Using circulation models for subscription planning and budgeting

When subscription managers, publishers and finance directors try to create budgets and forecasts for subscription-based titles using homemade DIY spreadsheets they realise the enormous complexity of the task. Even a single-sourced subscription promotion campaign generates a huge table of financial data which:

* Includes the effects of different numbers of issues published each month
* Investigates the differences between accounting for subscriptions on a profit and loss basis and on a cash basis
* Separates subscription revenues into earned and deferred income, month by month
* Includes the revenue and cash flow effects of multiple subscription prices and 2- and 3-year subscriptions
* Accounts for credit orders; the cost of bad debt copies; Direct Debits and, for international products, converting local currencies into sterling
* Includes the cost and revenue implications of conversions and renewals
* Forecasts future expires and ensures that the timing of new subscription promotions offsets months with high expires
* Ensures that additional copies are added to the print order projection at the correct time and that the printing and distribution costs associated with the extra copies are added to the production budget
* Evaluates the effects of price increases
* Forecasts how changes in circulation increases will effect the publication's ability to generate advertising sales

PC-based spreadsheets certainly ease the burden of performing manual calculations but ad-hoc DIY spreadsheets cannot possibly include the combined effects of all the subscription acquisition, up-sell, cross-sell and renewal campaigns. There are just too many variables for in-house developed spreadsheets to handle.

This is where circulation models come in. Circulation models are off-the-shelf software packages which contain pre-programmed financial simulations of all the variables involved with circulation, advertising, editorial and production. The complexity of circulation development through paid subscriptions is particularly well catered for: hence the name circulation modelling.

In its widest sense, circulation modelling is a three-stage process. Most UK publishers carry out the first and second stages but, as yet, only the largest UK publishers complete the third stage.

Stage 1

Subscription managers use Lifetime Value models to forecast the profitability of each new subscription promotion campaign. Lifetime Value models are loaded with the following data:

* The number of promotional efforts in this particular campaign
* Forecast response rate, pay-up rate and (one- and two-years later) the forecast renewal rates for this campaign
* Subscription prices (for the first and subsequent subscription years)
* Acquisition and renewal promotion costs
* Run-on printing costs per copy, fulfilment costs per copy and postage costs per copy
* The number of issues despatched each subscription year
* Additional revenues generated from this particular campaign (such as advertising, list rental, reader offer and merchandising sales)

Lifetime Value models provide Subscription Managers with campaign specific information such as:

* Forecast subscription volumes in the first and subsequent years
* Forecast subscription revenues
* Forecast profit contribution (before fixed costs and overheads)
* Campaign performance metrics (such as cost per order, return on investment, £ returned per £ spent, and forecast Lifetime Value)

Stage 2

Subscription managers use Source Ranking models to rank the relative attractiveness of all new subscription promotion campaigns. These models are loaded with summary data from each new subscription promotion campaign, which include:

* Forecast subscription volumes
* Forecast subscription revenues
* Forecast promotion costs
* Forecast profit contribution
* Forecast lifetime value

Source Ranking models allow subscription managers to optimise their new subscription promotion budgets. An additional 10,000 new subscriptions may need a promotion budget of £50,000, for example, but an additional 15,000 new subscriptions may need a promotion budget of £100,000.

Stage 3

Subscription managers and finance directors use publishing models (also called circulation models) to quantify the effects of different subscription development strategies; carry out "what-if" scenarios; and calculate overall subscription marketing budgets for new subscription, up-sell, cross-sell and renewal campaigns. These models are loaded with the following data:

* The number of different sources of new subscriptions and the price, term length and payment method combinations for each source group
* Expiry months of existing subscriptions
* Renewal rates by new subscription source group and by renewal segment (such as second time direct-sold subscriptions)
* Direct Debit details
* Pay-up rates from credit (or "bill-me") subscriptions
* Subscription acquisition, renewal and fulfilment costs
* Production set-up and run-on costs (ie printing, wrapping, postage and wrapping costs)
* Newsstand cover prices, sales volumes, sell through percentages and retained earnings by channel
* Newsstand promotion costs
* Free circulation volumes and promotion costs
* Display and classified advertising pages sold, together with their associated page rates
* Ancillary revenue sources such as list rental, merchandising, books, binders and back issues
* Editorial, administration and overhead costs

Publishing models calculate circulation volume, revenue, profit and loss, and cash flow projections on a month-by-month basis, usually over 3-years or 5-years. Monthly and annual totals, and category summaries are produced for:

* Forecast circulation volumes by category and forecast total print order projection
* Movement in subscription volumes, issue-by-issue
* Forecast earned and deferred subscription income
* Forecast subscription marketing budgets (for new subscriptions, up-sell and cross-sell orders, and renewals)
* Forecast profit and loss and cash flow for the entire publication

Testing the consequences of adopting different business development strategies is made easy with publishing models. Questions such as …

* How much investment do we need to grow our circulation by 10,000 within 18 months?
* What is our most profitable combination of subscription sources?
* What is the financial effect of improving our renewal rate by 1%?
* Would we generate more profits if we converted from free to paid circulation?
* How much would it cost to launch a new publication?

… can be investigated and quantified. Circulation modelling techniques allow publishers to:

* Evaluate the financial performance of their publications and identify the most critical items which affect profitability. A 1% improvement in renewal rate, for example, may increase the profitability of the entire publication by 15%
* Quantify the profit potential of an entire publication, especially when planning new launches and buying or selling existing titles
* Manage the changes in circulation mix between newsstand, paid subscriptions and free circulation
* Generate the largest financial returns from the least marketing budget

The history of circulation modelling

The first generation of circulation models in the 1970s ran on time-shared mainframe computers. Subscription Managers fed in their data and assumptions through a series of data entry tables, pressed the "calculate" buttons on their terminals, and waited a few minutes before reading-off the resulting forecasts, printed out through a series of paper-based reports. These early circulation models, the best known of which was KBM, were accurate though difficult and expensive to use.

Lighthouse Publishing Services launched the first spreadsheet-based circulation models in the 1980s. These models ran on PCs using Microsoft Excel or Lotus 1-2-3 and were much easier to use: calculations could be seen and audited, and Subscription Managers could visualise the effects of additional promotion campaigns by looking at circulation graphs showing forecast circulation volumes by category and by month for the next 3-years or 5-years. Some of Lighthouse’s clients in Europe were The Economist, Time Inc, Newsweek, Reed-Elsevier, L’Express and Handelsblatt.

Mainframe-based models were redundant by the end of the 1980s. PCs became ubiquitous and KBM re-engineered itself as two different PC-based circulation models: MPM Express (used by Ziff-Davis) and MPMW (used by The Financial Times). Similar "black-box" circulation models (where you can’t see the calculations) were developed in the USA by CDS, PDC, Ladd Associates and others.

Lighthouse grew in popularity during the 1980s and 1990s and became market leader with installations all over the world. Regrettably the company overtraded, ran out of cash and was acquired by the US fulfilment bureau, Neodata (later renamed as Centrobe, then EDS and subsequently sold to Kable). The new owners closed the Lighthouse company but sold the Lighthouse models alongside their existing fulfilment bureau services, though now with much-reduced levels of marketing and technical support.

Circulation modelling suppliers are still active in the USA market though none of the models are particularly suitable for publishers in Europe as they do not support Direct Debits or multi-currency payments.

Using circulation models

Imagine your promotion budget was increased by £100,000 on condition that you identified marketing opportunities which would maximise the financial returns on this investment. Could you select a specific publication; a specific country; a specific circulation type; and a specific price, term length and payment method combination that would generate the biggest profits? Circulation modelling techniques could!