Kevin Hillstrom: MineThatData

How Much Does Productivity Need To Increase To Cover Cost Increases?

You're told that if you are more strategic, if you execute better, you will increase productivity and cover the paper / printing / postage costs that come at you unabated.

Here is the optimized solution with a 12.5% ($0.10 per book) ad cost increase.

Optimal strategy drops from $9.18 profit at 12 catalogs to $8.17 profit at 9 catalogs.

We need to add merchandise productivity to offset the increase in ad cost if we want to get our profit back. We can do that in theory - let's do that in theory here. How much merchandise productivity do we need to get back to an equal amount of optimized profit?

We need average $/book to go from $3.50 to $3.71 (+6%). If that happens, we get back to $9.18 profit ... but something else happens ... optimal catalogs are at 10 instead of 12, meaning we generate $45.44 demand per customer for the year in this segment instead of $46.96 ... we give up a bit of top-line to get a bit of bottom-line.

In other words, a 6% merchandise productivity gain offsets the 12.5% ad cost increase, but results in two fewer catalogs being mailed (10 vs. 12) which leads to less top-line demand.

Paper / Printing / Postage increases set off a chain reaction of events, none of which will be positive for anybody.

1 - The optimal profit strategy for my clients is to reduce annual contacts and/or reduce pages per contact.

2 - The optimal profit strategy for my clients is to shift dollars out of print into digital, accelerating a twenty-five year transition. Many companies have completed the transition (hint - Orvis). Other clients are well into a major shift in strategy.

3 - All of this ultimately ends badly for advocates of Paper / Printing / Postage.

4 - Blaming my clients for not being strategic, for executing poorly, represents an amazing level of hubris - given the ones doing the blaming are the ones forcing this accelerated transition upon my clients.

If you need me to score your entire file for the optimal number of catalogs each customer should receive, annually, click here and then contact me (kevinh@minethatdata.com) and I'll create personalized scores / optimal catalog assignments for each individual customer, leveraging my proprietary organic percentage centric models.

The Optimization Story

Your paper / printing / postage partners want you to execute SMARTER, they want you to be more STRATEGIC. The way they figure, if you just improved everything you did, your performance would increase by 20% and that would cover the 20% increase in paper / printing / postage you've experienced the past few years. You'd be fine if you were just smarter.

They'd also still get the $3,000,000 of value transfer I explained yesterday. You'd be back to $0 value, they'd still transfer $3,000,000 of your profit to their net sales line.

That's what they're asking you to do.

You don't operate in their world.

Here is my Catalog Optimization Worksheet. Email me (kevinh@minethatdata.com) and I'll send you this worksheet at no cost, whether you work for a vendor or one of my clients. In this example, the brand mails this catalog segment 15 times per year ... the segment averages $3.50 per book ... 40% of demand flows-through to profit ... the organic percentage via tests is 50% (you measure this, right) ... and 40% of sales flow-through to profit. Here is how optimal profit is calculated based on the number of annual contacts mailed to a customer.

The brand is generating $52.50 demand per 15 catalogs, yielding $9.00 profit.

The brand should generate $46.96 demand per 12 catalogs, yielding $9.18 profit.

When the optimal strategy isn't much different than the current strategy, we leave things alone.

Let's assume your mailing costs in 2027 will increase from $0.80/book to $0.90/book. What does that do to an optimal solution?

The brand would generate $52.50 demand per 15 catalogs, yielding $7.50 profit (not $9.00 prior to ad cost increases).

The brand should optimally generate $40.67 demand per just 9 catalogs, yielding $8.17 profit.

Do you see what is happening?

The direct transfer of funds from your bottom-line to their top-line results in several problems.

If you want to keep mailing the same number of times per year, you must transfer $1.50 per customer in this segment from your bottom-line to their top-line ... you are less profitable, their revenue increases. See how that works?
The optimal number of catalogs decreases from 12 per year for this segment to 9 per year. This means if you want to manage your business properly to account for increased costs, you have to mail 9 times per year instead of 12 (or 15) if you want an optimal strategy.
To achieve an optimal strategy, you lower annual demand from this segment from $46.96 to $40.67.
To achieve an optimal strategy, you lower ad cost as well ... meaning the support community gets paid less. This is why they're clamoring for you to be more "strategic" and not cut back.
Of course, you will be more "strategic". You will accelerate your twenty-five year transition to digital marketing, out of necessity.

Seriously, if you want the spreadsheet, email me (kevinh@minethatdata.com) ... I'll give it to you for free.

I'll wrap up this diversion in my next post, then it's back to solving actual business problems via merchandising analytics.

Oh Come On!

I receive my daily dose of propaganda from industry sources. Digging through twelve glowing articles about Macy's because they posted their first positive comp store sales metric in (checks notes) four years is tiring enough.

The paper / printing / postage folks and their associated partners have made a habit in recent years of blaming you ... their customer ... for not being smart enough. It's YOUR fault that what used to be known as the catalog industry is crumbling.

Link from Midland Paper (click here).

The actual article from Printing Impressions (click here).

Oh come on. "Poor strategy costs more than postage ever will." You're blaming my clients for asking the wrong questions because the paper / printing / postage folks keep increasing costs?

Unacceptable.

There is virtually nobody left in what used to be the "catalog industry" who speaks up. Don Libey would have spoken up. I need to speak up. The cost of paper / printing / postage is too onerous now, and it isn't your fault that it is onerous. You're still practicing the craft.

For most of what remains of the "catalog industry" (and as one of my readers tells me, there is no such thing as a catalog industry anymore), the cost of paper / printing / postage for a comparable catalog increased by between 50% and 100% in the past decade, with increases of 20% over the past three years very common. Who is responsible for that?

It sure as heck isn't my client base.

One of my favorite emails of all time came in several years ago. The source was Midland Paper. Somebody mistakenly sent something to Kevin Hillstrom instead of the Kevin intended to email. The email contained an attachment ... the document in the attachment outlined how catalog pages circulated had declined dramatically in fifteen years (at least 40% and up to 80% based on what I could decipher in the document). Midland Paper outlined how they'd constrain supply (i.e. close down mills) going forward, and with supply constrained they'd be able to charge my clients more for paper.

Is that outcome the fault of my clients leveraging "poor strategy"?

I recall another client calling me in 2022. Their printer (a major one in the Midwest) told them they were being fired after a multi-decade relationship. This brand had to find a broker to help them complete print runs ... naturally their printing costs went up.

Is that outcome the fault of my clients leveraging "poor strategy"?

On LinkedIn, an industry expert posted pictures of a wine-and-dine event in Washington, DC, trying to communicate for the 22,549th time to Congress the importance of a viable USPS. This poor guy keeps fighting for my catalog clients - even though he doesn't get paid to do that. He keeps losing. He keeps showing up.

Is that outcome the fault of my clients leveraging "poor strategy"?

I'm so frustrated by the behavior of a community that increased your costs by 50% to 100% and then possesses the temerity to suggest you are asking the wrong questions.

Increased costs transfer wealth from your brand to support agencies.

You are less profitable because you send your profit to support agencies. You lose out on equity or bonuses.
They generate an increase in net sales.

Do you understand that? Your hard-earned profit dollars are reduced while at the same time their net sales / top-line growth improves.

Here's what the value transfer looks like for a typical catalog brand with $60,000,000 of annual attributed catalog demand / net sales.

This would be a company that mails twelve times a year, about 1,000,000 per drop. Since 2023, paper / printing / postage costs increased by 25%. Instead of making $12,000,000 of contribution / variable profit before factoring in fixed costs (likely $6,000,000 or more), the company makes $9,000,000. Three million dollars evaporate off the bottom line, transferred from client profit to agency/vendor/supplier net sales.

Are my clients wrong to do anything but cut back on print expense and instead focus on accelerating their twenty-five year transition to digital marketing?

The author of the article doesn't go after ORVIS ... they cut it all! They got out. Did Orvis ask the wrong questions?

No, Orvis did just fine. The article author and Midland Paper (who published this sample of the article) goes after you ... the very brand still doing what they want you to do. You're paying their bills (Orvis no longer is), and they suggest you are asking the wrong questions.

You are not asking the wrong questions.

Standing up for you will cost me business. Doesn't matter.

You simply cannot accept the ad cost increases via paper / printing / postage that are causing p&l challenges.

I'm not done. More tomorrow.

At 10,000 Feet?

We established that there are four categories that the Merchandising Team believes in ... and seven categories that are being purposely contracted.

Does a contracted category impact customer response?

Yes.

Let's look at how many customers bought from the four primary categories and all other categories (both) in the past four years.

3 Years Ago: 180,286.
2 Years Ago: 171,306.
1 Year Ago: 169,072.
Today: 110,850.

Yeah, that's a problem.

How many customers purchased just from the four primary categories?

3 Years Ago: 168,952.
2 Years Ago: 156,288.
1 Year Ago: 174,994.
Today: 184,286.

Counts are holding mostly steady.

How many customers purchased just from the other seven categories?

3 Years Ago: 217,656.
2 Years Ago: 243,028.
1 Year Ago: 218,436.
Today: 130,866.

Yeah, counts are crumbling.

Which customer do you want? Here is the amount of spend each customer segment generated in the past year based on how the customer was segmented a year prior.

Both Groups = $11.46.
Primary Categories Only = $6.44.
Secondary Categories Only = $4.60.

In other words, when you lose customers from Secondary Categories, you aren't losing highly productive customers. When you lose customers from Secondary Categories who also buy from the four Primary Categories, you lose $11.46 per customer, which is too much.

Worse, when a Primary+Secondary customer becomes a Primary-Only customer, value drops from $11.46 to $6.44. That's a stunning drop.

As the Merchandising Team at "Beans: The Internet's Only Variety Store" contracts the majority of categories, the Merchandising Team weakens the customer file - shifting customers from high-value segments to low-value segments. No Bueno! They are weakening the customer file, which lowers demand in all categories next year, which requires more of a marketing investment in new customers, which harms the p&l (in the short term).

So yes, before you start messing around with your merchandise assortment, think about what you are messing with! If you are lowering the value of customers for no good reason, well, that means you are harming the business.

The 15,000 Foot View

Yesterday we took a step back, looking at the business from a 30,000 foot view. We clearly observed that there was a new merchandise problem over the past two years.

I drilled down one level ... there are four categories that the Merchandising Team appear to have faith in.

Apparel Tops / Apparel Bottoms / Outside / Decorations were less than half the business three years ago ... today they're more than 60% of the business. Demand isn't necessarily stable, but it isn't bad. Existing items are stable, new items are down about $900,000 from two years ago.

Everything else?

Wow.

New items are down 45% from just two years ago. New item demand is down a whopping 70% from two years ago!!!!! In the past year, existing item demand is down a million dollars.

Tomorrow we'll apply this 15,000 foot level view of the business to customer response. It's obvious the Merchandising Team is doing something on purpose ... are customers impacted (hint - yes, they're impacted).

Click here for more information and file layouts.

Kevin Hillstrom: MineThatData

How Much Does Productivity Need To Increase To Cover Cost Increases?

The Optimization Story

Oh Come On!

At 10,000 Feet?

The 15,000 Foot View

More Recent Articles