Many metrics are used to run a profitable catalog business. For example, an apparel company may set a goal for its overall return rate of 22 percent, while a gift mailer may strive for less than 6 percent.
But one thing is universal among catalogers: The ideal metrics or ratios are those that lead to profitable income statements. After all, if you manage by the ratios, the dollars will take care of themselves. Remember, dollars go into the bank, not percentages.
Key metrics to calculate and watch include service levels (e.g., how long customers wait in your contact center’s queue), response levels (e.g., response rates to catalog or e-mail marketing campaigns) and specific costs (e.g., cost of goods). Metrics are the main influences in the success of your business, and all are essential. This month, I’ll discuss key ratio guidelines that will help you to maximize profitability.
It’s important to understand the key ratios that are standard for your specific market. This will enable you to measure against “realistic” standards. Set goals for each that will impact your bottom line. These goals can be set in a “what if” spreadsheet scenario. For example, if your cost of goods currently is 50 percent, imagine what could happen to your bottom line if you got this down to 48 percent. In this age of cost-cutting, try shaving a little bit like this for every line in your income statement. Be cautious not to overestimate, or expect all of your goals to fall into place at once. Be realistic about your expectations. As the saying goes, you want to under-promise and over-deliver.
Direct-selling expenses (e.g., catalog design, production, printing, paper, bind-in order form, postage, lists, merge/purge) comprise a significant line-item grouping on your income statement. For a consumer catalog company, this ratio typically ranges from 25 percent to 30 percent of net sales. For a business-to-business (b-to-b) cataloger, it ranges from 15 percent to 20 percent.
As a general rule, the lower the gross-profit ratio, the lower the selling-expense-to-sales ratio. For example, if you’re selling highly competitive, name-brand products, your gross-profit margin will be low, and your selling-expense-to-sales ratio also will be less than the industry average. While it would be nice to have it both ways — that is, high gross-profit margins and low selling-expense-to-sales ratios — this generally isn’t realistic.
What should key ratios be for a typical catalog company, both consumer and b-to-b? Below, I provide several key ratio guidelines, but keep in mind these ratios vary by catalog company. Again, the key to profitability is to manage these key ratios. If, for example, you prospect more aggressively, you’ll increase your selling-expense-to-sales ratio, and doing so could result in a loss on your income statement. Yet, you might decide to accept a short-term loss on the bottom line in exchange for long-term growth and improved profitability. Just know the probable impact such decisions will make on your income statement before you act.
Format of Income Statement
Often, direct-selling (catalog) expenses are included in the general and administrative (G&A) expenses. However, direct-selling expenses should be grouped both together and separately on your income statement as shown in our example of a typical income statement (see chart “Typical Catalog Income Statement” ). By grouping these expenses in this way, it’s much easier to manage this ratio.
Shipping & Handling Income and Expense
New guidelines from The Direct Marketing Association note that direct marketers should not charge customers more than a “reasonable amount” for shipping and handling (S&H). That is, S&H should not be thought of as a profit center.
That said, it’s important that you know if you’re making or losing money on S&H. Thus it’s common to show S&H on a catalog income statement. Moreover, S&H expenses should be handled on your income statement, too. Most often, shipping income is posted to the revenue line (e.g., sales). This is a legitimate revenue line item that’s part of gross sales.
The actual cost to ship the order is a fulfillment expense and normally an operational, or G&A, line item. S&H rate charts normally are set (and adjusted) by a catalog’s marketing department, which is another justification for having this important line item on the top line of the income statement.
What to Measure, How to Reach Your Goals
Cancellations primarily are caused by backorders. In general, cancellations run from 1 percent to 3 percent of sales. If you track the peaks of your cancellations (from the date of order), they generally occur when the 30-day and 60-day back-order notices are received by the customer. This prompts the customer to take action.
Allowing enough lead time from order to need, using back-up suppliers where necessary, developing strong inventory control/forecasting, and maintaining accurate and current stock information for the contact center team all play significant roles in managing cancellations due to backorders.
Customer return rates have an enormous impact on your bottom line. Not only is a return costly to process ($8 to $10), it can dramatically reduce your gross demand (and your revenue per catalog mailed). Return rates can range from a low of 1 percent to a high of 25 percent, depending on your type of business.
Analyze what’s being returned and why. To reach your return-rate goals, address the high-volume, high-return-rate items first. If there’s a top-selling item that’s returning at a high level, have the supplier fix what’s causing the returns. Or be more accurate in your creative for the item, so the customer knows exactly what to expect when the package arrives. Also, try to reduce order-processing errors by conducting random checks on orders and measuring the accuracy of the pickers, packers and other key personnel.
Cost of goods should range from 45 percent to 55 percent, and of course, the lower the better. There may be room to reduce your cost-of-goods percentage by raising the retail, but you must remain competitive and keep an eye on the perceived price/value of each item. Reducing your cost generally is a less-risky approach to managing cost of goods. Negotiate with your suppliers at every stage of the life of each item in your catalog. Run the numbers for each item, and know what you can pay to make the item profitable. In addition, consider quotes from alternate suppliers.
Fulfillment expenses and the cost to process an order also can range dramatically depending on your market and order volume. In general, the cost to process an order ranges from $7 to $15 and is heavily influenced by labor and freight costs.
With all of the peaks and valleys of the catalog business, efficient staffing is a major challenge. Accurate order forecasting and flexibility are necessary. For some companies, no matter how well they forecast and staff, the economy of scale doesn’t work in their favor and they cannot impact their fulfillment costs. If you find this, consider outsourcing the work to a third party.
Cut Costs and Direct-selling Expenses
Test different paper grades and weights to see if you can use a less-expensive paper without negatively impacting results. A lighter paper also may save on postage.
Annually bid out the production of your catalog with other printers. Also, consider a slight adjustment to the trim size.
Test an order form that’s printed as a page in the book versus a bound separate form.
Pre-tax profit/EBIT for most catalogers is 5-percent to 10-percent (measured as a percentage of net sales). Since this is the final measure of a successful business, it’s the common goal (regardless of market) that ultimately is the measure of how well all of your other metrics have played out.
Although 5 percent to 10 percent is the general target for pre-tax profit, the actual dollars you can generate pre-tax are just as important. (Note: If you’re in start-up mode, don’t expect to reach this level until at least the third to fifth year.) You may find that you have a pre-tax percentage that’s less than the prior year, but your actual pre-tax dollars increased. When working with scenarios, keep both a percentage range and a total dollar goal in mind. Remember: You put dollars in the bank, not percentages!
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 email@example.com.