How to Prepare for What’s Ahead

by Stephen Lett

Standard “A” postage rates should be a concern to all catalogers. After all, postage expense represent over 40% of total direct selling expenses (please refer to the chart below).

DIRECT SELLING EXPENSES TO NET SALES RATIOS
DIRECT SELLING EXPENSES CONSUMER B-to-B
   Creative/Preparation 2.85% 1.43%
   Printing & Paper 9.61% 7.68%
   Postage 12.59% 6.90%
   List Rental 2.01% 0.81%
   Order Form Bind-in Insert 0.62% 0.37%
   Merge/Purges 0.43% 0.43%
   Ink-Jet Addressing and Mailing 0.88% 0.38%
Total - Direct Selling 29.00% 18.00%

 

 

 

 

 

 

 

When postage rates increase, catalogers really feel the pinch. For example, in January of this year, we experienced a 5.4% rate hike. This was the first rate increase since mid 2002 (when we had three rate increases within two years!). Well, better brace yourself for yet another increase in 2007. What’s more, rumor has it that the USPS is talking about increasing rates again in 2008 which would be three rate hikes in three years. These rate increases are significant and could be enough to put some of the smaller catalogers over the edge. They could mean the difference, for example, between a profit and a loss on the income statement. So, what can you do about these increases? While we cannot stop the increases from happening, we can attempt to minimize the pain by taking advantage of the discounts being offered by the USPS and adjusting our business strategy.

Sometime in 2007, probably in April or May, Standard “A” rates will likely increase approximately 14%. Currently, a piece weight catalog (3.3 ounces or less) goes in the mail at the 3/5 digit rate of $275 per M. The USPS plans to split the 3/5 digit classification into two separate classes, i.e., 5 digit and 3 digit. The 5 digit rate is expected to be $300 per M or +7%. The 3 digit rate is going to $328 per M or +19%. If we assume a 50%/50% split on the 3 digit vs. 5 digit rates (112,500 copies each class in a mailing of 225,000 catalogs) the blended rate of the rate increase is approximately 14%. The Carrier Route rate is currently $204 per M which is going to $233 per M or +14%.

While the “blended” rate increase is approximately 14%, the USPS is offering discounts or incentives which could impact these large rate increases.  For example, today, the discount to take a catalog to a BMC is $22 per M and to an SCF is $27 per M. Under the new rate plan, the discount to take a catalog to a BMC is expected to increase to $28 per M and $34 per M to an SCF. This makes the effective rate increase for a carrier route catalog 11% and 12% for catalogs mailing at the 3/5 digit level.

So, what can you do about it? You can either sit back and do nothing and watch your bottom line erode. Or, you can face the music and consider ways to minimize the impact on your business. Here are a few ideas for you to consider:

  • Look for Co-Mailing Opportunities Through Your Printer – This is the process of combining different catalog titles into one mail stream in order to generate more carrier route discount mail. There is going to be more pressure put on printers to co-mail. A printing company’s ability to co-mail and distribute catalogs is just as important as their ability to put ink on paper in today’s world. The advantages are as follows:
    • Postal Savings – This is due to better presort levels and possibly better drop-ship discounts. More mail will qualify at the carrier route level.
    • Better Deliverability – More carrier route or 5 digit pallets will result enabling the catalogs to penetrate the postal system deeper (which could generate additional savings by going to more SCF’s). This will increase production flow through the postal system.
  • 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 $13,000 in postage on the mailing of 1.0 million 80-page catalogs (at today’s postage rates). Shown below are the results from our recent test.
PAPER TEST 34 lb., VS. 32 lb.
  QTY.
MAILED
ORDERS SALES AVG.
ORDER
RESPONSE
RATE
REVENUE
PER CAT.
CONTROL: 34 lb. PAPER          
0-6 Mos.; $150+ 12,246 856 $61,498 $71.84 6.99% $5.02
0-6 Mos.; $1-149 13,178 791 $53,624 $67.82 6.00% $4.07
7-12 Mos.; $150+ 11,519 518 $34,149 $65.88 4.50% $2.96
7-12 Mos.; $1-149 9,636 313 $19,548 $62.42 3.25% $2.03
Total – Test 46,579 2,478 $168,819 $68.12 5.32% $3.62
             
TEST: 32 lb. PAPER            
0-6 Mos.; $150+ 12,246 839 $58,728 $70.01 6.85% $4.80
0-6 Mos.; $1-149 13,178 797 $54,469 $68.32 6.05% $4.13
7-12 Mos.; $150+ 11,519 529 $34,103 $64.50 4.59% $2.96
7-12 Mos.; $1-149 9,636 340 $20,576 $60.49 3.53% $2.14
Total - Control 46,579 2,505 $167,876 $67.02 5.38% $3.60

NOTE: Sales decreased $943 and this firm saved $13,000 in postage due to the change in the basis weight.

  • Use a Lower Grade of Paper – Changing grades can have a similar effect 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. 
  • 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.
  • Do NOT Over Circulate Catalogs – Determine your “new” incremental breakeven point and eliminate mailings to outside lists and to segments of your house file falling below your established criteria. For example, eliminate the lower tier of outside lists. As the breakeven bar increases, circulation decreases.
  • 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.)These USPS rate increases are serious business. They pose a real threat to a catalog business. Now is the time to push your printer for co-mailing opportunities. If you are with a printer who is not proactive in this area, find a new printer. Do what needs to be done to hedge against the impact of what is headed our way.