How to Prepare for the Postage Rate Increase
by Stephen Lett
One year from this month postage rates are expected to increase from 13% to 20% which is not good news for catalogers. This will be the first rate increase since mid 2002 (when we had three rate increases within two years!). I chose this topic as the subject of my column this month because I feel it is important for catalogers to spend the next 12 months preparing to absorb an increase of this magnitude. Don’t wait until the increase is put into effect to determine what to do. Now is the time to begin making adjustments. Here are ten cost-savings reductions for you to consider (along with a few things NOT to do!).
What To Do
- Catalog Trim Size - If you are a pound rate catalog (weighs 3.30 ounces or more), a slight reduction in the physical trim size of your catalog will reduce your postage (and paper) costs. For example, a reduction of ½” vertically on an 80 page catalog can save $15,000 on the paper and postage costs per 1.0 million copies printed. (Note, this assumes the weight requirement does not change.)
- Paper Weight and Separate Covers – Test lighter weight papers. Test self-covers vs. using a heavier separate cover. A move to a slightly lighter basis weight paper should have no impact on your results. Paper is sold by the pound. If you use fewer pounds, you may save money. You can save money on postage by using lighter weight paper for sure, providing your catalog mails at the pound rate. A simple change from a 34 lb., #5 basis weight to a 32 lb., #5 basis weight will save approximately $12,000 in postage on the mailing of 1.0 million 80-page catalogs (at today’s postage rates).
- Use a Lower Grade of Paper – Changing grades can have a similar affect as changing the basis weight of the paper. Just be careful not to go to extremes. Test a #5 grade, for example, against a #4 or #3 grade. Unless your offer is extremely upscale, a slight reduction in the grade of paper you use can reduce your direct selling expenses and ratio.
- Tighten Circulation – Higher postage costs will increase your breakeven point. Be careful not to over circulate catalogs to your house file and to prospects against your adjusted breakeven point. A 15% increase in Standard A postage costs will increase your incremental breakeven point approximately 6% to 10% or more depending on your catalog costs and gross margin percentage. Review the lowest performing segments of your house file as well as the prospect lists (and coops) you are using. Reducing circulation will increase your revenue per catalog mailed. Don’t cut circulation first, however. Focus on reducing your direct selling expenses (points #1, #2 and #3 above) in order to determine if you can absorb the postage rate increase.
- Zip+4’d/Carrier Coded – If you say that you will be dropping non-codeable records with your list order as a requirement, you can deduct these names from the list rental invoice. Non-codeable records do not qualify for postal discounts and are generally less deliverable and therefore, less responsive. Also, make sure your list rentals have been NCOA’d recently and of course your house file. If you do any split tests make sure you look at the net benefit of selective binding in order to keep the mailing in one zip stream to maximize your postal discount as opposed to separate zip streams which is more costly (generally at quantities of 300M or more it is more cost efficient to selective bind). Ask your service bureau to give you the postage estimates both ways (one zip stream vs. two zip streams), to be sure where the cut-off is. If the postage savings outweighs the price of selective binding, then selective binding is definitely the way to go.
- Add-a-Name –Add-a-Name is the process where you add one or two records to a carrier route in order to qualify for a discount where you were previously short of the 10 per carrier route requirement. Often if you have a pool of records to draw from that are close or at breakeven, the records added bring your postal cost down and the net gain is positive. If you use inactive buyers or modeled names from a cooperative database, it’s usually worth doing. Keep in mind that the number of Add-a-Name pieces that are added will be a function of how many pieces are being mailed and the geographical distribution of the mailing. For most mailers, a national circulation of 700,000 or more is required in order for Add-a-Name to make economic sense. At this level, generally about 5,000 to 10,000 catalogs will be added.
- Develop a Contract Strategy – Test for the preferred method of contact. For example, if a customer only responds to E-mails, you may be able to decrease catalog mailings and replace these “contacts” with E-mail contacts. Since often web buyers are not trackable through typical source code tracking, they may look as if they are not responding well to a mailing, when in fact they are. Therefore, this method should be backed-up by significant testing over the course of one year.
- Obtain Competitive Print Bids – Be certain to obtain a print/paper bid at least annually. Market conditions change and so do printing and paper prices. Long-term contracts normally do not work in your favor due to the competitiveness of the marketplace. Contract only a year at a time. And, always obtain at least three different bids. When obtaining bids for paper and printing, you should also request a postage estimate based on a typical quantity mailed including the printers drop-ship fees.
- Eliminate the Bind-in Order Form/Envelope – As fewer orders are actually received by mail, many catalogers have eliminated the bind-in order form and envelope as a way to save money. Prices range from $12 to $20 (or more) per thousand depending on the size, quantity printed and use of color. They also add weight to the catalog, which can increase postage costs. If you decide to print the order form on a page in the catalog, part of your cost saving calculation needs to include the gross margin you will forfeit from the elimination of saleable merchandise on the page (or two) you devote to the “printed” order form.
- Increase Prices – Catalogers are reluctant to increase prices. Many price using a formula that is not our preferred method. For example, if the cost of an item is $20 and your desired mark-up is 2.0 times, you might establish a retail price of $40 that yields a gross margin ratio of 50%. Our preferred method of pricing is based on the perceived value of the item. If you are selling name brand merchandise others are selling, this method of pricing is more difficult. However, if you are selling proprietary items that are not readily available, pricing based on perceived value will avoid leaving gross margin dollars on the table. Consider increasing prices. It might be painful but catalog customers don’t normally purchase based on price (studies show that price is the #3 or #4 reason why people by mail). They buy based on convenience and service.
What Not To Do!
Often we make cuts in all the wrong places. Our intentions are good but the actions taken are not always the best for the business long term. Here is our list of things NOT to do!
- Don’t Stop Mailing to Web Only Buyers – When you look at your source code report it appears that the Web only buyers are considerably below breakeven. Even the results from the most recent Web buyers don’t look exciting to you, I’m sure. It is logical to conclude that you should stop mailing Web only buyers in order to save money. But wait a minute! In recent match-back studies we have done Web only buyers are performing at more than acceptable levels.
For most catalog companies, the Web buyers normally rank in the bottom 10 cells for house file when we report by key code. After doing a match-back, they rank in the top 10 cells! The clearest example of this happens to be in a recent Holiday mailing we did; there were no Web cells in the top 5 when ranked. However, after the match-back there were 3 in the top 5. The Web buyers are very strong responders. They receive a catalog, order on the Web and we lose traceability. The bottom line is we know that the Web buyers respond to the catalog. We also know the catalog is a big driver of traffic to the Web. Early this year when we did the split and created a hold out panel, it absolutely paid to mail the Web buyers a catalog. We created 2 panels of roughly 25,000. One panel was mailed 7x the other only 1x. The net contribution for the 7x group was $169,089 compared with the 1x group of $109,318. The Web buyers who were mailed all 7 times generated a contribution to profit & overhead (after all selling expenses) of $169,089. The Web buyers who were mailed only one time generate a contribution of $109,318. The additional 6 mailings to the Web buyers generated another $59,772 in profit contribution.
- Don’t Reduce Pages – We have always emphasized the importance of maximizing page count. Pages, i.e., more merchandise, DO increase the amount of revenue generated per catalog mailed. Rule of Thumb: The revenue per catalog mailed will increase at one half the percent increase in page count. Assuming there is plenty of “good” merchandise to sell, adding pages makes good economic sense. Adding pages while making certain that the paper and press manufacturing are efficient can lower your incremental breakeven point while increasing revenue. Our goal should be to add pages to the catalog as economically as possible. In order to accomplish this goal, we need to be aware of the weight minimum for the standard “A” postal rate. A catalog weighing less than 3.3 ounces can be mailed at the minimum postage rate (assuming this weight requirement does not change). A catalog weighting over this amount must be mailed at the pound rate. As the weight of the catalog increases over 3.3 ounces, i.e., more pages equals more weight increasing the unit cost of postage. We always want to maximize page count without increasing our postage costs when we can do so. Once we are required (by weight) to mail at the pound rate, using the right paper and page count combination can help minimize the increase. It is possible to circulate the same number of pages (or more) for less money. As you increase pages, you should consider reducing the basis weight of the paper you are using in order to reduce and to leverage or costs.
- Don’t Buy Your Own Paper as a way to Save Money – In some cases, catalogers can benefit from purchasing their own paper but there are drawbacks. Printers have far more leverage based on the tonnage of paper they purchase from various mills. Purchasing your own paper is often a cash flow issue since the paper will need to be paid for before the catalog even goes to press. What’s more, changing printers can result in butt rolls of paper leftover, which cannot be used. Paper can also arrive damaged and if you have purchased the paper directly, often you are left to deal with the merchant or the paper mill, which can affect your press date. Also, if the printer has a problem on press as a result of the paper, it is your responsibility, not theirs. This can result in press downtime at a rate of up to $1,000 per hour, which can become expensive.
The 2006 postage increase is likely to be large. The increase might be phased-in over time. Regardless, catalogers are going to pay more for postage. Absorbing an increase of this magnitude is not easy and it will take time to determine potential savings. Will you be ready?