Keeping tabs on your business performance is a huge challenge! So many numbers to keep up with, often telling conflicting stories. Wouldn’t it be great if you could look at a single metric and understand exactly how your business is doing?
Well, try this. Calculate the ratio of merchandise gross margin dollars (no shipping and handling revenue, please) to total marketing dollars spent. If the answer is 2.4 or higher, my guess is that you have a very profitable business. If the answer is below 1.8, I am guessing that you are struggling a bit. Of course there are other expenses that factor into business profitability, so the important thing here is to understand what that ratio needs to be for your business to hit its profit objectives. So look at your profit and loss statements for the past 5 years and figure that out.
But why is this particular ratio the most important number in catalog marketing? Because once you establish what that ratio needs to be for your company, you can make achieving it the number one goal of both your chief merchant and your head of marketing.
Think about it; the ratio of merchandising gross margin dollars to marketing costs encompasses all the key variables in both of those areas:
- Initial gross margin
- Promotional discounts
- Media mix
- Media productivity
By making this a shared merchandising/marketing goal (and one that heavily influences bonus payouts), you are strongly encouraging the two teams to work together to understand all the profit levers they are collectively pulling, and how effectively they are doing it. Rather than the all too typical finger pointing, you get a cooperative effort that will maximize your company’s profitability.
I strongly encourage you to do the calculations, and then give this a try.