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Ideas/Section-3
At this time you may
be starting a mail order business maybe you
started a business some time ago... In either case this
information is designed to make you aware of the critical expense
categories of our business
Business entrepreneurs generally channel
most of their energies
into building a customer base. We all know that without
customers there will be noting else to worry about.. At the same
time it is important to be very cost conscious right from the
start. The mail order business requires very cost conscious
management.
A mature mail order business has 6 major
expense categories which
will make up about 85% to 90% of its total
monthly cash outlay:
Cost of product
Advertising
Postage
Printing
Labor
Rent
The new mail order enterprise will however
not be concerned with
either labor cost or rent for office or warehouse space. Those
expenses will come later as your business grows, However, the
other 4 expense categories are critical from the start.
1. Cost of Product
These are the items you buy from your suppliers
for resale to
your customers. In the first two years of operation your cost of
product will be higher than later when you can buy in larger
quantities at better prices and when you have a good
understanding of what sells. At the start it is important to know
that your cost of product should be kept
at below 35%. That does
not have to work out for each product but it should represent an
average for all goods. You may for example elect to have some
sales leaders which have minimal mark-ups but you feel that they
will generate additional sales. Your mark-up may be as little as
10%. On the other hand, you will have items that have mark-ups of
10 or even 20 to 1.
In establishing your pricing you must be
aware what your
competition charges. It is best to be in line or slightly below
your competition. Or you may choose to charge more than your
competition because you give more or better service.. Do not
succumb to greed. Newcomers to the mail order business sometimes
commit this folly. Since volume of sales is ultimately more
important than profit per item careful pricing is important.. If
the cost of a book you are selling for $15.00 is $4 you may be
better of to lower the selling price to $12.00 and increase your
sales. As you know - since you are one of them - the American
consumer is very sophisticated. Suckers are in very rare supply.
The dropship method is the only way to
go for a beginner. This
way you do not have to tie up any start-up capital for inventory.
You want to be sure you are dealing with
a reliable company and
therefore price will not be your only consideration. Make sure as
possible that your supplier is as responsive to a $4 order as to
a $100 order. As soon as your volume increases start shipping and
you will be in a position to enclose your promotional material.
2. Advertising
This is a major expense for a new mail
order company and in the
early months of building your business it may be your highest
expense. Essentially in our business there are only two ways to
find new customers via advertising or via direct mail.. Although
many newcomers have a fascination with mailing lists they will
soon learn that adverting is more effective and less expensive.
Here is a hypothetical cost comparison for both approaches:
Direct Mail - 1000 pieces
Mailing list
$40.00
Postage (bulk rate @ 0.16.7) 167.00
1000 #10 envelopes 55.00
1000 return envelopes 50.00
Promotional material (est) 120.00
Total excluding labor 432.00
Cost per unit
$0.43
Response 1.5% == 15 orders
X avg sale $25.00
375.00
Cost of product 35% 130.00
Net
245.00
Loss for above mailing is <187.00>
Although the above is hypothetical, it
must be understood that
returns of higher than 1.5% are rare when using someone else's
list. When using your own list, they may be substantially higher.
Therefore direct mail campaigns rarely
work unless the average
order is in excess of $45.00 or you profit per order is about
500%. Before you undertake a mailing you owe it to your
pocketbook to calculate your expected return. Your aim should be
to break even at a 1% rate. Our mailings are geared to break even
at 0.7%.
1. Response for a well written classified ad in a monthly
publication may vary between 60 to 250 depending on the
publication and the season.
2. The national average for conversion
from inquirer to buyer is
between a low of 5% and a high of 12% depending on price and
other factors.
In the advertising scenario, you have a
good chance to make a
little money right from the start. Many mail order companies are
satisfied to break even. The initial effort in responding to the
inquirer of your classified is only the start. Over the next 12
months you should be sending at least 3 more mailings to those
inquirers who did not buy the first time.. And you should mail to
your buyers abut every 6 weeks to 3 months
until they have not
bought from you for about one year. Now if you had a crystal ball
or a very sophisticated way of tracking
the progress of each of
the above initial 150 inquiries of your classified ad and could
take another look at the results a year later, you would most
likely be very pleasantly surprised since the $23 has now grown
to several hundred dollars.
The greatest assets of a mail order company
are its mailing
lists. In the beginning you will have zero names, a few months
alter you may have a couple thousand, a year later 10,000 and
gets out on a daily basis, the more orders will come in. The more
mail are several important ways you will
save money in your
advertising:
1. Select well known monthly publications
which are ready by
individuals interested in what you have to sell. Monthly
publications will generate inquirers over many months since they
are kept on hand and read by different people. Bi-monthly or
weekly publications may be acceptable also. Stay away from Daily
Newspapers. They have a shelf-life of a day or less. They should
only be used for testing... And above all stay away from
"cheapies" like ad sheets, shoppers papers, etc.
2. When evaluating the cost effectiveness
of an ad it is not the
cost of the ad that counts but the number of inquiries it
generates. A very inexpensive $15 ad which generates 3 inquiries,
$5 per inquiry, is terribly expensive compared to a $150 ad which
generates 200 inquiries, 0.75 per inquiry.
3. To test an ad one insertion is enough.
The results will either
be very good in which case you should buy 3 insertions the next
time for a saving of about 10%, or the results will be average in
which case you may want to run another test, or they will be poor
which may be caused by any of the following reasons: Wrong
publication, wrong heading, or ad, reader not interested in the
particular offer.
4. Keep the cost per inquiry below $1.00
5. Write a tight ad. Each word including
your address is counted.
6. By all means, set up your own In-House
Advertising Agency. It
is easy to do and will save you 1% right from the start.
3. Postage
Postage is a big expense for any mail order firm.. This cost
covers three areas: Responding to initial inquiries, cost of
shipping orders to customers (this will include carriers such as
UPS) and the cost of repeat mailings to customers and previous
inquiries.
The first category of responding to initial
inquiries is most
often handled via First Class Mail. If the cost of mailing a
single piece exceeds 65 cents strong consideration to use Third
Class Bulk Mail should be given. This is especially true if
catalogs are mailed to prospective customers.
Repeat mailings to previous buyers and
inquirers as well as
mailings to a rented list should always be sent via Third Class
Bulk Mail. The exception to this may be when mailing a piece
which weights 1 oz or less. The cost for First Class postage is
25 cents compared to 16.7 cents via Third Class Bulk Mail.
Following is a broad overview of the usage
of bulk mail. Your
local POst Office will give you specific information. The major
advantage of using bulk mail is the considerable savings. The
major disadvantages are the time it takes for a piece to reach
its destination and the reliability of delivery. Recent surveys
have indicated that a sizeable percentage of bulk mail never
reaches its destination. This appears to be especially prevalent
with light weight pieces such as #10 envelopes.
Basic requirements to utilize the bulk
mail rate are that a bulk
mail permit has to be obtained. The annual cost is $60.. Anyone
can obtain this permit.. Secondly, each mailing must have a
minimum of 200 pieces and it must be sorted by zip code according
to Post Office regulations.
The rate for the first 3.37 oz is 16.7
cents. Weights in excess
of that weight are calculated by the combined use of a per pound
and per piece rate. Each piece in a mailing must have the
identical weight.
If as an example your piece weights 3 plus
ounces your rate to
send it via First Class mail is 85 cents. This compares with 16.7
cents for bulk mail... If you were to send 1000 piece per month,
First Class cost would be $850.00 versus $167.00 for Bulk rate.
This is a very sizeable difference. Even if you lost a few
potential customers, it would most likely still more profitable
for you to use bulk mail.
Bulk mail will generally reach its destination
in a radius of
about 500 miles in about 7-10 days, 500-1500 miles, 10-15 days,
over 1500 miles 15 to 25 days. Some mail order companies will use
a combination of bulk and first class. They may use bulk mail for
destinations of less than 1500 miles and first class for greater
distances.
If you can not generate at least 200 pieces
per week you may want
to consider to combine the responding to new inquiries with
remaining the same piece to a previous inquiry.
The cost of getting the product to your
customer is also quite
expensive and needs to be carefully managed.. If you are
utilizing the dropship services of a supplier you will not have
any control over this expense.. It is advisable that you ship at
least some of the orders yourself as soon as your volume makes
this feasible.
The Post Office has given shippers of books
and certain other
bound written material a special rate category which makes
substantial savings possible. Special 4th class mail costs 95
cents for the first ounce and 35 cents for each additional ounce.
Unless your customer pays you extra for
first class or UPS
service, this class of mail should be utilized. It will take a
little longer in reaching its destination, but the savings are
quite substantial.
UPS rates are generally less expensive
in distances of up to
about 1100 miles when compared with first class rates. Since UPS
charges a basic weekly pick-up rate of $5.00 you may want to
utilize the services of an outside company until your volume is
large enough to justify daily UPS pick-up.
4. Printing
Printing is another major expense and,
unlike postage, a certain
percentage of your printing cost may be for material that will
become obsolete before the supply is exhausted. This is
especially true for beginning mail order operations. You may
decide to discontinue promoting an item and find yourself stuck
with several thousand useless circulars.
For the above reason it is wise in the
beginning stages of your
new business to print in small quantities until you know exactly
what sells and how it should be promoted.. You may wish to make
exceptions for certain items such as envelopes which have
continued usage. Printing in small quantities will cost more per
piece but it is better than throwing money into a trash can.
As your volume increases and you see fit
to have larger volumes
of given pieces printed, be very careful in selecting your
printer.. In addition to price you will, of course, also be
concerned with quality and service. Some printers will provide
additional free services with a print job, such as typesetting..
Always obtain several bids when doing larger jobs.. For example,
at this time (summer 1990) 1000 11 x 17 pieces (this is a 2 page
foldover) imprinted on both sides will cost $130.00 in the
Washington, DC area. The very same piece can be done by a printer
in a medium size midwestern city for a little as 435.00. This
represents a difference of over 8 cents per single piece.
If you are doing business in one of the
many high cost areas of
the country or in Canada, by all means consider doing business
with out of town printers. You will see many ads in mail order
publications.. Some of the best prices can be found in some
midwestern and southern states. Lower labor and operating costs
make these prices possible. Before giving a larger job to an out
of town printer test his quality with a small job.
The cost of creating camera ready art work
through professional
graphic designers is substantial. It is strongly recommended that
you utilize the free art work supplied by many suppliers until
you are large enough to absorb this substantial expense or are
able to produce it yourself through a desktop publishing software
program.
Learning how to think on a per unit basis
is real important in
our business. The cost of printing, mailing and other costs are
generally quoted and calculated for 100 pieces.. But to evaluate
the cost effectiveness of mailing or advertising, etc get used to
thinking in the per unit mode.
An acquaintance of ours who recently did
mailing of 32,000 pieces
was able to make a small profit on his mailing which was of
limited success by making tow changes: 1. He utilized an order
form which was built into the piece rather than a separate order
form -- saving 2.7 cents. 2. He used a #66 3/4 business return
envelope instead of a #9 envelope -- saving 0.4 cents. The saving
was 3.1 cents per piece or $992.00 for the entire mailing.
