Controlling Your Direct Selling Expenses... The Need for Profit vs. Growth

by Stephen Lett

Often times a catalog company will struggle with profitability vs. growth. It is not uncommon for the bottom line to conflict with a desire to grow. Or said another way, growth and profitability can be at the expense of one another at least short-term. This month, we will focus attention on selling expense, i.e., printing, paper, postage, etc. Why is this ratio important and what should it be?

Your direct selling expense ratio is as important to track as your cost-of-goods ratio and other key ratios on the income statement. Controlling this ratio is a major part of the determining profitability. Let’s define what we mean by direct selling expenses which are as follows:

• Catalog Creative Expenses
• Printing and Paper
• Ink-Jet Addressing and Mailing Expenses
• Bind-in Order Form Envelope
• Postage
• Outside List Expenses
• Merge/Purge Expenses

Direct Selling Expenses can also include the following categories:

• Space Advertising
• Alternative Media
• Internet Marketing

It is important to group these expenses together on your income statement. They should not be included with all other operating expenses. You want to track these expenses and key ratios to net sales just like you monitor your cost-of-goods-sold percentage every month. If you do not set-up your income statement properly it will be extremely difficult to monitor this critical ratio.

Let’s take a look at what direct selling expenses should be as a percentage of net sales. We also want to understand the percentage each one of these line item expenses has to the other; see chart below:

DSEXP.xls LETT Direct, Inc. Date: 09-01-05	DIRECT SELLING EXPENSES
EXPENSE CATEGORY	PERCENT TO TOTAL EXPENSES		RATIO TO NET SALES CONSUMER		RATIO TO NET SALES B-to-B
Catalog Creative Expenses	6.15%		1.75%		1.50%
Printing and Paper	38.60%		11.55%		8.00%
Ink-Jet Addressing/Mailing	1.80%		0.85%		0.75%
Order Form	2.50%		0.60%		0.50%
Postage	40.00%		10.00%		7.00%
List Rental Expenses	8.50%		2.50%		1.00%
Service Bureau Expenses	2.45%		0.75%		0.75%
Total	100.00%		28.00%		19.50%

Printing, paper and postage account for approximately 80% of all direct selling expenses. Catalog postage is the largest expense category at 40%. In terms of the direct selling expense to net sales ratio, we need to look separately at a consumer catalog company vs. a business-to-business firm. A typical ratio for a consumer cataloger is 25% to 30%. This ratio for a B-to-Ber usually ranges from 18% to 20%.

Increasing the amount of prospecting you do will increase this key ratio. If you drive the ratio from say 30% to 35% or even 40% your profitability will suffer. As we have said before, don’t try to grow too fast. Rather, grow within your financial means and maintain the proper balance between mailings to your housefile vs. mailings to prospects. If you make a conscious effort to grow at a faster rate, be certain you have the proper amount of financing in place to fund the growth and know what to expect. If not, financial disaster could strike.

Let’s take a look at what you can do to reduce direct selling expenses. Here are a few tips:

1. Catalog Creative Expenses – It is easy for this ratio to get out of hand. Minimize version changes and take advantage of re-mails (cover changes only).
2. Printing and Paper – By all means, obtain at least three different competitive bids (from catalog printers) once every year or two. Change is always difficult but you should be willing to do so for a difference of 5% or more. Ways to reduce your printing costs are as follows:

• Trim Size – Ask your printer for alternative trim sizes which can reduce paper and postage costs, especially if your catalog exceeds the Standard A piece rate minimum.
• Your Disks – Prepare them correctly. Send them to your printer with all of the necessary files.
• Leverage Longer Print Runs – Use multi-covers and a re-mail strategy in order to maximize your economies of scale.
• Purchase Your Own Paper – This is something we do not recommend unless your company is of the size and scope to deal with any resulting issues such as what to do with butt rolls, paper quality issues, etc

3. Postage – Here is another area where money can be saved. Here are a few suggestions:

• Paper Weight – Consider a reduction. Paper is sold by the pound.  If you use fewer pounds, you may save money.  You will also save money on postage by using lighter weight paper, providing your catalog mails at the pound rate (vs. at the piece rate); i.e., exceeds 3.306 ounces.
• Catalog Printer – Here again, make certain you are with a catalog printer. Lots of companies can put ink on paper but the distribution of the catalog through the postal system must be considered. A catalog printer is set-up to penetrate the postal system by drop-shipping catalogs to various drop points where a local letter shop will most likely send all the mail to a local post office or BMC (Bulk Mail Center).
• Co-Mailing – Explore with your printer the idea of co-mailing your catalog with another one of their catalog customers in order to create a denser mailing list. This will help create more carrier route mail which goes at a lower rate.

4. Outside List Expense – Exchange when you can but don’t accumulate exchange balances you will likely never use. Leverage the cooperative databases after the exchanges. Reduce outside list costs by minimizing the per thousand additional charges for extra selects, i.e., dollar, recency, etc., that you might not need. And, by all means, use your list broker to negotiate base pricing, net arrangements and select charges on your behalf.
5. Merge/Purge Expenses – Here again, you should obtain competitive bids from at least three service bureaus every year or two to make certain the one you are using is competitive. Purge Your File – When you are doing a merge/purge, don’t pass more names than you need to. Combine merge/purges when you can. Caution: This is only possible if the mailings are fairly close together, i.e., 4 or 5 weeks apart. Obviously, you want to mail to “fresh” names when possible.

These are just a few of the ways you can reduce your direct selling expenses. By all means, do NOT over circulate catalogs. If your selling expense to sales ratio is too high and your bottom line is suffering, reduce circulation. Determine your incremental breakeven point and eliminate mailings to outside lists and to segments of your house file falling below your established criteria. Manage by the ratios for the long term viability of your company.