Guidelines for Acceptable Direct Selling Expenses (1,202 words)

Guideline: The higher your gross margin percentage, the higher your selling expense-to-sales ratio. Companies that enjoy a high gross margin, i.e., greater than 60 or 70 percent, generally have a higher selling expense-to-sales ratio. The opposite is also true. If you are in a highly competitive market like sporting goods, electronics or other brand name products with a gross margin of less than 40 percent, your selling expenses as a percentage of your sales will be low. Why? In a highly competitive marketplace where prices are easier to compare, response rates are generally higher. This increases demand, which helps to reduce selling expense-to-sales ratios. Average order sizes will tend to be higher, too. The typical selling expense-to-sales ratio for a consumer catalog company with annual sales of less than $20 million and a gross margin of 50 percent will be approximately 30 percent of net sales. A cataloger with a selling expense-to-sales ratio much above 30 percent is probably overprospecting in relation to the size of the housefile. If you overprospect, the red ink will flow!