Eight Money-saving Ideas for 2005

Since the beginning of the calendar year often is the start of a budget year, I’ll discuss some ways to save your company money and improve your bottom line in 2005. Hopefully you’re finishing a great holiday season, and instead of needing these savings to make ends meet, you can use them to increase circulation or catalog page count for next holiday season.

In addition, these ideas may help you offset the impending postage increase. (For more, see this month’s column by my colleague, Stephen Lett, page 39.) Here, I’ve listed the ideas in order of potential magnitude, with the last ones providing the greatest opportunity for most organizations.

1. Cut pages. If you haven’t done an analysis in a while, you could be mailing more pages than necessary, especially in your slower season. Make sure at least 70 percent of your pages are paying for themselves. If not, trim non-performing items/categories, and reduce page count. Create an efficient-sized book, and ask your printer for options that would save even more. You can increase response rates with a smaller book, because it’s more focused and gives customers what they’re looking for — without the extraneous items that don’t sell anyway.

2. Trim unprofitable list segments. Compile a profit-and-loss (P&L) statement on every house- and rental-list segment, and trim those that produce a loss-per-order greater than you can recover in a reasonable amount of time (based on your strategic objectives, of course).

3. Paper. If you want to cut paper costs, consider the following tips:

- Buying paper and providing it to your printer directly may offer cost savings. If so, this leaves you in a better position to negotiate harder with your printer.

- The weight and grade of paper you’re using could be adding significantly to your overall printer/paper bill without providing enough of a benefit. I’ve been involved in many paper tests in my career, and I’ve never seen more expensive paper win out in a head-to-head test. I’m sure it’s happened, but I’d bet that more times than not, you’re wasting money on paper. Unless you have a very high-end brand or need a great paper to show your product (e.g., if you sell artwork), you probably could go down in basis weight and grade and see very little to no decrease in response. If you haven’t tested this, do so. You may have left money on the table.

4. Postage. Testing down in paper and potentially cutting pages also will provide opportunities for postage savings.

In addition to a lighter book, there are other ways to save postage by making sure you’re sorting properly and that you have the longest ZIP strings possible. If you have a catalog drop with a lot of versions or testing, be sure you can bring these back together for the sort, or that you bind by demographic to maximize discounts. Also, make sure you’re using a mailing house or printer that can get you deep into the postal stream. I’ve seen many catalogers switch printers to reduce costs, only to lose the savings in increased postage because the mailer couldn’t get deep enough into the postal stream or wasn’t advanced enough in sorting and commingling techniques.

5. Inbound freight. Inbound freight is another area that can drive up your product costs if you aren’t watching closely. The first rule of inbound freight is to never let the vendors pay the freight and add it to the invoice. I only allow this if the vendor provides a free-freight incentive. Even then, it’s sometimes better to ask what the unit price would be without it.

Negotiate your own freight contracts with a large carrier or with a freight consolidator such as DM Transportation Management. Name your carrier on your purchase orders.

Such companies ship freight for hundreds of customers; they can negotiate fantastic rates and pass them on to you. In addition, they can provide audit services to ensure that tariff codes are properly applied, which can dramatically affect freight rates. Ship UPS or FedEx Ground inbound only if the weight of the shipment is less than 100 pounds.

6. Outbound freight. I believe many companies spend far too much on outbound freight. For some reason, they think everything must go FedEx Ground or UPS. Unless your brand dictates it, getting the package to your customer via two- and three-day shipping methods may be more than your customers demand.

Look into several shipping methods, including U.S. Postal Service via a consolidator such as American Package Express (formerly Donnelley Logistics) or FedEx Smart Post (formerly Parcel Direct). These services can achieve respectable delivery times with greatly reduced costs. And having multiple shipping methods at your disposal will enable your software to do rate shopping.

You still can send your Web orders and rush orders using quicker methods, while your phone orders and especially your mail orders are delivered using slower, cheaper methods. One of the best ways to ensure good delivery is to have the merchandise in stock, and get the order out within 24 hours.

7. Improve your inventory management. Too much of something will create liquidation risk that eventually will erode your margin when you move it out. In addition, you might be paying storage costs if you’re in a public warehouse or use a third-party fulfillment house.

Having too little of an item will create backorders, which creates cancellation risk. Too little inventory also increases your outbound freight, because you may have to send orders in more than one shipment. Then there are costs associated with backorder notices, customer dissatisfaction, etc.

If yours is not a fashion catalog and you have an initial fill rate of less than 90 percent (less than 80 percent for fashion), or if your inventory turns fewer than five times a year, you most likely have a large opportunity for cost savings.

8. Reduce your cost of goods (COGS) as a percentage of sales. The No. 1 cost item on your P&L is product cost. In addition to proper inventory management (see No. 7), the two primary ways to reduce this cost are through negotiation and effective pricing. Negotiate thoroughly, and work closely with your suppliers. Since this isn’t an article on negotiating, I’ll give you just one idea to try immediately: Go to your top 10 suppliers, and negotiate a rebate program for this year. Make an agreement that if you spend x percent more with them in 2005 than you did in 2004, you’ll get 5 percent of the purchase value back at the end of the year.

After you’re certain you’re getting your product for the best price possible from the vendor, you’ll be ready to ensure you’re charging the best price possible to your customers. Don’t set your retail prices based on a cost-plus markup formula. I use this kind of a formula for the target price range of an item, but never for the final price. Set the final price based on what you believe you can get for the item, while selling the optimum number of units. Sometimes this will be at a margin much higher than your target — sometimes lower. However, if you can’t get close to your target margin, choose another product. Don’t set the price too high. There are many products available, find something that will help you meet your margin goals.

Remember, the easiest way to improve your overall bottom line is through small improvements in your margin (the inverse of the COGS).

Although it’s usually more fun to focus on growing sales, cutting costs often can provide an instant shot in the arm for your bottom line. And improving the bottom line will pave the way to enabling you to grow from a more solid foundation.

Phil Minix is the senior vice president of catalog and tours marketing at Reiman Publications. You can reach him by e-mail at pminix@reimanpub.com.