Data Driven: Print Dollars
What are the key profit-and-loss statement (P&L) components of a print marketing campaign? What can you affect in the short-term to turn around a P&L starting to fall short of forecast? The direct marketing printed campaign P&L statement differs from a traditional business P&L in several ways:
- Its purpose is primarily for direct marketers to measure individual marketing campaigns, as opposed to traditional monthly, quarterly or
- It indicates gross merchandise demand in order to quantify returns and cancellations; a key direct
- The application of overhead expenses depends upon the nature of the marketing campaign—be it a mailing to current clients or to potential clients.
Best-in-class marketers build a separate forecast for each print marketing campaign, including inputs for merchandise sales in units and dollars, response rates (RR%), average order value (AOV), sales per mailed piece ($/Book), advertising costs and fulfillment cost per order. All of these variables, including returns and cancellations, are entered in a P&L format. At the end of the marketing campaign cycle, actual results are entered into the P&L. Variations between forecast and actual results are noted and explained.
The following chart shows an example of a print campaign P&L. It assumes that a physical good is being sold. Direct marketers can use the P&L to pinpoint specific issues concerning price points, units per order, margins, advertising costs, sales revenue and overhead.
By analyzing metrics to this detail, direct marketers are able to quickly implement corrective actions to either take advantage of a new market situation or correct an issue.
• Average Unit Price and Average Order Value (AOV): The average unit price is calculated by dividing gross sales by units sold. The chart uses gross sales rather than net sales, because many companies report total units sold before returns and cancellations. AOV is similarly calculated by dividing gross sales by total orders. Increasing AOV is a typical method for direct marketers to quickly bump up revenues if they begin to fall short of forecast.
• Response Rate and Average Units per Order: RR% is another method for direct marketers to rapidly correct a P&L imbalance. It is measured as the number of total orders received divided by the number of total mailed pieces. Current clients will traditionally generate a much higher RR% than prospective clients or former clients. Average units per order is calculated by dividing units sold by total orders.
• Cost of Goods: Given the importance of margins to a direct marketing business, it is not surprising to find numerous subcategories listed in the P&L. As a key driver of success, it is critical to monitor various elements. The elements within this category of the P&L include product costs, freight to your warehouse, cost of markdowns and leftover product at the end of a season.
• Fulfillment Costs: Fulfillment costs include everything associated with receiving a client’s orders, inquiries and catalog/printed materials requests, as well the costs associated with shipping their orders. This includes applicable costs for order entry, systems, warehousing, shipping, returns and customer service.
• Advertising Costs: This is often the largest cost center for a print direct marketing campaign. This portion of the P&L captures many of the fixed and variable costs, including design, photography, paper, printing, outside list rentals and postage.
Fixed creative costs can significantly impact campaigns with smaller circulations. If the fixed creative costs are $46,800, then with a total circulation plan of 250,000, that comes to $187/M or $0.19 per printed piece. If, however, the total circulation plan was only 100,000, then the fixed creative costs would jump to $468/M or $0.47 per printed piece.
Another factor is response rate. The higher the response, the lower advertising is as a percent of net sales. For example, consider if the combined printing, paper and postage costs were $84,240. With a 2 percent response rate and an actual average order value of $104, that comes to $520,000 in gross sales. Print/postage/paper therefore represents 17 percent of net sales. If, however, the campaign is primarily client acquisition-driven, then the RR% may be just 0.9 percent, with an AOV of $80. That translates to 2,250 orders and $180,000 in gross sales. Assuming a consistent combined returns/cancels percentage of 6.2 percent of gross sales, we get net sales of $168,840. That same print/postage/paper cost of $84,240 is now 50 percent of net sales!
• General Overhead: If the campaign is focused on current clients, overhead is generally added into the equation. New client acquisition campaigns or reactivation of lapsed client segments, with their lower RR% and AOV, usually cannot achieve breakeven if saddled with these costs. Because new client acquisition should be an important factor in any circulation plan, these segments are given a pass to avoid the overhead burden.
• List Rental Income: A mature print direct marketer typically turns its 12-month client file rentals 20 to 25 times annually. Any list rental income is traditionally reported at the bottom of the P&L after contribution to overhead and profit.
Identifying and benchmarking your key costs against your company’s financial plan, competitors’ results and industry averages will allow you to constantly evaluate your current market position.
Philippe Graner is director of marketing strategy at the Mission, Kan., direct marketing agency J. Schmid & Associates. He can be reached at email@example.com.