Control Direct Selling Expenses
Your direct selling expense ratio is as important to track as your cost-of-goods ratio and other key metrics on your income statement. Indeed, controlling your direct selling expense ratio plays a major role in helping to improve your catalog company’s profitability.
This month, I’ll focus on ways you can reduce your direct selling expense ratio. But first, let’s look at what normally comprises direct selling expenses:
- catalog creative costs;
- printing and paper;
- ink-jet addressing and mailing expenses;
- bind-in order forms and envelopes;
- outside list expenses; and
- merge/purge costs.
Direct selling expenses also can include: space advertising; alternative/insert media; and Internet marketing.
Group these expenses together on your income statement. They shouldn’t be included with all other operating expenses. Track these expenses and key ratios to net sales just like you monitor your cost-of-goods-sold percentage every month. If you don’t set up your income statement properly, it’ll be extremely difficult to monitor this critical ratio.
Let’s look at what direct selling expenses should be as a percentage of net sales. We also want to understand the percentage each of these line-item expenses has to the other. On the chart “Direct Selling Expenses,” you’ll see that printing, paper and postage account for about 80 percent of all direct selling expenses.
|Expense Category|| Percent to
| Ratio to Net
| Ratio to Net
|Catalog creative expenses||6.15%||1.75%||1.5%|
|Printing and paper||38.6%||11.55%||8%|
|Ink-jet addressing, mailing||1.8%||0.85%||0.75%|
|List rental expenses||8.5%||2.5%||1%|
|Service bureau expenses||2.45%||0.75%||0.75%|
In terms of direct selling expense to net sales ratio, it will be different for a consumer catalog company than for a business-to-business (b-to-b) firm. A typical ratio for a consumer cataloger is 25 to 30 percent, while for a b-to-b company it’s 18 to 20 percent.