|
We recently received a call from the VP of marketing of a large specialty food catalog company. She wanted to know what they could do to offset the new postal rate increase.
I realized that if this large and successful specialty food cataloger had questions, other readers of this newsletter might have similar concerns. Below are a few techniques you can employ to help map out a plan to lessen the pain of the latest postal increase while hopefully maintaining your profitability and sanity.
SLIM-JIM VS. FULL-SIZE CATALOG
Years ago we did some testing around this issue and came to the conclusion that, more times than not, the slim-jim format produced a lower response rate. That was years ago and two things are different today:
- The rate difference between letter size/slim-jims (6” x 10.875”) and flat size (8.375” x 10.875” catalogs) mail has never been higher. Before the May rate increase, postage for flats was about 16% more than letter-rate mail. Now on mailings of 50M or less, postage for flats will be about 47% more than slim-jims.
In holiday 2006, we were spending about $260/M to mail a full-size catalog and about $210/M to mail a slim-jim. Add in the cost of tabbing a slim-jim at $15/M, and the net difference was about $35/M.
The average marketing margin (i.e., sales less COGS and all variable operating expenses) for specialty-food direct marketers is around 40% of sales. Therefore, to pay for the added postage of the full-size book, you would need additional revenue of around $87M to breakeven. More times than not, it was possible and even likely for the full-size book to generate the required increase, so most food mailers opted for the larger size catalog. In fact, over 80% of the food catalogs we received in the holiday 2006 season were full-size books.
With the new rates, however, flats will cost about $360/M vs. $245 for a tabbed slim-jim. Therefore, the cost difference is about $115/M. To breakeven on the added postage, the full-size catalog will need to generate additional sales of $287/M. It’s not likely that the larger catalog will generate that level of added response, so the slim-jim may now be the right way to go, especially for small mailers who don’t mail one-hundred thousand or more catalogs per drop.
- Chances are half or more of your orders are now transacted online, so you don’t need the catalog to do all of the heavy lifting that it used to.
We are not suggesting you do away with the catalog! Without question, it is still the most cost-effective vehicle food mailers have for driving traffic to their sites. However, by virtue of the fact you can show and tell your entire story on your website, the catalog is morphing into more of a site-traffic driver than a standalone marketing vehicle that must take the customer or prospect all the way from stimulating initial interest to closing the sale.
This point became remarkably clear to us this spring when we conducted several head-to-head tests between post cards and catalogs. In each test, the post card pulled in more orders and sales at a lower cost!
COMPARING THE FULL-SIZE TO SLIM-JIM FORMAT IN FOUR EASY STEPS
- Estimate the total marketing costs for the two options; compare them side by side. Don’t just look at the cost of postage. There are other considerations, too. Printing and paper will be less with the slim-jim.
However, if your current catalog is in the full-size format, you may be in for the cost of a complete redesign to move to a slim-jim. Depending on your page count, the new creative will likely add thousands to your costs. Therefore, it needs to be factored into your decision.
- Calculate your marketing margin. From your most recent year-end P&L, separate all of your operating expenses, excluding marketing, into either fixed or variable expenses. Marketing margin is simply your gross profit margin (sales less cost of goods sold) minus your variable operating expenses.
Ninety percent of the food mailers we see have a marketing margin between 38% and 48% of sales.
If you are having trouble with the calculation, give us a call and we can walk you through it.
- Use the cost difference you calculated in #1, and divide it by your marketing margin (as a percentage of sales) you calculated in step 2. This will tell you the added sales per 1000 you need to generate to break even on the larger catalog.
If you are more comfortable working with whole dollars instead of dollars per thousand catalogs, just multiply the added sales per 1000 by the total number of catalogs you plan to mail—this will tell you how much of a sales increase you will need to cover the added cost of the full-size catalog.
- Now comes the hard part. Ask yourself, “Do we really think the bigger book will generate that much of a sales increase?” If you answer yes, you probably should mail a full-size book this holiday season. If you answer no, the slim-jim may be better for you.
OTHER STEPS TO MITIGATE THE POSTAL INCREASE
- Many mailers are drastically cutting list rental circulation as a way to cope. Unless you have an alternate source of new name flow, this is dangerous and will have a long-term negative effect on your sales and profits.
A simple way to gauge the impact of changes to your prospecting program is to look at the number of new names you generated last year by source and channel.
Let’s say you generated 10,000 new buyers last year. Where did they all come from? Was it from list rental, retail-store signups and conversions, untracked Internet orders, pay-per-click Internet orders, print ads, or some other source?
If, say, 3,000 of those new buyers came in from list rental and you drastically cut rentals in 2007, you will need to replace that source of name flow, or your 12-month buyer file will be smaller next year than this year. That starts a vicious spiral, if not a tailspin, that is difficult to pull out of.
Our point: be careful when deciding on major changes to your prospecting program, run the numbers, and be aware of the longer-term consequences of the decision you make.
Look for untapped opportunities from your new name-flow analysis. For example, can you expand on your pay-per-click program and still generate an acceptable ROI? Are you testing print advertising? If not, now may be the time to revisit it. If you have retail stores, are you doing all you can to motivate the staff to ask customers and visitors for their postal and/or email address?
Rank all of your prospecting sources by their net acquisition cost per new name, and max out all opportunities in the lowest cost sources before spending any money on the next higher cost source of a new buyer.
If you use square-inch analysis (squinch) as a guide to space allocating your catalog, you may have kept items in the book that will not pay their way given the new higher costs of your 2007 catalog. Plug in estimated 2007 costs into your 2006 squinch. Is every item you are keeping in the catalog still paying its way? You may be able to cut page count and see a minimal fall-off in sales. Again, run the numbers.
Ask your printer to quote your catalog on a slightly lighter and/or lower grade of paper. The savings could be huge with no perceptible loss in quality look and feel.
Ask your printer for every possible option to cut cost. This may include slight changes to the trim size. It may also mean changing the addressing area on the back of the catalog to allow you to co-mail your book with other catalogers.
Make sure your printer has the volume, distribution and capabilities to co-mail and co-palletize your catalog. Any reputable printer can print a good-looking catalog these days, assuming the prepress was done correctly and the paper is of reasonable quality. The most important thing to consider when talking to your printer is how much they can help you save on postage by combining your catalog with some of their other customers. Don’t get a printing quote without asking for their postage estimate. If your printer can’t or won’t do this, move on!
Don’t forget list hygiene. It has never been more important to dedupe your list and run it though NCOA and other address change/clean-up processes before you mail.
Look at non-catalog formats. Direct-mail packages (i.e., a letter, brochure and response device inserted inside an envelope) may be more economical for you than mailing a full catalog. This is especially true for food mailers who usually generate 60% to 80% of their sales from one or two products or product categories. Post cards are also important to add to your circulation plan, especially in the off-season when mailings don’t generate the same response rates as in the holiday season.
Work your house file harder. Look back at the numbers from your holiday 2006 mailings. Are there any house file segments that can support one more mailing squeezed in before the cut-off for Christmas delivery? Reward your best customers with an unexpected free gift sent along with their catalog and a letter thanking them for their business last year. If you are not using a gift list, do so. It will be the most profitable addition to your mail plan this year.
There is no getting around it: the new postal rate can have a crippling effect on our businesses if we don’t take steps to offset the cost increase. We hope you can use a few of the ideas presented here to better cope and make it through the holiday 2007 with a bigger and more profitable specialty-food catalog/Internet operation.
If you have other ideas you would like us to share with our readers, please drop us a line. We would love to hear from you.
Warmest Regards,
Tony Cox
President
The 5th Food Group and Catalog Solutions, LLC
ABOUT 5TH FOOD GROUP & CATALOG SOLUTIONS
5th Food Group helps specialty food catalogers and internet marketers grow and make more money by developing, managing and implementing their mail order and online marketing programs. We are the only catalog/internet marketing firm that works exclusively in the specialty food industry. Helping smaller companies or large companies with small mail order or Internet divisions is what we do best.
Visit us online at www.5thFoodGroup.com to download a copy of our free booklet, The Seven Habits of Highly Ineffective Catalogers, and for information on our fully guaranteed introductory program called Jump Start.
WILL YOU BE ATTENDING THE NEW YORK FANCY FOOD SHOW IN JULY?
Mo Frechette, my friend, client and co-founder of Zingerman’s Mail Order, and I will be co-presenting a workshop titled, 10 Steps to Increase Website Sales and Profits. The workshop with be held at the show on Monday, July 9 from 8:30 to 10:00 AM. For more information, visit the NASFT’s web site at www.fancyfoodshows.com. We’d love to see you there.
|
