Background:
You are acting as a consultant for a direct mail retailer specializing in selling ladies' clothing. The client is grappling with a recent increase in catalog printing and postage costs, amounting to thirty-two cents per catalog. They seek your guidance to determine whether this new price is acceptable and how it impacts their operations.
Additional Information:
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The average response rate for catalogs mailed stands at 2%. Essentially, every 100 catalogs sent out results in 2.5 orders being placed.
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The average order size amounts to $80, and intriguingly, 25% of customers who make an initial order are likely to place a reorder within six months.
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Excluding mailing costs, the fully allocated profit margin for catalog orders stands at 15%.
Solution:
Analyzing the cost implications of the new pricing structure at thirty-two cents per catalog is crucial. Here's a breakdown:
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Cost per 100 Catalogs Mailed: Printing and postage costs per catalog: $0.32 Total cost for 100 catalogs: 100 x $0.32 = $32.00
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Sales and Profit: Each 100 catalogs will yield 2 orders and an additional 25% reorder, totaling 2.5 orders per 100 catalogs mailed. Total sales from 2.5 orders: 2.5 x $80 = $200.00 Total profit at a 15% margin: 15% of $200 = $30.00
The profit of $30.00 derived from these sales falls short of covering the printing and mailing costs of $32.00. Consequently, based on this analysis, the client should consider rejecting the printing arrangement at thirty-two cents per copy as it would result in an overall loss. Further cost optimizations or pricing adjustments may be necessary to ensure profitability.
