Strategy How to Use Selling Expense Ratios
By Stephen R. Lett
In my previous columns, I've talked a great deal about direct selling expenses — e.g., paper, printing, postage, list rental — and why these expenses need to be separated on the income statement. This month, I offer a slightly different twist by relating direct selling expenses to recency segments of the housefile. I'll demonstrate how overmailing the housefile can and will increase this key ratio, and why not all housefile segments should be mailed in every drop.
Typically, direct selling expenses range from 25 percent to 35 percent for consumer catalog companies and 15 percent to 22 percent for business-to-business catalogers. In order to best manage this critical ratio from an expense standpoint, it's important to know what exactly is driving it. For example, we know the more prospecting that's done in relation to what the housefile can support will affect it. But, mailings deep to our own housefile will cause the ratio to increase, too. The gold at the end of the rainbow is finding the proper balance between housefile circulation and prospecting to optimize the direct selling expense to sales ratio.
It's not unusual for 15 percent or 20 percent of the current customer file to account for half or more of the sales from any given mailing. In fact, I see approximately 25 percent of total revenue often coming from 5 percent to 10 percent of the customers. The selling expense to sales ratio would be pretty low if you only were able to focus on these segments of the housefile. While circulation to the housefile needs to be expanded beyond this level, you need to be careful to avoid mailing too deep or too often to certain segments of your housefile. This is why it's important to properly segment the housefile and to mail by recency, frequency and monetary value (RFM). The more you dilute the results from your top tier customer group, the more you'll increase the selling expense to sales ratio. And, the more you increase the selling expense to sales ratio, the less profit you'll see on the bottom line.