Prepare for the Upcoming Postage Rate Increase

Next year, postage rates are expected to increase from 13 percent to 20 percent. This will be the first increase since mid-2002.

It’s important to spend the next 12 months preparing to absorb an increase of this magnitude. Don’t wait until the increase is in effect before deciding what to do. Now is the time to begin making adjustments. Following are 10 cost-savings tactics to try.

Action Steps

1. Look at your catalog trim size. If yours is a pound-rate catalog (i.e., weighs 3.3 ounces or more), a slight reduction in your book’s physical trim size will reduce your postage (and paper) costs. For example, a half-inch per page reduction on an 80-page catalog can save $15,000 on the paper and postage costs per 1 million copies printed. (Note: This assumes the U.S. Postal Service’s weight requirement doesn’t change.)

2. Test lighter-weight papers, as well as self covers vs. heavier separate covers. Using a slightly lighter basis-weight paper should have no impact on results. Paper is sold by the pound, so if you use fewer pounds, you may save money. And you also can save on postage, 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 about $12,000 in postage on a mailing of 1 million, 80-page catalogs (at today’s postage rates).

3. Switch to a lower-grade paper. Changing grades can have an effect similar to changing the basis weight (see No. 2 above). But be careful not to go too far. Test a #5 grade, for example, against a #4 or #3. A slight reduction in paper grade can reduce your direct selling expenses and ratio.

4. Tighten your circulation. Higher postage costs will increase your break-even point. Don’t over-circulate catalogs to your housefile and prospects against your adjusted break-even point. A 15 percent increase in Standard A postage costs will increase your incremental break-even point 6 percent to 10 percent, depending on your catalog costs and gross margin percentage.

Review the lowest-performing segments of your housefile as well as the prospect lists and co-ops in use. Reducing circulation will increase your revenue per catalog mailed, but don’t cut circulation straight away. Focus on reducing your direct-selling expenses (see steps above) to determine if you can absorb the postage-rate increase.

5. Look at ZIP+4/Carrier Coded mail. Deduct non-codeable records from your list rental invoice. Non-codeable records don’t qualify for postal discounts and generally are less deliverable and less responsive.

Also, be sure your list rentals and housefile have been NCOA’d recently. If you do split tests, look at the net benefit of selective binding to keep the mailing in one ZIP stream. This will maximize your postal discount — as opposed to separate ZIP streams, which are more costly. (At quantities of 300/M or more, it’s generally more cost-efficient to selective bind.)

Ask your service bureau for the postage estimates both ways (one ZIP stream vs. two ZIP streams) so you know where the cut-off is. If the postage savings outweigh the price of selective binding, it definitely is the way to go.

6. Consider add-a-name. This is the process in which you add one or two records to a carrier route to qualify for a discount you previously were ineligible for (fell short of the 10-per-carrier-route requirement).

Often if you have a pool of records that are close to or at breakeven, the records added bring your postal cost down, and the net gain is positive. If you use inactive buyers or modeled names from a cooperative database, it’s usually worth it.

Keep in mind the number of add-a-name pieces will be a function of how many pieces overall are being mailed and the geographical distribution of the mailing. For most catalogers, a national circulation of 700,000 or more is required for add-a-name to make economic sense. At this level, usually 5,000 to 10,000 catalogs will be added.

7. Test for customers’ preferred methods of contact. For example, if a customer responds only to e-mails, decrease catalog mailings and replace those contacts with e-mails. Bear in mind, however, that since Web buyers often aren’t trackable through typical source-code tracking, they may look as if they’re not responding well to a mailing when in fact they are. So this method should be backed up by significant testing during the course of a year.
(Editor’s note: For more on matchbacks in a multichannel sales environment, see “How to Expertly Evaluate Your Campaign Results” in the December issue of Catalog Success.)

8. Get competitive printing bids at least annually. Market conditions change as do printing and paper prices. Long-term contracts normally don’t work in your favor due to the competitiveness of the marketplace. Contract only one year at a time.

Always get at least three bids. When obtaining bids for paper and printing, also request a postage estimate based on a typical quantity mailed, including the printer’s drop-ship fees.

9. Eliminate your bind-in order form/envelope. As fewer orders are received by mail, many catalogers have eliminated the bind-in order form and envelope as a way to save money. Prices for such forms range from $12/M to $20/M (or more) depending on the size, quantity printed and use of color. They also add weight to the catalog, which can increase postage costs.

If you decide to print the order form on a catalog page, part of your cost-saving calculation must include the gross margin you’ll forfeit from eliminating saleable merchandise on the page you designate to it.

10. Increase merchandise prices to offset postage increases. Many catalogers price using a formula that’s not my preferred method. For example, if the cost of an item is $20 and your desired markup is two times, you might establish a retail price of $40 that yields a gross margin ratio of 50 percent.

But my preferred method is based on the perceived value of the item. If you sell name-brand merchandise that other catalogs also sell, the perceived-value method is more difficult. But if you’re selling proprietary items that aren’t readily available, pricing based on perceived value will help you avoid leaving gross margin dollars on the table.

Increasing prices might be painful, but catalog customers don’t normally purchase based on price. Studies show that price is the No. 3 or No. 4 reason people shop by mail. They primarily buy on convenience and service.

Steps to Avoid

Often catalogers make cuts in the wrong places. Their intentions are good, but the actions taken aren’t always the best in the long run. Here’s a list of things not to do.

1. Don’t stop mailing to Web-only buyers. When you look at your source code report, it may appear that results from Web-only buyers fall considerably below breakeven. Even the results from the most recent Web buyers don’t look exciting. It’s logical to conclude you should stop mailing such buyers to save money. But in recent matchback studies we’ve done, Web-only buyers are performing at more than acceptable levels.

For most catalogs, Web buyers rank in the bottom 10 cells for housefile when reported by key code. But after doing a matchback, they rank in the top 10 cells. The clearest example of this is in a recent holiday mailing we did. There were no Web cells in the top five when ranked. But after the matchback, there were three in the top five.

Web buyers are very strong responders. They get a catalog, order on the Web, and there’s no way to trace them. The bottom line: We know Web buyers respond to the catalog, and we know the catalog is a big driver of traffic to the Web.

Early this year we did a split test and created a hold-out panel. We found it absolutely paid to mail Web buyers a catalog. We created two panels of roughly 25,000 names. One panel was mailed seven times, the other only once. The net contribution for the seven-time group was $169,089 compared with the one-time group of $109,318. The Web buyers who were mailed all seven times generated a contribution to profit and overhead (after all selling expenses) of $169,089.

Meanwhile, Web buyers who were mailed only once generated a contribution of $109,318. The additional six mailings to the Web buyers generated another $59,772 in profit contribution.

2. Don’t reduce pages. Pages (i.e., more merchandise) increase the amount of revenue generated per catalog mailed. Rule of Thumb: Revenue per catalog mailed will increase at one half the percentage increase in page count. Assuming there’s plenty of good merchandise to sell, adding pages makes good economic sense. Adding pages while making certain the paper and press manufacturing are efficient can lower your incremental break-even point while increasing revenue.

Your goal should be to add pages to the catalog as economically as possible. To do that, be aware of the weight minimum for the Standard A postal rate. A catalog weighing less than 3.3 ounces can be mailed at the minimum postage rate (assuming this weight requirement doesn’t change). A catalog weighing more must be mailed at the pound rate.

Since the weight of the catalog increases over 3.3 ounces, more pages equals more weight, thus increasing the unit cost of postage. Try to maximize page count without increasing postage costs when you can. Once you’re required to mail at the pound rate, using the right paper and page count combination can help minimize the increase.

3. Understand the pros and cons of buying your own paper. Printers have far more leverage based on the paper tonnage they buy from mills. Purchasing your own paper often becomes a cash-flow issue, since you must pay for the paper before your catalog goes to press. What’s more, changing printers can result in leftover butt rolls of paper that can’t be used.

Paper also can arrive damaged, and if you’ve bought the paper directly, often you’re left to deal with the merchant or the paper mill, which can affect your press date.

Finally, if the printer has a problem on press as a result of the paper, it’s your responsibility, not theirs. This can result in press downtime at a rate of up to $1,000 per hour, which can become expensive.

In short, the 2006 postage increase likely will be large. The increase might be phased in over time, but regardless, you’re going to pay more for postage. Absorbing the increase won’t be easy, and it’ll take time to determine potential savings. Get ready now!

Stephen R. Lett is president of Lett Direct, a catalog consulting firm specializing in circulation planning, forecasting and analysis. He can be reached at (302) 537-0375, or by e-mail via his Web site: www.lettdirect.com.