Five Costly Mistakes That Can Impact Your Business
by Stephen Lett
It pains me to see catalog companies making bad decisions (with good intentions) that can be self-destructive to their business. I know these decisions are being made for all the right reasons; mainly to reduce expenses and to save money. The actions taken are most often the opposite of what should be done for the health and well-being of the business, however. I have always believed that you cannot slash and burn your way to prosperity. Meaning that major cuts will result in more reductions spiraling a decline that at some point cannot be reversed. Expense cuts that are not carefully thought out will likely reduce profit contribution and increase the incremental break-even point. It’s a matter of short-term gain and long-term pain. I’ve been in the business of catalogs for over 40-years. While I’m sure I haven’t seen everything, I have seen enough to know what to do and better yet, what not to do to properly manage expenses. Based on my observations over the years, here are the five fastest ways to negatively impact a catalog business when trying to reduce expenses:
- Replacing the catalog with ecommerce – Several years ago, I had a client tell me that within five years, they wanted to do 100% of their business via the Internet and eliminate their print catalog. On this path to self-destruction, they reduced circulation every year as their 12-month buyer file continue to shrink. The catalog is the largest single driver of traffic to the web. Therefore, it is important to utilize all marketing channels in order to maximize sales.
- Cut circulation – The goal should be to mail down to the incremental break-even point (BEP). For example, if the incremental break-even is $1.00 per catalog, I’d suggest mailing to all house file segments and prospect lists starting at this level. (The incremental break-even is defined as sales less refunds less cost-of-goods sold less direct selling expenses.) We have a break-even calculator on our website that will enable you to determine your BEP: Click here for Lett Direct BEP If management dictates that you have to reduce expenses by a stated amount, you will most likely have to eliminate circulation that is above the incremental break-even or above $1.00 per catalog in our example. This will result in the elimination of circulation that is contributing to profit and overhead.
- Reduce page count – Pages increase response, i.e., more pages (more SKU’s) the greater the response. As long as you follow the 1/3, 1/3, 1/3 rule don’t cut pages. If you have the product, it would be much better to add another signature to your catalog especially if you mail at the piece rate (under 4.0 ounces). “Pages” are one of the few bargains left in this business. Postage costs account for 50% to 60% of total selling expenses. Therefore, you can leverage this expense by adding pages for little additional costs for paper and print manufacturing. Our formula is that sales will increase by one-half the percent increase in page count. For example, if you increase page count by 20% your sales will increase by approximately 10%. If you cut pages, the opposite is also true and sales will decline.
- Eliminate drops to the house file – The house file is what lays the golden eggs. Your previous buyer file is what keeps you in business. It maximizes your revenue per catalog. It’s what you strive to increase. Eliminating a drop to the house file will reduce your overall contribution to profit and overhead. Think about adding another drop to your house file as a way to generate more profit contribution. You can tweak circulation by drop but don’t eliminate an entire mailing.
- Stop prospecting with the catalog – Eliminating prospecting and mailing only to the buyer file is another way to kill business. Yes, prospecting can be expensive but here again, the proper analysis is required. Some prospect lists will likely perform about the incremental break-even point. However, in order to maintain and/or grow your 12-month buyer file, you probably need to mail below break-even. The question is how far below and how fast will you recoup your investment. I believe that if you prospect below the incremental break-even point, the payback on that investment must occur within 12-months or less. Generally, we recommend prospecting approximately 20% below break-even depending on the economics of the business.
In summary, do the right thing for all the right reasons. There are ways to reduce expenses without accelerating a downward spiral that will continue to perpetuate itself. You can cut selling expenses and show a larger profit this year. But what are you going to do the next year and year after? Keep your business healthy. Maximize all marketing channels; print and web. Tweak circulation, add pages, add a drop to the house file, etc., and keep your business moving forward.
Stephen R. Lett is the President of Lett Direct, Inc., and a catalog consulting firm specializing in circulation planning, forecasting, analysis and digital marketing since 1995. Mr. Lett spent the first 25 years of his career with leading catalog companies; both business-to-business and consumer. He is the author of a book, Strategic Catalog Marketing. He can be reached at 302-539-7257 or by e-mail at firstname.lastname@example.org.