Cost-cutting Tips You Can Take to the Bank
Much has been said and written about the stunning postage increase that took effect earlier this year. With new rates running upwards of 40 percent-plus greater than the previous ones for some Standard mail (catalog) categories, this may be the toughest challenge I’ve seen this industry encounter in all my years covering the business.
Fortunately for all of us, we have sharp minds like our lead columnist Stephen R. Lett and his vice president at Lett Direct, Sandy Wolstencroft. Steve and Sandy took it upon themselves to break down virtually all the ways you can implement change in your catalog mailing strategy to adapt to the new rates — but without having to cut circulation. I strongly encourage you to read this feature, take notes, clip out parts, whatever it takes. It could save your business.
— Paul Miller, Editor-in-Chief
This analysis will show you how the new postage rate increase impacts the incremental break-even point. Cutting circulation isn’t the solution to increased costs. Instead, consider the following.
Talk with your printer about co-mailing (or commingling). There are two big advantages:
① Postal savings. This is due to better presort levels and possibly better drop-ship discounts. More mail will qualify at the carrier route level.
② Better deliverability. More carrier route or five-digit pallets will result, enabling the catalogs to penetrate the postal system deeper, which could generate additional savings by going to more sectional center facilities (SCFs). This will increase production flow through the postal system.
Eliminate the Bind-in Order Form/Envelope
If you use a separate bind-in order form with envelope, consider printing the order form on a page in the catalog. As fewer orders actually are received by mail, many catalogers have eliminated the bind-in order form and envelope as a way to save money.
Bind-in prices range from $12 to $20 (or more) per thousand depending on the size, quantity printed and use of color. They add weight to the catalog, too, which can increase postage costs. If you decide to print the order form on a page in the catalog, part of your cost saving calculation needs to include the gross margin you will forfeit from the elimination of saleable merchandise on the page (or two) you devote to the “printed” order form. Eliminating the bind-in order form also will impact your ability to trace orders to a specific mail code, increasing the necessity to do a matchback.
Improve Your Margins
Work with suppliers to improve margins by lowering costs or increasing retail prices. Catalogers are reluctant to increase prices. Many use a bad formula when pricing merchandise. For example, if the cost of an item is $20 and your desired mark-up is two times, you might establish a retail price of $40, which yields a gross margin ratio of 50 percent. The preferred method of pricing is based on the perceived value of the item.
If you’re selling name-brand merchandise others are selling, this method of pricing is more difficult. But if you’re selling proprietary items that aren’t readily available, pricing based on perceived value will avoid leaving gross margin dollars on the table. Consider increasing prices. It might be painful, but catalog customers normally don’t purchase based on price.
Catalog Trim Size
If you mail a pound-rate catalog (weighing 3.3 oz. or more), a slight reduction in the physical trim size of your catalog will reduce your postage and paper costs. For example, a reduction of a half-inch vertically on an 80-page catalog can save $15,000 on the paper and postage costs per 1 million copies printed.
(Note: This assumes the weight requirement does not change.)
Paper Weight and Separate Covers
Test lighter weight papers. Test self-covers vs. a heavier separate cover. A move to a slightly lighter basis weight paper should have no impact on your results. Paper is sold by the pound. If you use fewer pounds, you may save money. You certainly can save money on postage by using lighter weight paper, provided your catalog mails at the pound rate.
A simple change from a 34 lb, No. 5 basis weight to a 32 lb, No. 5 basis weight will save approximately $12,000 in postage on a mailing of 1 million, 80-page catalogs.
Use a Lower Grade of Paper
Changing grades can have a similar effect to changing the basis weight of paper. Just be careful not to go to extremes. Test a No. 5 grade, for example, against a No. 4 or No. 3 grade. Unless your offer is extremely upscale, a slight reduction in the grade of paper you use can reduce your direct selling expenses and ratio.
Zip + 4 and Carrier Coding
If you say you’ll be dropping non-codeable records with your list order as a requirement, you can deduct these names from the list rental invoice. Noncodeable records don’t qualify for postal discounts and generally are less deliverable and therefore, less responsive. Also, make sure your list rentals and housefile have been put through National Change of Address (NCOA) recently.
A/B Split Tests
If you do any split tests, look at the net benefit of selective binding to keep the mailing in one ZIP code stream to maximize your postal discount as opposed to separate ZIP streams, which are more costly. Generally at quantities of 300,000 or more, it’s more cost-efficient to selective bind.
Ask your service bureau to give you the postage estimates both ways (one ZIP stream vs. two ZIP streams) to be sure where the cutoff is. If the postage savings outweigh the price of selective binding, selective binding definitely is the way to go.
Use add-a-name or add-an-address to increase carrier route volume and qualify for added discounts. Add-a-name is the process where you add one or two records to a carrier route in order to qualify for a discount if you were previously short of the 10-per-carrier requirement. Often, if you have a pool of records to draw from that are close or at breakeven, the records added bring your postal costs down, and the net gain is positive. If you use inactive buyers or modeled names from a cooperative database, it’s usually worth doing. Keep in mind that the number of add-a-name pieces added will be a function of how many pieces are mailed and the geographical distribution of the mailing. For most mailers, a national circulation of 700,000 or more is required for add-a-name to make economic sense. At this level, generally about 5,000 to 10,000 catalogs will be added.
Develop a Contact Strategy
Test for the preferred method of contact. For example, if a customer only responds to e-mails, you may be able to decrease catalog mailings and replace these “contacts” with e-mail contacts. Often, Web buyers aren’t traceable through typical source code tracking. So they may look as if they’re not responding well to a mailing when, in fact, they are. Therefore, this method should be backed up by significant testing over the course of a year.
Don’t Stop Mailing to Web-only Buyers
When you look at your source code report, it appears that Web-only buyers are considerably below breakeven. Even the results from the most recent Web buyers don’t look exciting to you, I’m sure. It’s logical to conclude that you should stop mailing Web-only buyers in order to save money. However, in recent matchback studies we’ve done, Web-only buyers are performing at more than acceptable levels. Keep mailing them.
Don’t Reduce Pages
Maximize page count. Pages, i.e., more merchandise, do increase the amount of revenue generated per catalog mailed. The revenue per catalog mailed will increase at half the percent increase in page count. Assuming there is plenty of “good” merchandise to sell, adding pages makes good economic sense. Adding pages while making certain the paper and press manufacturing are efficient can lower your incremental break-even point while increasing revenue.
Always maximize page count without increasing your postage costs when you can. Once you’re required (by weight) to mail at the pound rate, using the right paper and page count combination can help minimize the increase. It’s possible to circulate the same number of pages (or more) for less money. As you increase pages, consider reducing the basis weight of the paper you’re using in order to reduce and leverage costs.
Stephen R. Lett is president of Lett Direct Inc., a catalog consulting firm specializing in circulation planning, forecasting and analysis, and a regular columnist for Catalog Success.
Sandy Wolstencroft is vice president of Lett Direct where she is responsible for all circ planning, execution and analysis. Having joined the firm in 2002, she previously was marketing director at Petals and had prior stints with dressbarn and Bedford Fair Industries. You can reach both of them at (302) 537-0375 or via their Web site www.lettdirect.com.