Selling Expense Ratios

by Stephen Lett

In our previous columns, we have talked a great deal about direct selling expenses, i.e., paper, printing, postage, list rental, etc., and why these expenses need to be separated on the income statement.  This month, we want to take a slightly different twist by relating direct selling expenses to recency segments of the housefile. We will demonstrate how over mailing the housefile can and will increase this key ratio. And, we will talk about why not all housefile segments should be mailed in every drop.

Typically, direct selling expenses range from 25% to 35% for consumer catalog companies and 15% to 22% for business-to-business catalogers. In order to best manage this critical ratio from an expense standpoint, it is important to know what exactly is driving this ratio. For example, we know the more prospecting that’s done in relationship to what the housefile can support will affect this ratio. But, mailings deep to our own housefile will cause this ratio to increase too.  The gold at the end of the rainbow is finding the proper balance between housefile circulation and prospecting on order to optimize the direct selling expense to sales ratio.

It is not unusual for 15% or 20% of the current customer file to account for 50% or more of the sales from any given mailing. In fact, we see approximately 25% of total revenue often coming from 5% to 10% of the customers. Our selling expense to sales ratio would be pretty low if we could only focus on these segments of our housefile. While our circulation to the housefile needs to be expanded beyond this level, we do need to be careful to avoid mailing too “deep” or too often to certain segments of our housefile. This is why it is important to properly segment the housefile and to mail by R-F-M (recency, frequency and monetary value).  The more we dilute the results from our top tier customer group, the more we will increase the selling expense to sales ratio. And, the more we increase the selling expense to sales ratio, the less profit we will see on the bottom line.

The 12-month buyer file is the fuel that keeps the lights burning.  Knowing how to leverage the 12-month buyer file is what drives the profits and helps to reduce the direct selling expense to sales ratio. Take care of growing your 12-month buyer file and everything else will take care of itself. Maximizing the number of mailings to the 12 month housefile is critical. Increased sales and profits will follow right in line. Growing your 12-month buyer file does not necessarily mean prospecting more. Growth can result from reactivating “older” buyers and inquiries too.
Let’s take a closer look at the importance of the 12-month buyer file. Our chart below includes mailing the housefile 12 times over the course of one year. For example, we circulated a total of 2,352,711 catalogs to the housefile during a 12-month period. A total of 794,311 last 12-month buyers were mailed which represented 33.8% of our total housefile circulation. The 13-24 month buyers accounted for 39.1% of our total housefile circulation and the 25+month old buyers made up the remaining 27.1% of our circulation.

IMPORTANCE OF 12-MONTH FILE
TOTAL BUYERS 0-12 Month 13-24 Month 25+ Month TOTAL
CIRC 794,311 919,811 638,589 2,352,711
ORDERS 40,924 13,092 12,048 66,064
DEMAND $2,710,210 $775,043 $725,013 $4,210,265
RPC       $1.79
PERCENT TOTAL BUYERS % of 12M
Buyer to total
% of 13-24M
Buyers to total
% of 25+M
Buyers to total
TOTAL
CIRC 33.8% 39.1% 27.1% 100.0%
ORDERS 61.9% 19.8% 18.2% 100.0%
DEMAND 64.4% 18.4% 17.2% 100.0%
         
SELLING EXPENSES 0-12 Month 13-24 Month 25+ Month TOTAL
Selling Expenses * $436,871 $505,896 $351,224 $1,293,991
Selling Expense Ratio 16.1% 65.3% 48.4% 30.7%
* $.55 per catalog        

For the full year, the housefile generated 66,064 orders and $4,210,265 in demand revenue.  The 0-12 month buyer file represented 61.9% of total orders and 64.4% of the demand.  For comparison 39.1% of total circulation went to the 13-24 month buyer file which produced 19.8% of total orders and 18.4% of total demand. The RPC (Revenue per Catalog) from the 0-12 month file was $3.41 and only $.84 from the 13-24 month file. Obviously, the 13-24 month file is being over mailed.

What affect do mailings to the housefile have on direct selling expenses?  The last section of our chart details the selling expenses. The cost to mail a catalog to the housefile (not to prospects) is $.55 in our example. Therefore, we calculate the direct selling expenses by multiplying $.55 times the circulation. As you can see from the chart, the selling expense to sales ratio from mailings to the 0-12 month buyer file for a year is only 16.1%. Yet, the direct selling expense ratio resulting from mailing the 13-24 month buyers is a whopping 65.3% and 48.4% from the 25+ buyer file. Our total selling expense to sales ratio is slightly on the high side at 30.7% (before returns & allowances).

So, what does the chart suggest we do? How can we alter our circulation strategy in order to reduce the direct selling expense to sales ratio? Here are few suggestions:

  1. Increase the 0-12 month buyer file. The more “recent” buyers we have to leverage, the lower the selling expense to sales ratio. Look at ways to reactive older buyers, convert inquiries to buyers, mail the “hot-line” buyers more frequently, increase prospecting, etc. Develop a circulation strategy which will grow your 12-month buyer file at a faster rate.
  2. Add another drop (or two) to the 12-month buyer file. Keep in mind that it is difficult to over mail your more recent customers. You will achieve a higher RPC from your 12-month buyer file which will help reduce the selling expense to sales ratio.
  3. It is obvious that the entire 13-24 month buyer file cannot be mailed 12 times a year. Certain segments of the file, based on R-F-M should be mailed less frequently. Look at mailing the higher dollar segments more frequently. Also, consider less frequent mailings to the one-time only buyers. Trust what R-F-M is telling you and mail accordingly.
  4. As for the 25+ month old buyers, follow point #2 above. In addition, consider a reactivation strategy in order to improve these results. This might include the use of promotional offers, i.e., free shipping, a dollar amount off the order, etc. Using one of the cooperative database companies, you can also consider running a reactivation model in order to identify the “older” buyers who are most likely to make a purchase.

In summary, our message this month is to focus on growing your 12-month buyer file and on using proven circulation techniques in order to maximize results while reducing your direct selling expense to sales ratio. Segment your housefile by R-F-M and believe the results. Circulate according to what the results are telling you and avoid the temptation to mail every customer every time.  The correct and balanced circulation strategy will put more profit on your bottom line.