In the last two columns we discussed why keeping tabs on your fixed creative costs is crucial to managing your catalog or Internet budget. This month we’ll look at the effect of variable creative or promotional costs on your profit-and-loss (P&L) statement, breakeven analysis, and other metrics. ▪ First, though, let’s review what constitutes variable mailing costs. These are expenses, measured by the unit or by the thousand, that change as the mailing volume goes up or down. Rented names, paper, printing, order forms, wrap-arounds, dot whacks, binding, addressing, inkjetting, and postage are examples of variable costs.
Many variable promotional costs actually decline — at least on a per-unit basis — as volume increases. Take printing costs: If a cataloger produces 10,000 copies of a 32-page book, the per-unit cost is considerably higher than if the company produces 1 million catalogs. While postage doesn’t decline as volume increases, catalogers can usually take advantage of postal discounts based on 3- and 5-digit presort automation rates, barcoding, and carrier route mail preparation based on the higher mailing quantities.
The P&L factor
The chart to the right shows two sample P&L statements for a hypothetical catalog. Let’s take a look at the first mailing, in the middle column. This is a solid mailing program:
- One million catalogs mailed at a variable cost of $0.85 for printing, binding, addressing, and postage, and the rental of lists for half of the mailing.
- Fixed creative costs represent only 2.5% of sales, boosted by the ability to spread the $86,700 cost over the 1 million catalogs.
- Variable mailing costs are in line for a 48-page catalog with half of the books mailing to house names and half mailing to prospects.
Overall the variable mailing costs amount to 22.4% of sales. When we add fixed creative costs and other advertising expenses, the overall promotion expense comes to 26.0% of sales. Again, this is not out of line for a successful catalog financial model. The contribution to general and administration costs (G&A, or overhead) and profit is 14.0%, a success as long as overhead isn’t outrageous.
For our second mailing, far right column, we are factoring in a 10% increase in all variable mailing costs. An increase of this magnitude — which fortunately is unlikely to hit a cataloger all at one time — would cost our hypothetical mailer $145,000, or slightly more than 4% of sales.
Controlling the variables
During the next five to 10 years you can expect postal costs to continue to increase. The same will likely hold true for paper and printing costs as well. And since postage and printing are by far a cataloger’s two largest budget items, controlling your variable mailing costs and anticipating increases should be a top priority.
You may think that such expenses are out of your control. But here are a number of cost-saving options you can consider:
- Review the number of pages and your catalog trim size with your printer.
- Reexamine your paper weight and grade. Many tests show that, unless you reduce the weight drastically, your response rate will not suffer.
- Reevaluate your order form. You might be able to save money by gang-printing several seasons’ order forms at once.
- To reduce postage, commingle catalogs with other mailers who have the same size specifications.
- Barcode catalogs and drop-ship them to bulk mail centers (BMCs) for significant postal savings.
- Sort mailing lists to the sectional center facility (SCF) and zip code level, and even ultimately to the carrier route level, to increase postal discounts.
- Arrange longer-term contracts with printers to lock in “preferred” prices.
- Strongly negotiate with multiple printers to seek the best printing price for your catalog.
- Negotiate payment terms to spread out printing costs over time.
To produce a winning and profitable catalog, you must commit to a great deal of planning, competitive bidding, and proactive management of costs. Whether you manage the costs internally or with a reliable vendor who specializes in catalog production, you’re bound to see the benefits in your bottom line.
Jack Schmid is chairman of J. Schmid & Associates, a Shawnee Mission, KS-based catalog consulting firm.
Profit-and-Loss Statements
| Catalog mailing | % of sales | Catalog mailing with 10% increase in variable costs | % of sales | ||||
|---|---|---|---|---|---|---|---|
| Catalog mailing quantity | 1,000,000 | 1,000,000 | |||||
| Number catalog pages | 48 | ||||||
| Cost per catalog in the mail – fixed | $86,700 | $86,700 | |||||
| Cost per catalog in the mail – variable | $850,000 | $935,000 | |||||
| Sales per catalog mailed | $4.00 | $4.00 | |||||
| GROSS MERCHANDISE SALES | $4,000,000 | $4,000,000 | |||||
| Cancellations – 2% | $80,000 | 2.0% | $80,000 | 2.0% | |||
| Returns – 10% | $400,000 | 10.0% | $400,000 | 10.0% | |||
| NET SALES | $3,520,000 | 100.0% | $3,520,000 | 100.0% | |||
| Cost of goods sold – 45% | $1,584,000 | 45.0% | $1,584,000 | 45.0% | |||
| Gross margin | $1,936,000 | 55.0% | $1,936,000 | 55.0% | |||
| FULFILLMENT EXPENSE | |||||||
| Fulfillment cost | $704,000 | 20.0% | $704,000 | 20.0% | |||
| Shipping income | $176,000 | 5.0% | $176,000 | 5.0% | |||
| Net fulfillment expense | $528,000 | 15.0% | $528,000 | 15.0% | |||
| OPERATING INCOME – BEFORE ADVERTISING | $1,408,000 | 40.0% | $1,408,000 | 40.0% | |||
| FIXED CREATIVE EXPENSES | |||||||
| Catalog design and photography | $38,400 | 1.1% | $38,400 | 1.1% | |||
| Page production | $9,600 | 0.3% | $9,600 | 0.3% | |||
| Color separations | $31,200 | 0.9% | $31,200 | 0.9% | |||
| Other fixed creative expenses | $7,500 | 0.2% | $7,500 | 0.2% | |||
| Total fixed creative expenses | $86,700 | 2.5% | $86,700 | 2.5% | |||
| VARIABLE MAILING EXPENSES | Unit cost | Unit cost | |||||
| Paper – catalog and order form | $200,000 | 5.7% | $0.200 | $220,000 | 6.3% | $0.220 | |
| Printing and binding – catalog | $100,000 | 2.8% | $0.100 | $110,000 | 3.1% | $0.110 | |
| Printing – order form | $40,000 | 1.1% | $0.040 | $44,000 | 1.3% | $0.044 | |
| Postage | $320,000 | 9.1% | $0.320 | $352,000 | 10.0% | $0.352 | |
| Inkjetting | $30,000 | 0.9% | $0.030 | $33,000 | 0.9% | $0.033 | |
| List preparation – merge/purge | $40,000 | 1.1% | $0.040 | $44,000 | 1.3% | $0.044 | |
| List rental | $60,000 | 1.7% | $0.120 | $66,000 | 1.9% | $0.132 | |
| Total variable mailing expenses | $790,000 | 22.4% | $0.85 | $935,000 | 26.6% | $0.935 | |
| Other advertising expenses | $40,000 | 1.1% | $40,000 | 1.1% | |||
| Total promotion expenses | $916,700 | 26.0% | $1,061,700 | 30.2% | |||
| Contribution to G&A and profit | $491,300 | 14.0% | $346,300 | 9.8% | |||
| (Shortfall due to increased mailing expense) | ($145,000) | ||||||