Question

the company is going to send 2 different catalogs to their customers. One of the catalogs costs 50 cents to make and is 50 pages long. The conversion rate for the catalog is 5% and each customer brings in 315 dollars. The second catalog costs 95 cents to make, is 100 pages long and each customer brings in 300 dollars from it. The profit margin is 30%. What should the conversion rate for the second catalog be to make at least the same amount of profit as the first one.

After you find the conversion rate for the second one, there is a second part of the problem. Company is planning to make a new catalog which is going to cost 10 cents more than the 100 page one. The more expensive catalog is going to be sent out to 20% of the customers while the remaining 80% are going to get the 100 page one. Assume the same 30% profit margin and 300 dollar profit from each customer. What should the conversion rate for the new catalog be in order to receive the same profit at the end?

Answer 1

Conversion rate is 5%

It means for every 20 (100/5) catalogues, 1 customer is converted

Cost of 20 catalogues = 20*.5$=$10

1 customer brings in 315$ revenue out of which profit is 30% = 30%*315=$94.5

Total net profit = $94-5-$10=$84.5

The 2nd catalogue also has 30% margin and revenue of $ 300 per customer = 30%*$300 = $90

For total net profit to be equal the cost of catalogues needed for 1 customer conversion has to be $90-$84.5=$5.5

Cost of 1 catalogue is $.95

# of catalogues needed is $5.5/$.95=5.79

Therefore conversion rate is 100/5.79=17.27%

Second part:

New cost of 1 catalogue = $0.95+0.1=$1.05

This is going to be sent to 20% of customers

To the other 80% of customers the cost of 1 catalogue will be $0.95

Weighted cost of 1 catalogue = (0.2*1.05)+(0.8*.95)= 0.97$

Revenue of 1 customer is $300 and profit = 30%*300=$90

In order to get same profit of $84.5, the cost has to be $5.5

No of catalogues needed for 1 customer is $5.5/0.97$=5.67

Conversion rate = 100/5.67=17.63%