily computed by totaling the sales and costs associated with your 12-month file during the course of a year and adding them to the sales and costs of the acquisition mailing.

This approach is often less intimidating to catalogers since it makes it possible to make a decision based on recouping costs in one year, rather than during a lifetime. Also, since a catalog operating within these one-year value guidelines is willing to make more short-term investments, it may ultimately acquire more customers than it would if evaluated each campaign independently.

Catalogers that effectively incorporate a one-year value measurement into their prospect circulation decisions will be able to eliminate marginal lists that do not perform well on a one-year value basis and increase circulation to high one-year value lists, thereby improving their sales, lowering their costs, increasing the growth of their house file, and raising profits.

Yes, postal rates are rising! Paper costs are going up! Margins are declining! But the sky is not falling. In fact, the catalog world is full of great ideas for increasing prospect sales, lowering costs and improving the future value of your customers. The fastest, most consistently growing catalogs are the ones that continually investigate all these areas.

In addition to maximizing the use of multibuyer names, a number of other avenues can keep your prospecting costs under control. The most powerful of these include controlling merge/purge costs, reducing the amount of or the quality of paper needed for your catalog, and adjusting print sizes and formats for greater paper efficiency. Most catalogers will find that they have some opportunity in one or more of these areas.

To help reduce merge/purge costs, consider whether you need to run your entire house file as part of every merge/purge. Since the service bureau charges based on how many names you bring in altogether, it can be more economical to include only those house names you intend to mail. For example, if your merge/purge costs are $10/M, your house file has 200,000 names, and you are planning on mailing only 100,000 customers, you can save approximately $1,000 by not sending the extra 100,000 names to the service bureau.

To reduce paper requirements, make sure your catalog is configured in the most efficient manner possible. Multiple gathers or forms of 16 or 32 pages are often the most cost-effective to print, even if it means increasing the size of your book. For example, if you have a catalog that is 60 pages including the cover, you may want to consider either increasing it to 64 pages or reducing it to 48 pages to meet these requirements.

You may also want to reconsider your trim size; sometimes you can save a great deal of money spent on paper by trimming as little as 1/16″ from your catalog’s size without changing the perception of the catalog by the customer. In addition, switching the press configuration may generate substantial savings. Sometimes a catalog can be printed much more efficiently, and use less paper, on one press rather than another, if the size of the press more closely matches the size of paper supplied by the cataloger.

You may also want to lower the grade and/or weight of the paper used to print your catalog. Ask yourself, “Will consumers object – to the point where sales decline – if the catalog paper is a little less bright or a little less heavy?” Catalogers generally determine this by testing in the mail, by holding focus groups, or by setting up internal committees. Often, the consumers will not object, and you can save a considerable sum.