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Measuring Your Business:
Nine Questions You Must Ask — and Answer — to Succeed
By Cynthia Baughan Wheaton
Principal, Wheaton Group
Original Version of an article that appeared in the
July 1999 issue of Catalog Age
One of the greatest strengths of any form of database marketing,
including the catalog arena, is that the numbers can be massaged
in such a way that they will "talk to you." You want to find
those numbers that help you move in the best direction and avoid
First of all, step back and ask a few questions. It is imperative
to ask the right questions. Clarify what you need to know
in order to make decisions for the future. Then, you can seek
the corresponding data, measure it, analyze it and use it as input
to the decision-making process. Be sure that you give priority
to numbers that will enable you to take swift action; to understand
key changes; give hints as to what areas should be evaluated more
thoroughly — send up "flares." You may miss important
insights if you only look at the existing measurement data.
At the same time, there is a need to narrow down the data derived
from a potential overabundance of numbers.
An entire book could be written on the hows and whys of measuring
success. So, let's take a broader approach. Let's examine
some key questions that should apply to any cataloger. They
will give you a foundation to build a more complete set of questions
that reflect the needs of your unique catalog situation.
#1: What Specific Goals Should We Have For Our Organization?
As in any situation, catalog success is best understood in context.
Absolute numbers are only valuable when placed in context with past
history and future expectations.
To be meaningful, success must be measured against goals, which
have been based on past performance, current industry status, and
perceived opportunities. Or, in the case of a new venture,
a "best guess" set of goals based on similar industry performances
and the requirements of funding the business.
Any form of measurement must start with a comparison against some
type of "yardstick." For a catalog business, that tool should
be a Strategic Plan.
In its simplest form, a Strategic Plan is a written document that
answers the following questions — Where have we been?
Where are we now? Where are we going?
The financial aspect of a Strategic Plan should be developed from
the "Bottom Up." In other words, establish a circulation plan
for the next three years. Apply costs and revenues, based
on reasonable assumptions, including the effects of inflation and
other outside influences. Be realistic, but include goals
that will stretch the organization, so that complacency can be prevented.
Work with the initial plan, carefully thinking through various
strategies. However, do not use every opportunity (e.g., media
type, new venture idea) you can think of in the first cut.
Compare top-line sales and bottom-line profits with any corporate
goals that may have been assigned. Assuming that the first
cut is inadequate, go back to the bottom again to stretch the original
goals more than you did originally. Continue the process until
everyone is satisfied that all aspects have been considered, including
staffing, office space, warehouse space, and more. Every department
should be involved in this process to the greatest extent possible.
That way, there will be more ownership of the plan and less finger-pointing
down the road.
By looking at plans over a three-year period, you will be able
to see the long-term implications of consecutive short-term plans.
For instance, the number of first-time buyers acquired in year one
will directly impact profits in the future. This will clarify
choices made in the magnitude of investment in prospect acquisition.
Key top-line results such as sales, profits, number of customers,
and average order size should always be reported with a comparison
to plan. This will provide an early-warning system to identify
whether or not the current path will meet business objectives over
time. Forecasting today's results into the future will help
identify issues that may not show up otherwise. This process
eliminates many surprises and allows every member of management
to work together to build and re-build future plans.
#2: How Should We Look At Sales?
Certainly, total sales are meaningful. However, a relative
measurement for sales helps bring the business into focus:
- (1000 * (Response Rate)) * Average Order Size = Sales Per Thousand Catalogs sent
Sales/Book is often used, as well. The difference is the position
of the decimal point and the choice is based on personal preference
or intra-company tradition.
These relative numbers allow easy comparison and are simple to
carry in your head. Thus, you will be able to calculate trends
quickly and compare with past history. At higher levels of
management, concentrate on concise summary data.
Sales can then be broken down in meaningful ways:
Customer versus prospect — For most businesses, customer
Sales Per Thousand are higher than prospects (i.e., first-time
buyers). Customers should be generating profits even if
prospects are acquired at a loss.
Type of customer.
Sales should also be evaluated based on timing. Seasonal
variations should be measured in absolute and relative terms.
Also, response curves should be developed so that results to-date
can be projected to their likely conclusion.
#3: How Should We Measure Profits?
is a sample profit and loss statement for a catalog. One of
these should be developed for each event (e.g., Spring Prospect
Catalog) and each test within an event:
Such budget line items as personnel salaries, benefits, agency
retainers and other overhead should be handled at a corporate level.
Many organizations do not include those here for the sake of simplicity.
There are certain decisions that should be consistent throughout
the organization. For instance, determining the average cost
of shipping out products. Those costs should be used consistently
unless a change needs to be made for a particular test or event
to reflect actual differences. For instance, in a shipping
and handling test, a higher cost per order should be used for the
In evaluating tests, a preliminary P&L may be constructed
with certain test assumptions to gauge initial success. However,
they should always reflect rollout costs, not the higher test costs
of small quantities, especially in areas of artwork, printing or
postage (e.g., the test may not qualify for postal discounts).
Within the P&L, determine the biggest point of vulnerability
and identify the actions that can be taken to compensate.
For example, a major factor in overall profitability will be the
mix between customer and prospect sales. It is helpful to
do the P&L from the standpoint of actual dollars, projected
dollars, and by percentage of dollars.
#4: Are We Building For the Future?
must always work at replenishing attrition with new customers of
greater or equal value. To do this, look at:
Mix between first-time buyers and multi-buyers.
Mix of buyers by source. This will include a look at the
impact of Internet customers. Are you bringing in new customers
or adding sales for existing customers or retaining customers
Sales of new first-time buyers versus sales of past first-time
A little more than a decade ago, a catalog company was sold that
looked quite profitable to the new owners. What they did not
realize was that the owner, in anticipation of retirement, had not
done any prospect mailings for two years. Profits were up,
but there had been no investment in the future. This catalog
struggled for years to repair the damage done by its founder.
#5: Where Should I Concentrate Prospect Dollars?
by looking at the cost per customer acquired. That is what
you spent to acquire them, including list rental and total in-the-mail
Next apply any conversion rate (and associated costs) that is
relevant to a two-step process, such as a space ad offering free
catalog. If fewer than 100% actually make a purchase, the
cost per first time buyers will rise.
Then, compare these by source (e.g. by media type, promotion type,
format) to maximize your most cost-effective acquisition methods.
The most valuable measurement tool you can have in this area is
Lifetime Value (LTV). LTV is the net present value of expected
future profits from a cohort of similar customers. It represents
a best guess of the net profit a new customer will bring in over
her lifetime. LTV must be developed by a statistician after
a careful study. Many experts analyze at least two years worth
of purchase data.
LTV is a measuring stick for what you can afford to spend in order
to acquire future customers. For instance, if your LTV is
$20, many companies have determined that they should spend 20 to
40 % of that, or $4.00 to $8.00, to acquire new customers.
If you spend less, you are being too conservative. If you
are spending more, you are risking the future profitability of the
catalog. LTV may vary based on the original source of the
name (e.g., space ads, rental lists, and Internet purchase).
#6: How Much Will Sales Need to Increase to Pay
for a More Expensive Creative?
Determine the in-the-mail
cost of the new creative in rollout quantities. Using the
P&L format, calculate how much sales need to increase.
If they need to go up by 50%, and creative changes have never given
you more than a 15% increase, this is probably not a good way to
spend test dollars.
#7: Which Test Cell Should We Rollout?
by verifying that:
There is not more than one change between the control and each
There is no name selection bias.
The sample size is sufficient to read significant differences
between test cells.
If these issues are not resolved up-front, test dollars will be
wasted and valuable time lost.
The goals of each test should be clear from the beginning.
Are the objectives of the test to lower costs, increase response,
or some other factor?
Construct a P&L for each test, using rollout costs.
Apply different costs where appropriate. Carefully measure
any element that is likely to be affected by the test (e.g., percent
of orders that qualify for premiums or other special promotions).
As results come in, build a "Test Cell Summary," which is a concise
summary of the key results and issues of each test. Identify
results that are significantly different from each other.
Indexing results can help clarify differences.
#8: Which Customers Should We Promote and When?
(Recency — Frequency — Monetary Value test cells) results
are often used by catalogers. And, these do give helpful insight
into the performance of various customer groups. However,
they will only look at one aspect of a customer's performance in
On the other hand, statistics-based predictive models evaluate
the multiple variables and assign a specific score to the customer.
Customers are then ranked from high to low and divided into groups
of equal size. These groups are often deciles, or ten equal
groups. A statistician is needed to assign the scores.
Once the scores have been assigned to each name, the implementation
of circulation decisions is much easier than with RFM.
Significant history is needed to build a statistics-based predictive
model. Ideally, multiple years of historical information should
be included in the model-building process. Typically, separate
segmentation models are done for single-buyers versus multi-buyers,
or seasonal variations.
Over time, the circulation manager can develop a plan based on
the number of deciles that should receive a given catalog.
#9: Which Items are Profitable Within the Catalog?
useful tool is the Square Inch Analysis, which measures the number
of square inches dedicated to an item. The cost of the space
is then deducted from the gross margin (i.e. sales minus cost of
goods) that the product produced.
However, caution must be applied. If a cataloger determines
that 15% of the items were unprofitable, and eliminates them from
the catalog, that would increase the cost burden on the remaining
items and cause some of them to be unprofitable. If the incremental
cost of including an item is low, it is fine to include some items
that are not profitable on a fully-loaded basis.
We have only covered a few of the many
metrics available to catalogers. However, it is important
to realize that the questions we ask, and the search for the answers,
is first step in a meaningful measurement of success.
Never stop asking those questions.
Cynthia Baughan Wheaton is a Principal at Wheaton Group, which
specializes in direct marketing consulting and data mining, data
quality assessment and assurance, and the delivery of cost-effective
data warehouses and marts. Cynthia can be reached at 919-969-9218,