Catalog Analysis: Demystifying the B-to-B Financial Model

Apr 01, 2003 10:30 PM  By

The business-to-business catalog financial model is quite similar to the consumer counterpart we discussed last column (“Understanding Catalog Financial Models,” February issue) other than the type of product being offered. But there are some critical differences between consumer and b-to-b catalogs. The list below shows some differences that affect the financial side of the business — and the financial model:

  • Returns and cancellations on b-to-b catalogs are normally lower than those for consumer books.
  • Cost of goods (and gross margin) have wider swings among b-to-b catalogs than for their consumer counterparts.
  • B-to-b books are typically bigger in terms of page counts, but catalogs are mailed less often than consumer books.
  • B-to-b catalogs are often delivered in an envelope with a letter.
  • A b-to-b mailing plan/contact strategy often involves less-frequent catalog drops supplemented with interim mailings of offerings presented in other formats.
  • Business marketers tend to use more push e-mail campaigns to supplement or replace b-to-b catalog mailings, so capturing e-mail addresses is essential.
  • B-to-b product delivery is often free or inexpensive. Overnight or even same-day delivery is becoming the norm for some industries.
  • Prospecting is difficult for b-to-b catalogers, since there are fewer lists to choose from, and the files are often in poor condition. Business marketers are more likely than consumer catalogers to use alternate media for customer acquisition.
  • Getting past the “gatekeeper” can be a challenge — b-to-b catalogs are sometimes intercepted or refused by the mailroom personnel.
  • Database marketing is more complicated for b-to-b catalogers due to the need for more data fields of information.
  • B-to-b marketers boast higher average order values and lifetime values than consumer catalogers, so retaining and reactivating buyers is more critical.
  • Incentives and discounts are commonplace among some types of b-to-b catalogs.
  • Telemarketing often replaces or augments the sales force in b-to-b catalogs — phone personnel and systems are a major concern.
  • Organization of a b-to-b catalog reflects that the catalog is often used as a reference tool rather than for impulse sales. Business catalogs are normally paginated by product category rather than by theme or color.
  • B-to-b catalog copy is usually more detailed than consumer catalog copy and must help to close the sale.
  • B-to-b back covers must address routing information.
  • Rather than order forms, b-to-b catalog customers typically use purchase orders, telephone, and fax.

But arguably the most critical difference stems from the types of products b-to-b catalogers sell and how they affect business margins. The “Business Financial Model” chart below details some of the differences by b-to-b sector. What happens when gross margins in an industry disappear? With computer equipment and accessories and other electronic products, margins have been reduced to minuscule levels. Sometimes a 20% margin is wonderful. Many times 10%-15% gross margin is more realistic. Do you still have a business? Can you survive?

Look at the Computer column of the chart. This is the challenge for every company, be it Dell, HP/Compact, or Joe’s Computer Shack, trying to sell computers via catalogs or the Internet. Thankfully the average order value is high, and the net dollars received from a single transaction help offset the lack of margin.

Using financial modeling for your catalog

Financial modeling provides all direct sellers with economic benchmarks and goals for which to strive. But you must remember several things in applying a financial model to your company:

  • Your financial model is one of a kind, unique to your product line, margins, and method of doing business. Be sure to benchmark against other like companies of your size and in your industry. Companies that don’t compare in size and are not industry-specific are nice to read about but quite irrelevant in comparing financial metrics.
  • The best predictor of the future is history. By looking at your financial results for the past two or three years, you have numbers from which to build a financial model. The key question in looking at your financial history is, Where is it realistic to expect to improve performance? Can you improve your gross margin by improvement in cost of goods? Can you produce your catalog more efficiently and reduce the cost in the mail? Can you reduce returns and cancellations by better managing your mailings and inventory?
  • If you have done adequate financial planning for your business, you have an annual business plan. For many companies a three-year or five-year planning cycle is commonplace. These planning cycles are a reliable place to start your year-to-year financial model; I suggest using a five-year model.
  • From your annual business plan, build a simple year-by-year financial model for years one, two, and three. You can always extend the financial model to years four and five.
  • Research and construct an estimated financial model for each public company in your product category sector, and compare these models with that of your company. Identify where there are major variances.
  • Annually update your financial model and assign goals to the people or departments who are responsible for controlling costs and who can affect the financial model.

Financial models are a starting place in understanding the overall fiscal measurement of a catalog. In the coming months, we will start looking at the detailed format of a catalog profit-and-loss income statement.


Jack Schmid is president of J. Schmid & Associates, a Shawnee Mission, KS-based catalog consultancy.

BUSINESS FINANCIAL MODEL

Business gifts Work apparel Electronics Computers
GROSS MERCHANDISE SALES 107% 115% 113% 113%
Less returns 3%-5% 10% 5%-10% 5%-10%
Less cancellations 1%-2% 3%-5% 1%-3% 1%-3%
NET SALES 100% 100% 100% 100%
Less cost of goods 45%-47% 50% 60% 80%
GROSS MARGIN 53%-55% 50% 40% 20%
Less fulfillment 12% 15% 10% 5%
Less advertising 25% 17% 15% 5%
CONTRIBUTION TO OVERHEAD & PROFIT 16%-18% 18% 15% 10%
Less fixed costs (overhead) 8% 8% 7% 5%
PRETAX PROFIT 8%-10% 10% 8% 5%
AFTER-TAX PROFIT 4%-5% 5% 5% 2.5%