Strategy: Generate Extra Revenue While Leveraging Existing Overheard

I’ve always believed you put dollars in the bank, not percentages. For example, it’s not the percent of net income that’s important, but the total dollars of profit achieved.

To maximize dollars, manage the income statement by the ratios as a percentage of net sales — the dollars will take care of themselves. This month, I’ll review the key ratios of a typical profit and loss (P&L) statement for a B-to-B and a B-to-C catalog company and discuss how these ratios are different today than just a few short years ago.

If your company’s experience has been similar to others, sales are flat (or down), expenses are up and your bottom line is getting squeezed. It’s no secret catalogers are feeling the pinch. It’ll pass, but in the meantime, managing the key ratios on your P&L is even more critical for protecting net income.

Margins Up, Expenses Up
B-to-C catalogers traditionally have posted EBITs (Earnings Before Interest and Taxes) of around 5 percent. An EBIT of 10 percent to 14 percent has been more common for B-to-B mailers. But today, these profit margins are difficult to achieve. The combination of increased costs, harsh economic conditions and lower response rates is forcing catalogers to decrease circulation and make other cuts to maintain profitability.

How you organize your income statement is very important. Often, selling expenses are shown as part of operating expenses, which camouflages the overall selling expense-to-sales ratio and makes these expenses much more difficult to manage. I prefer to see direct selling expenses broken out on income statements so the overall ratio can be managed. Managing your selling expense-to-sales ratio is just as important as tracking gross profit margin on a monthly basis — these expenses can easily get out of hand if they’re not managed as a percentage of sales.

Gross margin ratios have been increasing the past few years. Not long ago, catalog companies operated on a 50 percent gross margin ratio (100 percent markup). Today it’s around 60 percent. The pressure to offer free shipping, coupled with cost increases — i.e., paper and postage — have forced catalogers to increase gross margin to remain profitable.

Often, however, the increase in margin has been offset by increased direct selling expenses. Paper prices have increased more than 30 percent the past 18 months, and we all know about the significant postage increases in 2007. As a result, expenses that were 25 percent of net sales for consumer catalogs a few years ago are 30 percent today. Business mailers enjoy a lower selling expense-to-sales ratio, but they too have seen an increase with total operating expenses around 20 percent to 25 percent.

Leverage Your Overhead
It’s difficult to slash your way into profitability. The long-term effect of that type of quick fix can be hard on your business. But here are a few ideas to generate additional revenue that’ll leverage your existing overhead expenses without increasing costs:

1. Use a bounceback offer. You can do this immediately with very little lead time. Place a coupon for “$5 off (or $10 off) your next order” in all outgoing packages. Dollar-amount-off offers work better than percentage-off.

2. Promote to catalog requestors. Make a “strong” offer to catalog requestors that’ll increase conversion rates. Also, run reactivation models on older requestors. You should be able to mail these prospects at least three or more times.

3. Promote to prospects. Offer prospects a dollar amount off their first orders (or flat or free shipping). This doesn’t create expectations that another offer is coming. In numerous tests, I’ve determined that a strong offer to prospects increases the revenue per catalog by 20 percent or more.

4. Use your call center. A customer on the phone is a perfect opportunity to sell additional merchandise — cross-sell, upsell, etc. Empower your telephone sales reps with the authority to make special offers, albeit within guidelines, of course.

5. E-mail your best customers. Make them a strong offer. It’s difficult to over-e-mail your “best” customers. Hit them often and hard with merchandise and promotional offers.

6. Add a mailing to your “best buyers.” If you need to generate additional demand revenue, consider adding another mailing to your better customers. Like with e-mails, it’s unlikely you can overmail your best customers.

7. Develop an outbound telemarketing program (B-to-B). For B-to-B or business-to-institution catalogers, consider testing an outbound telemarketing program. This can’t be done by your existing telephone sales or customer service representatives. It takes someone specialized in outbound calling. You might want to consider outsourcing.

8. Mail the gift recipients. Make a special offer to the recipients of gifts from your catalog, a group called “giftees.” People who’ve received a gift from one of your customers are excellent prospects.

9. Use title slugs. This is another B-to-B mailing technique: using your own customer list as a prospect file. Simply remove the customer’s name on your housefile and insert a functional title such as Purchasing Manager, Chief Engineer, etc.

10. Postcard mailings. A tool to react quickly to lagging sales is the postcard mailing with a quick expiration date that offers a discount. Postcards should be mailed to current customers, not prospects. Make a strong offer, and drive traffic to the Web.

Keep an eye on your key ratios, compare them against industry benchmarks and leverage your overhead expenses by identifying other programs that can generate incremental revenue cost effectively in this difficult market.

Stephen R. Lett is president of Lett Direct, a catalog consulting firm specializing in circulation planning, forecasting and analysis. He’s also the author of “Strategic Catalog Marketing,” and can be reached at (302) 539-7257 or by e-mail at steve@lettdirect.com.