If you build it, they will buy

Mar 01, 1999 10:30 PM  By

Ever-increasing competition is inspiring more catalogers to develop and manufacture their own products. Among participants in Catalog Age’s 1998 Benchmark Report on Mer-chandising, 85% manufacture (or contract for the ma-nufacture of) products, compared to 76% the previous year.

“The industry is evolving to where each catalog has to become its own brand to compete,” says Andrea Lawson Gray, president of Aesthetics Marketing, a San Francisco-based catalog agency. “But most catalog merchandisers go to the same trade shows and buy the same products,” which is encouraging some companies to develop their own merchandise.

Because customers can’t buy these items elsewhere, they often become a cataloger’s best sellers. At Hello Direct, a San Jose, CA-based catalog of telephony equipment, only 25% of its SKUs are proprietary products, says vice president of direct marketing Dennis Waldera. But those products actually account for more than 50% of the $63.8 million cataloger’s overall sales. (For a case study of one such product, see “Building it yourself,” at right.)

“Proprietary products help us build our brand,” says Ken Hawk, president of 1-800-Batteries, a cataloger of batteries and accessories for mobile professionals. To meet the specialized needs-and gain the loyalty-of its target market, the Reno, NV-based cataloger developed products such as a wireless fax machine and a numeric keyboard for accountants that plugs into a laptop.

Beyond the obvious benefits of increasing sales, promoting customer loyalty, and building brand-name recognition, proprietary products also tend to have higher profit margins, largely because there are no middlemen such as rep firms and distributors. Hello Direct’s proprietary products are 50% more profitable than other products, Waldera says. And San Francisco-based Sharper Image, which sells upscale gadgets, says that its emphasis on developing its own merchandise resulted in a rise in its profit margins of 2 percentage points last year.

The cost of higher margins While manufacturing a product may cost a cataloger less than buying a similar, ready-made item from a vendor, catalogers developing proprietary products must factor in research costs, the time and money to produce product manuals and packaging, and the additional personnel required to manage the program. “We had to add a product manager to our staff,” Hawk says. “Plus we had to personally train our technical support staff to handle inquiries on our proprietary products. Normally, when you buy someone else’s product, they provide the training.”

Product development also requires catalogers to deal in larger quantities. When 1-800-Batteries decided to work with a manufacturer on developing products, it had to commit to buying a minimum of those developed products before the manufacturer would agree.

And predicting the quantities that will sell is tricky. “Most catalog resellers have return privileges,” Waldera says. “But when you develop your own products, you can’t send them back if they don’t sell or if they become outdated. It comes down to closely managing your inventory levels and managing the transition from one generation of products to the next.” In fact, Hello Direct ended up staffing an inhouse department to handle such inventory challenges.

When master merchant Lillian Vernon hosted “Bring Your Child to Work Day” at her Rye, NY-based gifts catalog company last spring, she probably didn’t expect one of the youngsters attending to come up with a hot product idea.

But the company’s new yo-yo rack is the brainchild of a child-13-year-old Bryan Morton of Norwalk, CT (the son of the cataloger’s director of new purchasing, Peter Morton). The younger Morton, a yo-yo enthusiast, sketched the idea for the five-yo-yo rack during a product design workshop, for which he won $100 for best idea. But the cataloger was the real winner: It commissioned a Taiwanese supplier to make the wooden yo-yo racks and introduced the product last fall. Since the rack began appearing in Lillian Vernon catalogs in October, the company has sold more than 18,618 units.

The yo-yo rack, which retails for $14.95 and-of course-can be personalized with up to 12 letters, is now scheduled to appear in the company’s spring and fall ’99 catalogs. To thank its guest designer for the surprise winning product, the cataloger in January presented Bryan Morton with a $1,000 U.S. savings bond.

Half of Hello Direct’s sales come from its proprietary products. And it’s easy to see why, given the care with which the telephony products cataloger launched one such product: the Linestein, which lets the user connect analog equipment such as modems to almost any phone system.

According to Dion Blundel, director of product marketing, what distinguishes the Linestein from similar products is its “learn” button. Previous adapters required users to look up the phone system in a matrix provided by the manufacturer, then manually reconfigure the switches; the Linestein’s learn button does this automatically.

The chip that facilitates the learn button is the same type Hello Direct uses in its headset amplifiers; with the technology already inhouse, bringing the Linestein to market was relatively easy. And by developing the Linestein inhouse, the cataloger could “set the price slightly lower than the market,” Blundell says. So while a major competitive product runs $150-$160, the Linestein costs $119.99.

To launch the Linestein, Hello Direct devoted the cover of its first-quarter 1998 edition-with a circulation of 2.3 million, the largest mailing of the year-to “a super close-up of the Linestein’s learn button,” Blundell says. “We also featured the Linestein on the back cover and gave it a big spread inside.”

The investment in the space paid off. “Sales of the Linestein are four times what our original forecasts had been,” Blundel says.-MDF