I published an article in May 2020 titled, “How Much Does it Cost to Mail a Catalog”. This is a continuation of that article; Part II. My initial article focused on the actual cost to print and mail a catalog. While the cost per catalog will vary depending on page count, paper, quantity, etc., the average cost per catalog in the mail will range from $.55 to $.70 or more. Our focus in this article is not on dollars and cents but rather on key operating ratios specifically the direct selling expense ratio. If you manage the ratios you can improve profitability.
When reviewing your monthly income statement, I am sure you pay a great deal of attention to the cost of goods and gross margin ratios. These ratios are important. However, your direct selling expense to sales ratio is equally as important. If this ratio is too high profitability will be impacted. If this ratio is too low, you can afford to increase your marketing effort.
The first step toward managing your direct selling expense to sales ratio is to make sure these expenses are grouped together on your income statement. Don’t include direct selling expenses in administrative or in other groupings. These expenses need their own grouping and/or category so that they can easily be identified and managed separate from other expenses. If line item selling expenses are reported in other categories on the income statement, they will not receive the visibility needed to manage them.
What are the line item expenses that should be classified as direct selling expenses and grouped together? They include the following:
- Catalog Creative (only if you use an outside design firm)
- Paper and Printing Expenses
- Ink-Jet Addressing and Mailing Expense
- Postage Expense (net of co-mail fees)
- Outside Lists Expense
- Service Bureau Merge/Purge Expense
Having these expenses grouped together and sub-totaled on the income statement makes it easy to manage this important financial ratio. If your income statement is not set up this way, direct selling expenses lose their visibility, and you could be spending your way into the poorhouse wondering how that could have happened.
Now that you know how to identify direct selling expenses, what is an acceptable ratio? For a healthy, profitable direct-to-consumer business this ratio will range from 25% to 35%; 30% of net sales is a good target. This means that approximately $.30 out of every dollar of revenue (net sales) is a direct marketing expense. It is not unusual for this ratio to be higher, i.e., 35% if your gross profit margin can support it. This key ratio will be lower for a business-to-business direct marketing company. Typically for b-to-b this ratio ranges from 20% to a high of 30%.
The higher the gross profit ratio, the higher the direct selling expense-to-sales ratio. The reverse is also true. The lower the gross margin ratio, the lower the direct selling expense-to-sales ratio. Generally, you can’t have it both ways, meaning a high gross profit margin with a low selling expense-to-sales ratio.
The circulation decisions you make will affect the ratio. For example, if you mail too deep to your house file or if you aggressively prospect, it is easy to drive up this ratio. That’s why it is important to manage your direct selling expense-to-sales ratio on your P&L statement. You’ll want to find the proper balance of circulation to the house file vs. mailing to prospects, i.e., non-buyers.
Customers who have purchased in the last 12 months are the geese who lay the golden eggs. The 0 to 12-month buyers generate the highest response rate and, therefore, the highest revenue per catalog mailed. Therefore, can you leverage these R-F-M (Recency-Frequency-Monetary) cells to help drive down the ratio. For example, you might consider adding a mailing or directing an email campaign to what is considered the heart of your house file. If you can squeeze in another mailing it should help reduce your selling expense-to-sales ratio if it is higher than you desire.
In summary, be sure you know your selling expense-to-sales ratio. Manage this ratio by adjusting your spend, i.e., catalog circulation. Find the right balance of circulation to the house file vs. to outside prospects. By managing this important ratio, you will be able to manage your profitability.