How to Use Selling Expense Ratios

In my previous columns, I’ve talked a great deal about direct selling expenses — e.g., paper, printing, postage, list rental — and why these expenses need to be
separated on the income statement. This month, I offer a slightly different twist by relating direct selling expenses to recency segments of the housefile. I’ll demonstrate how overmailing the housefile can and will increase this key ratio, and why not all housefile segments should be mailed in every drop.

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

It’s not unusual for 15 percent or 20 percent of the current customer file to account for half or more of the sales from any given mailing. In fact, I see approximately 25 percent of total revenue often coming from 5 percent to 10 percent of the customers. The selling expense to sales ratio would be pretty low if you only were able to focus on these segments of the housefile. While circulation to the housefile needs to be expanded beyond this level, you need wto be careful to avoid mailing too deep or too often to certain segments of your housefile. This is why it’s important to properly segment the housefile and to mail by recency, frequency and monetary value (RFM). The more you dilute the results from your top tier customer group, the more you’ll increase the selling expense to sales ratio. And, the more you increase the selling expense to sales ratio, the less profit on the bottom line.

Properly leveraging your 12-month buyer file drives profits and helps reduce the direct selling expense to sales ratio. Also, maximizing the number of mailings to the 12-month housefile is critical; increased sales and profits will follow. Growing it doesn’t necessarily mean prospecting more, since 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. The chart below includes mailing the housefile 12 times over the course of one year. For example, I circulated more than 2,352,711 catalogs to the housefile during a 12-month period. A total of 794,311 12-month buyers were mailed, which represented 33.8 percent of total housefile circulation. The 13- to 24-month buyers accounted for 39.1 percent of total housefile circulation and the 25-month-plus buyers made up the remaining 27.1 percent of the circulation.

For the full year, the housefile generated 66,064 orders and $4,210,265 in demand revenue. The 12-month buyer file represented 61.9 percent of total orders and 64.4 percent of demand. For comparison, 39.1 percent of total circulation went to the 13- to 24-month buyer file, which produced 19.8 percent of total orders and 18.4 percent of total demand. Revenue per catalog (RPC) from the 12-month file was $3.41 and only $0.84 from the 13- to 24-month file. The 13- to 24-month file is being overmailed.

What effect do mailings to the housefile have on direct selling expenses? The last section of the chart details the selling expenses. The cost to mail a catalog to the housefile (not to prospects) is $0.55 in this example. Therefore, you calculate the direct selling expenses by multiplying $0.55 times the circulation. As you can see from the chart, the selling expense to sales ratio from mailings to the 12-month buyer file for a year is only 16.1 percent. Yet, the direct selling expense ratio resulting from mailing the 13- to 24-month buyers is a whopping 65.3 percent and 48.4 percent from the 25-plus buyer file. Total selling expense to sales ratio is slightly on the high side at 30.7 percent (before returns and 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 12-month buyer file. The more recent buyers there are to leverage, the lower the selling expense to sales ratio. Look at ways to reactivate older buyers, convert inquiries to buyers, more frequently mail hotline buyers, increase prospecting, etc. Develop a circulation strategy to grow
your 12-month buyer file more quickly.

2. Add another drop (or two) to the 12-month buyer file. It’s difficult to overmail your more recent customers. You’ll achieve a higher RPC from your 12-month buyer file, which will help reduce the selling expense to sales ratio. It’s obvious that the entire 13- to 24-month buyer file can’t be mailed 12 times a year. Certain segments of the file, based on RFM, should be mailed less frequently. Look to mail the higher dollar segments more frequently. Also, consider less frequent mailings to one-time buyers. Trust what RFM is telling you and mail accordingly.

3. As for the 25-month-plus buyers, follow point No. 2 above. In addition, consider a reactivation strategy to improve these results. This might include the use of promotional offers such as free shipping, a dollar amount off the order, etc. Using one of the cooperative database companies, you also can run a reactivation model to identify the older buyers most likely to make a purchase. n

Stephen R. Lett is president of Lett Direct. Reach him at
(302) 537-0375 or via his Web site: www.lettdirect.com.