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.
Of course, increasing the amount of prospecting you do will, in turn, boost this key ratio. If you drive the ratio from, say, 30 percent to 40 percent, your profitability will suffer. As I’ve noted in past columns, don’t try to grow too quickly. Rather, grow within your financial means and maintain the proper balance between mailings to your housefile vs. mailings to prospects. If you make a conscious effort to grow at a faster rate, be sure you have the proper amount of financing in place to fund the growth.
Reduce Direct Selling Expenses
1. Cut catalog creative expenses. Minimize version changes and take advantage of re-mails — for example, make cover changes only.
2. Reduce printing and paper costs. Get at least three competitive bids from different catalog printers once every year or two. Change always is difficult, but you should be willing to do so for a difference of 5 percent or more. Following are some ways to reduce your printing costs:
- Ask your printer for alternative trim sizes that can reduce paper and postage costs, especially if your catalog exceeds the Standard A piece rate minimum.
- Prepare your disks correctly. Send them to your printer with all of the necessary files.
- Leverage longer print runs. Use multiple covers and a re-mail strategy to maximize economies of scale.
- Buy your own paper. Caveat: Do this only if your company is of the size and scope to deal with results such as what to do with butt rolls, paper-quality issues, etc.
3. Cut postage costs.
- Consider reducing your catalog paper’s weight. Paper is sold by the pound, so if you use fewer pounds, you’ll save money. And you may save money on postage, providing your catalog mails at the pound rate (vs. the piece rate), i.e., exceeds 3.306 ounces.
- Use a printer that specializes in catalogs. Many companies can put ink on paper, but the efficient distribution of a catalog through the postal system should be an important criterion in your print vendor selection. While a local lettershop most likely will send all mail to a local post office or bulk mail center, a catalog printer is set up to penetrate the postal system by drop-shipping catalogs to various points.
- Explore with your printer the idea of co-mailing your catalog with one of its other catalog customers in order to create a denser mailing list. This will help create more carrier route mail, which enjoys a lower rate.
- Exchange lists when you can, but don’t accumulate exchange balances that you’re unlikely to ever use.
- Leverage the cooperative databases.
- Reduce outside list costs by minimizing the per thousand additional charges for extra selects (e.g., dollar, recency) that you may not need.
- By all means, use your list broker to negotiate base pricing, net arrangements and select charges on your behalf.
- Get competitive bids from at least three merge/purge service bureaus every year or two to be sure the one you use is competitively priced.
- Purge your file. When doing a merge/purge, don’t pass more names than necessary. Also, combine merge/purges when you can. Caveat: This is possible only if your mailings are fairly close together, say, four or five weeks apart. Obviously, you want to mail to fresh names when possible.
These are just a few of the ways you can reduce your direct selling expenses.
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.