Guidelines for Acceptable Direct Selling Expenses (1,202 words)
Direct Selling Expenses -
What Are Acceptable Guidelines?
By Stephen Lett
An important ratio to manage on the income statement is your selling-expense-to-sales ratio.
our cost-of-goods ratio is probably imbedded in your head. But are you as familiar with the other key ratio on your profit and loss statement: the direct selling-expense-to-sales ratio? If not, you should be.
In this article, I will discuss what is an acceptable guideline for a consumer catalog company and for a business-to-business cataloger. I will also examine what percentage of the total each of the line items in selling expenses should be. Last, I will determine the effect on the selling expense-to-sales ratio when more (or less) prospecting is done. Aggressive prospecting can spell financial disaster! I will show you why.
It is important to organize your income statement so that your direct selling expenses are grouped together and subtotaled. Selling expenses should neither be grouped with your operating expenses nor with your administrative expenses. Again, these line item expenses need to be separated and exposed on your income statement so that you can better manage this ratio.
Direct Selling expenses are all of the costs associated with the production, printing and mailing of your catalog. Internal payroll and labor costs are not generally included here unless you produce the catalog in-house. Then, the direct cost to produce the catalog should be included in your Catalog Creative and Production costs.
The following expenses should be included in your selling expense breakdown:
•Catalog Creative and Production (outside design firm)
•Paper and Printing
•Bind-in Order Form
•Outside List Rental Expenses
•Ink-Jet Addressing and Mailing Fees
•Space Ads (if any)
•Alternate Media (if any)
The selling-expense-to-sales ratio is a critical factor contributing to the profitability of any catalog company. If the ratio is too high, a cataloger will lose money, guaranteed! If the ratio is too low, the cataloger is probably under prospecting. A high ratio is the exact reason why a start-up cataloger cannot be profitable. Too much money has to be spent renting names and developing a housefile of proven mail order catalog buyers. Start-ups will spend more than 50 percent out of every dollar of sales to acquire a new buyer. There is a cost to growing a housefile. Most catalogers cannot prospect above the incremental break-even point defined as: net sales less cost-of-goods less direct selling expenses less direct order processing costs.