In this time of uncertainty, controlling your direct selling expenses is critical to your bottom line. Fortunately, paper prices have remained low, which helps offset the recent postage increase.
But the business climate is difficult, and the squeeze on the bottom line is real. This month, I’ll offer various ways to reduce your direct selling expenses. Specifically, the following line-item expenses should be considered direct selling expenses:
- catalog creative and production;
- print manufacturing;
- outside rented lists;
- bind-in order form insert; and
- ink-jet and mailing.
These direct selling expenses always should be grouped together and sub-totaled separately on your income statement. Often, these expenses are lumped in with general operating expenses, which isn’t a good practice. Direct selling expenses as a percentage of net sales is one of the most important and critical ratios on your income statement. It must be managed just like you monitor your returns ratio, gross profit margin ratio and operating expense ratio.
For a consumer catalog company, this ratio should range between 25 percent and 30 percent. For a business-to-business cataloger, a lower ratio in the range of 17 percent to 20 percent is more typical. Rule: The lower your gross margin ratio, the lower your direct selling expense ratio.
In a highly competitive catalog business where name-brand merchandise is sold and prices are easily compared, margins tend to be low. But demand generally is greater, which helps drive down the selling-expense-to-sales ratio. Businesses of this type might include fishing and hunting supplies or consumer electronics.
When we break down direct selling expenses, the ratios of the individual line-item expenses vary from a consumer to a b-to-b catalog company. Ratios for both types of businesses typically are as follows:
For a catalog company to remain profitable, the selling-expense-to-sales ratio must be in-line. The ratio for a consumer catalog company is considerably higher than the ratio for a cataloger selling b-to-b. This is because the revenue per b-to-b catalog mailed is higher than a consumer catalog. It’s important to manage by the ratios. If the selling-expense-to-sales ratio gets out of line, most likely the income statement will show a loss on the bottom line. Profitability will be impacted. The more prospecting you do, the higher the ratio. Management may decide to tip the scales between mailings to the housefile vs. mailings to prospects in order to grow. This will increase the selling-expense-to-sales ratio. A company with adequate funding might be in a position to do this. On the other hand, it could mean disaster for a cataloger that has limited capital and is trying to grow too fast.
Steve Lett graduated from Indiana University in 1970 and immediately began his 50-year career in Direct Marketing; mainly catalogs.
Steve spent the first 25 years of his career in executive level positions at both consumer and business-to-business companies. The next 25 years have been with Lett Direct, Inc., the company Steve founded in early 1995. Lett Direct, Inc., is a catalog and internet consulting firm specializing in circulation planning, plan execution, analysis and digital marketing (Google Premier Partner).
Steve has served on the Ethics Committee of the Direct Marketing Association (DMA) and on a number of company boards, both public and private. He served on the Board of the ACMA. He has been the subject of two Harvard Business School case studies. He is the author of a book, Strategic Catalog Marketing. Steve is a past Chairman of both the Catalog Council and Business Mail Council of the DMA. He spent a few years teaching Direct Marketing at Indiana University in Bloomington, Indiana.
You can contact Steve at email@example.com.