Ways to Reduce Your Direct Selling Expenses
by Stephen Lett
In this time of uncertainty, controlling your direct selling expenses is critical to your bottom line. Fortunately, paper prices have remained low which has helped to offset the recent postage rate increase. But, the business climate is difficult and the squeeze on the bottom line is real. This month, we want to provide various ways you can reduce your direct selling expenses.
First, let’s define what we mean by direct selling expenses. These are all of the marketing expenses, excluding labor, that are associated with producing, printing and mailing a catalog. Specifically, here are the line item expenses that should be considered as direct selling expenses:
- Catalog Creative and Production
- Print Manufacturing
- Outside Rented Lists
- Bind-in Order Form Insert
- Ink-Jet and Mailing
These direct selling expenses should always be grouped together and sub-totaled separately on your income statement. Often times, these expenses are lumped in with general operating expenses which is not good. Direct selling expenses as a percentage of net sales is one of the most important and critical ratios on the income statement. It needs to be managed just like you monitor your returns ratio, gross profit margin ratio and operating expense ratio. What should this ratio be? For a consumer catalog company, this ratio should range between 25% and 30%. For a business-to-business cataloger, a lower ratio in the range of 17% to 20% is more typical. RULE: The lower your gross margin ratio, generally the lower your direct selling expense ratio. In a highly competitive catalog business where name brand merchandise is sold and prices are easily compared, margins tend to be low. But, demand is generally greater which helps drive down the selling expense to sales ratio. Businesses of this type might include fishing and hunting supplies or consumer electronics.
When we breakdown direct selling expenses, the ratios of the individual line item expenses vary from a consumer to a business-to-business catalog company. Ratios for both types of businesses are typically as follows:
DIRECT SELLING EXPENSES TO NET SALES RATIOS
|DIRECT SELLING EXPENSES||CONSUMER||B-to-B|
|Printing & Paper||9.61%||7.68%|
|Order Form Bind-in Insert||0.62%||0.37%|
|Ink-Jet Addressing and Mailing||0.88%||0.38%|
|Total - Direct Selling||29.00%||18.00%|
For a catalog company to remain profitable, the selling expense to sales ratio must be in-line. The ratio for a consumer catalog company is considerably higher than the ratio for a cataloger selling business-to-business. This is due to the fact that the revenue per catalog mailed for a cataloger selling business-to-business is higher than a consumer catalog company. It is important to manage by the ratios. If the selling expense to sales ratios gets out-of-line, most likely the income statement will show a loss on the bottom line. Profitability will be impacted. The more prospecting you do, the higher the ratio. Management may decide to tip the balance of scales between mailings to the house file vs. mailings to prospects in order to grow. This will increase the selling expense to sales ratio. A company with adequate funding might be in a position to do this. On the other hand, it could mean disaster for a cataloger with limited capital who is trying to grow too fast
So what can catalogers do to reduce their direct selling expense to sales ratio? One way is to increase revenue without spending more money … easier said than done. Another way is to reduce your direct selling expenses. Here are a few suggestions you might want to consider:
- Use Square Inch Analysis to Plan Your Page Count – Be careful not to over circulate pages. For consumer catalog companies, the page count should most likely vary depending on the season, i.e., holiday vs. summer. Circulating too many pages will increase your costs because the productivity of those “extra” pages may not be enough to offset the additional cost.
- 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.
- Alter Your 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 costs. For example, a reduction of ½” vertically on an 80-page catalog could save $15,000 on the paper and postage costs based for every 1.0 million catalogs you print.
- Decrease Paper Weight to Lower Postage Costs – Test lighter weight papers. Test self-covers vs. using a heavier separate cover. The results shown below are typical of what we have learned from our testing. A move to a slightly light basis weight paper has not impacted results as you can see. Shown below are the actual results from a recent test using 34 vs. 32 lb., paper:
|PAPER TEST 34 lb., VS. 32 lb.|
|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|
Both the response rate and the average order size for this test to the 0 to 12 month buyer file were not negatively affected. The revenue per catalog mailed in both cases came out about the same; $3.62 vs. $3.60 per book. Consider a reduction. 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.
- 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.
- Use a Printer Who Can Maximize Destination Discounts – Getting printing bids today means comparing distribution (mailing) costs as much as you compare printing and paper costs. You will find that print manufacturing and paper costs will be fairly competitive from one printer to another. Distribution costs may not be as competitive, however. But be sure you are maximizing postal discounts with your printer. And, be sure you are printing with a known catalog printer.
- Use Exchanges, Databases and Rented Lists – Maximize the use of list exchanges. However, be careful NOT to exchange with other catalogs unless their list works for you. Racking-up large exchange balances serves no useful purpose when you could be maximizing list rental income. On the other hand, if you know the outside list works for you, exchange! When building your circulation plan, use exchanges when possible. Next, maximize the use of names selected from cooperative databases. These names rent for approximately $70 per thousand. Then, pick-up those outside rented lists which meet your breakeven criteria.
- Negotiate Outside List Pricing – See if you can get a better deal than the prices published on the list data card. Ask to have selection charges such as recency, dollar, etc., waived. If you are using a list on a continuing basis, request a discount. Request a discount for re-using the same names two mailings in a row (your best performing prospect lists only).
- Re-use Photography – Pick-up and re-use existing photography. Change the cropping to make the photo look different if you wish. Avoid costly re-shoots of the same item.
- Eliminate Residual Mail – After the postage qualification has been run, eliminate the residual mail. These catalogs mail at the highest rate.
- Purge Your File – When you are doing a merge/purge, don’t pass more names than you need to. You will want to go a year (or two) beyond the last year you normally mail. But, for every record you pass, there is a charge from your service bureau regardless of whether you are mailing that name or not.
- Combine Merge/Purges – Try running one merge/purge for two mailings in a row. Bring in enough names so that one merge can be split into two drops in order to help reduce processing costs. 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.
- Provide Written Merge/Purge Instructions – Be sure you give your service bureau written instructions for every merge. Establish priorities for your merge. And, be sure to re-use those outside multi-buyer names that “hit” on more than one outside list. Written merge/purge instructions will avoid mistakes and costly rerun charges.
- Employ Good Data Input Hygiene Techniques – This will insure the data being keyed in is of the highest quality. This will assist in making sure similar records are identified during the merge purge process as well as having your customer properly categorized.
- Combine Print Runs – Combining print runs will lower your per unit catalog cost. Print multiple covers to make the catalog appear different. Avoid printing only one catalog at a time.
- Avoid Select Charges on Outside Names – List selection charges add to the cost of the names you are renting by as much as 25% to 50%. Don’t request certain selects unless you feel they are absolutely necessary. For example, a list costing $120 per thousand to rent (base prices) wants an additional $41 per thousand for a $100+ dollar select. The average order size of this high-ticket gift catalog list is already $135. In this case, paying an additional $41 or increasing the cost of the list by 34% is probably not cost justified. Again, question those outside list select charges. Do you really need them?
Obviously, you want to save money whenever possible. You also want to be careful not to cut marketing expenses too dramatically. Manage by the ratio. If your ratio is too high based on the guidelines shown earlier, make the necessary changes which will help bring your direct selling expense to sales ratio in line. Your bottom line depends on it and so does the future of your company.