Trade Secrets to Help Boost Your Bottom Line

With world conditions and the economy in upheaval, business has been tough for most catalogers lately. This month I’ll focus on several ideas to improve your bottom line.

Although it’s always important to stay focused on long-term growth and strategic development of your business, some of you obviously will have to take action now to ensure short-term profitability. The following suggestions may produce only a temporary increase in your profitability, however, so be cautious about any potential impact down the road.

Cut Cautiously

1. Improve your margins. The No. 1 expense line on your profit-and-loss statement (P&L) most likely is cost of goods. Small improvements here can yield substantial overall results.

Improvements in your product margins can come in many ways:
- reducing vendor costs per unit;
- getting vendors to pay for some advertising allowances or co-op advertising;
- negotiating rebates from suppliers when certain purchase thresholds are met; and
- increasing your product prices.

In this economy you may think it would be difficult to boost prices, but your customers may not even notice a slight price increase if it’s handled properly. Since the No. 1 reason people shop by catalog is for convenience, many times small changes in price won’t decrease response.

For example, if you have price endings of $.50 or $.75, try increasing the endings to $.95 (as long as this fits with your brand). Or if you’re not at a threshold price point on an item, you may be able to increase the price a bit (e.g., from $17.95 to $19.95), usually with no or only a slight decrease in response.

2. Cut or limit investment spending on circulation. Since catalog mailing costs probably comprise your second-largest expense, another way to trim costs is to mail fewer catalogs. Of course, this also will lower your revenue, but it may be unprofitable revenue anyway. To find out, perform a P&L on each of your outside lists and your housefile.

To do this, segment your housefile by a minimum of RFM (recency, frequency and monetary value), and code each outside list separately. You’ll also need to know your break-even sales per catalog.

Then you can trim out mailings that are below breakeven or some other comfortable cost-per-customer threshold.

3. Reduce catalog pages. If less than 70 percent of your catalog pages currently are profitable, look at decreasing your page count to reduce printing, paper and postage costs. Do the necessary calculations to ensure that the decrease in expenses will be more than the incremental revenue you would have achieved from those unproductive pages.

4. Reduce your cost per order (CPO). Fulfillment — from answering the phone to shipping the package — usually costs 10 percent to 12 percent of sales. If it’s more than that, look for ways to reduce your CPO, such as instituting improvements in your contact center or distribution center. Be sure the managers in these areas are striving to drive down your CPO.

Back-end Considerations

5. Reduce your inbound freight costs. These should total 3 percent to 5 percent of your purchases. It might seem like too small of an amount to pay attention to, but if you’re currently paying 10 percent, that additional expense eats into your profits. Indeed, any improvement you make here will drop right to your bottom line.

There are several ways to reduce your inbound freight costs. The first step, however, is to know what your freight costs are. You should be able to track your inbound freight and state it as a percentage of your total monthly or annual purchases. If you’re above the 3-percent to 5-percent range, focus on the following tips:
- Certify a freight company (or companies), or use a third-party freight consolidator/broker to consolidate your volume and get the best discounts. Then specify this to the carrier on your shipping instructions.
- When negotiating with product vendors, always ask for a unit price without freight added on. Never agree to let your vendors pre-pay freight and add it to your invoice — they may mark it up, and you won’t know it. After you have the lowest unit price, then ask for free freight, or let the vendor quote the freight and compare it against your certified carrier’s cost.
- Audit your freight bills regularly, or hire an outside service to do this for you.
- Make sure you’re not bringing in too many smaller shipments from the same vendor. This often is done to reduce the amount of inventory being carried. However, those cash-flow savings often can be offset by the large increase in freight costs for so many small shipments.

(For more tips on saving money on freight, see “Vendor Inbound Freight: 10 steps to reducing costs and improving control,” Catalog Success, April 2003, p. 30).

6. Decrease the cost of outbound freight. Unless your customers or your brand image demands the fastest delivery service possible, try using a less-expensive method. The difference in the cost per package of an overnight package and a package sent through the U.S. Postal Service via a consolidator such as Parcel Direct can be staggering. If you don’t need the speed or the trackability, don’t pay for it.

7. Stay in-stock, especially on your high-velocity/low-cost items. Most catalog orders average more than one line. So if any product on an order is not in stock, a second shipment has to be made to the customer, with no additional revenue to cover it.

The second package’s processing, packaging material, dunnage and postage usually costs $5 to $8 per backorder. If you’re trying to lower your inventory investment, don’t do it on low-cost, high-velocity items. You may find yourself spending another $5 to ship a product that cost you only $1.50 to have on hand.

Calls and Response

8. Test only big ideas. Although testing is extremely important for any direct marketing company, it’s expensive. When times are tough, be sure each test is meaningful, can be executed well and has the potential to get significant results. Knowing your test costs is important — especially so you can remove them when analyzing the rollout potential.

9. Focus on response. A larger percentage of the revenue on every additional order you get above your breakeven drops to your bottom line. If your product cost is 40 percent, then 60 percent of every dollar you get above your effort’s breakeven drops to your profit line. Additionally, you may be making a profit on shipping and handling. And you’ll also have more buyers for mailing the next effort. Be sure your merchants, creative team and marketing staff all focus on making decisions that drive response.

10. Upsell. The only costs to an upsell are the product costs, the fulfillment costs and the incremental phone time to make the sale. If you normally contribute 10 percent of every dollar in revenue to overhead and profit, you’ll contribute about 35 percent of every upsell dollar to overhead and profit. That’s because you incur no additional marketing costs to make the upsell. So you have room to offer a great deal, move product out the door and still make a positive contribution to your bottom line.

I wish you luck in these tough times. If you master some of the above tasks now, just think of the rewards you’ll get when the economy turns around.

Phil Minix is the managing director of catalogs for Reiman Publications. You can reach him by e-mail at pminix@reimanpub.com.