Reduce Your Direct Selling Expenses

In this time of uncertainty, controlling your direct selling expenses is critical to your bottom line. Fortunately, paper prices have remained low, which helps offset the recent postage increase.

But the business climate is difficult, and the squeeze on the bottom line is real. This month, I’ll offer various ways to reduce your direct selling expenses. Specifically, the following line-item expenses should be considered direct selling expenses:

- catalog creative and production;
- paper;
- print manufacturing;
- outside rented lists;
- merge/purge;
- bind-in order form insert; and
- ink-jet and mailing.

These direct selling expenses always should be grouped together and sub-totaled separately on your income statement. Often, these expenses are lumped in with general operating expenses, which isn’t a good practice. Direct selling expenses as a percentage of net sales is one of the most important and critical ratios on your income statement. It must be managed just like you monitor your returns ratio, gross profit margin ratio and operating expense ratio.

For a consumer catalog company, this ratio should range between 25 percent and 30 percent. For a business-to-business cataloger, a lower ratio in the range of 17 percent to 20 percent is more typical. Rule: The lower your gross margin ratio, the lower your direct selling expense ratio.

In a highly competitive catalog business where name-brand merchandise is sold and prices are easily compared, margins tend to be low. But demand generally is greater, which helps drive down the selling-expense-to-sales ratio. Businesses of this type might include fishing and hunting supplies or consumer electronics.

When we break down direct selling expenses, the ratios of the individual line-item expenses vary from a consumer to a b-to-b catalog company. Ratios for both types of businesses typically are as follows:

For a catalog company to remain profitable, the selling-expense-to-sales ratio must be in-line. The ratio for a consumer catalog company is considerably higher than the ratio for a cataloger selling b-to-b. This is because the revenue per b-to-b catalog mailed is higher than a consumer catalog. It’s important to manage by the ratios. If the selling-expense-to-sales ratio gets out of line, most likely the income statement will show a loss on the bottom line. Profitability will be impacted. The more prospecting you do, the higher the ratio. Management may decide to tip the scales between mailings to the housefile vs. mailings to prospects in order to grow. This will increase the selling-expense-to-sales ratio. A company with adequate funding might be in a position to do this. On the other hand, it could mean disaster for a cataloger that has limited capital and is trying to grow too fast.

16 Actionable Tips

What can you do to reduce your selling-expense-to-sales ratio? One way is to increase revenue without spending more money … easier said than done. Another way is to reduce your direct selling expenses. Following are a few suggestions to consider:

1. Use square-inch analysis to plan your page count. Be careful not to over-circulate pages. For consumer catalogers, the page count should vary depending on the season (i.e., holiday vs. summer). Circulating too many pages will increase your costs, because the productivity of those extra pages may not be enough to offset the additional cost.

2. Don’t over-circulate catalogs. If your selling-expense-to-sales ratio is too high and your bottom line is suffering, reduce circulation. Determine your incremental break-even point and eliminate mailings to outside lists and to segments of your housefile falling below your established criteria.

3. Alter your catalog trim size. If yours is a pound-rate catalog (weighs 3.3 ounces or more), a slight reduction in the physical trim size of your catalog will reduce your postage costs.

4. Decrease paper weight to lower postage costs. Test lighter-weight papers, and self-covers vs. heavier separate covers. Following are the actual results from a recent test using 34-lb vs. 32-lb paper:

Both the response rate and the average order size for this test to the 0- to 12-month buyer file were not negatively affected. The revenue per catalog mailed in both cases came out about the same—$3.62 vs. $3.60 per book. Consider a reduction. Paper is sold by the pound. If you use fewer pounds, you may save money.

You also can save costs on postage by using lighter-weight paper, provided 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.

5. Use a lower grade of paper. Changing grades can have a similar effect to that of changing the basis weight of the paper. Be careful not to go to extremes. For example, test a #5 grade against a #4 or #3 grade. Unless your offer is extremely upscale, a slight reduction in paper grade can reduce your direct selling expenses and ratio without hurting sales.

6. Use a printer that can maximize destination discounts. Getting printing bids today means comparing distribution (mailing) costs as much as you compare printing and paper costs. You’ll find that print manufacturing and paper costs will be competitive from one printer to another. Distribution costs may not be as competitive, however.

7. Use exchanges, databases and rented lists. Maximize the use of list exchanges. But be careful not to exchange with other catalogs unless their lists work for you. Racking up large exchange balances serves no useful purpose when you could be maximizing list-rental income. On the other hand, if you know the outside list works for you, exchange!

When building your circulation plan, use exchanges whenever possible. Maximize the use of names selected from cooperative databases. These names rent for about $70/M. Then, pick up the outside rented lists that meet your break-even criteria.

8. Negotiate outside list pricing. See if you can get a better deal than the prices published on the list data card. Ask to have selection charges (e.g., recency, dollar) waived. If you’re using a list on a continuing basis, request a discount. Also ask for a discount for re-using the same names two mailings in a row (your best-performing prospect lists only).

9. Re-use photography. You can change the cropping to make the photos look different. Avoid costly re-shoots of the same item.

10. Eliminate residual mail. After the postage qualification has been run, eliminate the residual mail. These catalogs mail at the highest rate.

11. Purge your file. When you’re doing a merge/purge, don’t pass more names than you need to. You’ll want to go a year (or two) beyond the last year you normally mail. But, for every record you pass, there’s a charge from your service bureau regardless of whether you’re mailing that name or not.

12. Combine merge/purges. Try running one merge/purge for two consecutive mailings. Bring in enough names so one merge can be split into two drops to help reduce processing costs. Caution: This is only possible if the mailings are fairly close together (i.e., four or five weeks apart). Of course, you want to mail to fresh names when possible.

13. Provide written merge/ purge instructions. Give your service bureau written instructions for every merge. Establish priorities for your merge, and re-use those outside multi-buyer names that hit on more than one outside list. Written merge/purge instructions will avoid mistakes and costly rerun charges.

14. Employ good data-hygiene techniques. This will ensure that: the data being keyed in is of the highest quality; similar records are identified during the merge/purge process; and your customers are properly categorized.

15. Combine print runs. This will lower your per unit catalog cost. Print multiple covers to make the catalog appear different. Avoid printing only one catalog at a time.

16. Avoid select charges on outside names. List selection charges add to the cost of the names you’re renting by as much as 25 percent to 50 percent. Don’t request certain selects unless you think they’re absolutely necessary.

Take, for example, a list costing $120/M to rent (base price). The manager wants an additional $41/M for a $100-plus dollar select. The average order size of this high-ticket gift catalog list already is $135. In this case, paying an additional $41, or increasing the cost of the list by 34 percent, probably is not cost-justified.

You want to save money wherever possible. You also don’t want to cut marketing expenses too dramatically. Manage by the ratio. If it’s too high based on the guidelines shown here, bring your selling-expense-to-sales ratio in line. The future of your company may depend on it.

Stephen R. Lett is president of Lett Direct, a catalog consulting firm specializing in marketing, circulation planning, forecasting and analysis. He can be reached at (302) 541-0608 or by e-mail at slett@lettdirect.com.

Definition:
Direct selling expenses: All of the marketing expenses, excluding labor, associated with producing, printing and mailing a catalog.