Focus On: Merchandising: Show 'Em Your Wares

How can a $20 lace nightgown help fight cancer? What good can a candle shaped like a moccasin be to a child whose family can’t afford to send him to school?

These products, and thousands like them, appear in catalogs produced by nonprofit organizations to increase contributions and educate donors. The American Cancer Society sells the nightgown, along with accessories made with cancer patients in mind, in its “TLC” catalog; the shoe-shaped candle appears in the Southwest Indian Foundation’s tome. No matter what the cause, nonprofits that sell products, either through a catalog or on the Internet, must run their call centers and fulfillment operations efficiently and competitively in order to keep costs low and customer satisfaction high.

Focus on the product
Product is the single most important aspect of a profitable catalog business and is central to nonprofits using catalogs, retail stores and Internet sites. Increasing revenue per catalog is all about increasing the number of products, pages and page density.

“Product development is one of my major concentrations,” says Liz Grainer, executive director for retail marketing at The Art Institute of Chicago. “How products in the retail stores, catalog and on the Internet site relate to the institute’s collection and mission is a key to success. The institute in the past five years has moved from having 60 percent of the product being open-market vendor merchandise to 60 percent proprietary-developed product unique to the institute. The products relate to the institute’s collection, different cultures and exhibitions in progress.”

Exclusive and proprietary product differentiates product-selling nonprofits from other catalogs and retail stores and helps organizations achieve considerably higher gross margins. Hard-goods and gift catalogs need to have a gross demand of $2 per catalog mailed to make money. Apparel typically increases gross demand but suffers from high return and cancellation rates. Overall, apparel catalogs generally exceed $2 revenue per catalog.

Bill McCarthy, executive director of the Southwest Indian Foundation, has mastered the development of high-quality Indian jewelry, pottery, kachina dolls and other Native American-related gifts, books, music, clothing and videos. The catalog entity has created jobs for Indian artisans of the Navajo tribe and the pueblo tribes of the Zuni, Laguna, Acoma and Hopi. Since 1990, McCarthy has increased SWIF’s proprietary items from 10 products pictured on one page, which was folded and inserted into a No. 10 envelope, to the 375 products in the 120-page catalog for Spring 2004, which will have a circulation of 14 million.

To make the best use of space in a catalog, there are some basic rules of thumb to consider. First, assuming that new products are equal in mail-order buyer appeal to existing products, demand will increase anywhere from 25 percent to 50 percent of the corresponding space-percentage increase. For example, a 12 percent increase in space should achieve up to a 6 percent increase in sales.

From a product-per-page perspective, gift catalogs need to feature four to five products (not SKUs) per page. Nonprofit catalogs also have the responsibility of balancing the needs of curators, program directors, exhibition directors and legal advisors with the preferences of the shopper. No small task.

Marketing and creative
The Southwest Indian Foun-dation uses about 25 percent of the space in its catalog to tell its story and explain its mission. Profits from catalog sales join other donations to fund social action, education, job training, household necessities and arts development, etc., for Native American peoples. From a catalog space/cost perspective, one could argue that the extensive and expensive space that’s now being filled with copy would be better used for product photos and depictions. Nonprofits must abide by certain IRS regulations if they want to maintain their 501(c)(3) nonprofit status. But equally as important, this space has been proven to yield considerable donations in addition to product sales.

Nonprofits make extensive use of rented lists when prospecting for donors, and it’s no secret that the mailing-list universe is shrinking. However, cataloging is one way for nonprofits to cope with that fact.

“For most nonprofits that rely on direct mail appeals, be it straight or premium based, their potential donors come from renting or exchanging [names with] like-minded nonprofit direct mailers and, secondarily, through cataloger and publisher files,” says Kevin Price, director of fundraising for the list brokerage and management firm of Mokrynski & Assoc.

“However, for nonprofits with an additional channel, such as product catalogs, the bulk of their success is derived from consumer mail-order buyer files,” he continues. “So for these nonprofits, it’s a double-win — they tap into a new donor pool and at the same time spread their mission and cause to a new audience.”

SWIF’s McCarthy goes considerably further, partnering with database services such as Abacus, Z24, The Preferred Network and iBehavior. All of these alliances work on the basis of submitting your house file and determining the affinity of various member-list segments (on a blind basis) to your catalog’s product offering. He also makes use of regional ZIP code and geographic modeling.

Aim for synergy
The Colonial Wil-liamsburg Foundation has 29 retail shops, four seasonal catalogs annually and an Internet site that sell a total of 25,000 SKUs.

“The challenge from a marketing, product and mission perspective is to tie all our channels of selling and communication together,” says Tammy Kersey, director of retail and direct marketing. “Unlike many nonprofits, Colonial Williamsburg is a historic place — the restored town was the Colonial capital of Virginia during the American Revolution. Our call center representatives, besides selling product, field questions ranging from the weather to upcoming events at the foundation. The stores in total have a far wider assortment than any one catalog.

“In the next few months, we’re testing our first kiosk in one of the stores to show all the places in Colonial Williamsburg where you can shop,” she adds. “We have also started an initiative where our historic trades products from the milliner, silversmith, brickmaker, blacksmith, cabinetmaker, etc. will be offered online.”

No matter what the cause, it pays for nonprofits to train call center and fulfillment staffs to answer questions about their missions and the people/causes they serve. Sales representatives at the National Wildlife Federation are trained not only to sell but to answer questions about clean water, wolf populations, backyard bird and animal habitats, and a host of other NWF issues, according to Carole Fox, vice president of operations at NWF. Scientific or highly technical calls are referred to the pros.

Key financial elements
In order to make money, nonprofit catalogs, like their consumer-based cousins, must manage five financial areas. For-profit catalogs typically earn 5 percent to 10 percent or higher of the net sales after all expenses. While there might be dozens of line items on a profit-and-loss statement, managing for profitability comes down to controlling these five critical elements:

Gross margin. Catalogs typically earn a gross margin that is in a range of 52 percent to 58 percent. In recent years, many organizations have dramatically in-creased the percent of imported products their catalogs carry, which has improved the initial markup.

Advertising costs. This is the total cost of creating, printing and mailing the catalog. As a percentage of net sales, it typically ranges from 25 percent to 35 percent. Admittedly, catalogs are an expensive advertising tool. But when well-merchandised offerings are sent to targeted mail-order buyer lists, they are the most productive way to sell product.

There are fixed and variable components to the advertising costs. The fixed cost to create a page includes the design, copy, models, photography, film, color separations, etc. Catalogs using in-house creative typically range from $1,300 to $1,900 per page, and catalogs using a creative agency can range from $2,000 to $3,500 per page. Many catalogs use a combination of in-house and freelance creative, adding up to costs of $1,800 to $2,200 per page.

The variable costs, which include printing, paper, the assembly and binding process, list rentals, and postage, etc., are per-copy costs and vary depending on how many copies you print and mail.

Call center, fulfillment. Consulting firm F. Curtis Barry & Co.’s proprietary benchmarking studies of catalog companies have shown that the most cost-effective call center and fulfillment costs are typically 8 percent to 15 percent of net sales. For smaller entities, it’s important — and often difficult — to get costs under 20 percent of net sales.

Net sales comparisons can vary widely based on average order. From a cost-per-order perspective, efficient companies average $8-$13 for fully loaded costs.

Front-end costs: Efficient order processing costs $3-$5 for data-entry and customer-service operations, including direct and indirect labor, benefits, credit processing, occupancy and telecom costs.

Back-end costs: Efficient order processing costs $4-$7 for merchandise processing and fulfillment, including direct and indirect labor, benefits, occupancy and shipping materials. It does not include outbound shipping costs or an offset with shipping and handling revenue that varies widely between catalogs. When these are taken into account, they distort the picture of the cost of fulfillment between catalogs.

General costs. These are the costs of buying, marketing, accounting, human resources and IT that are part of the business unit. Typically, in profitable catalogs, G&A costs are 9 percent to 11 percent.

Returns and cancellations. Everyone knows that sales is what gets booked in accounting and deposited in the bank. But demand — orders in the door — is very important. There are two ways that demand gets eroded to yield lower net sales: cancellations and returns. Customer cancellations because of back orders are ideally 2 percent or less. For hard goods, this is often achievable. For apparel and soft goods that have a higher fashion design and more new products that are difficult to forecast, the average may be more typically 3 percent to 4 percent. When bestsellers strip the inventory, cancellations can range into high single digits.

The natural return rate for hard goods, home decor and jewelry can range from less than 2 percent to 9 percent depending on the category. Apparel, which achieves a much higher revenue per catalog, also has a much higher return rate of 10 percent to 15 percent. Add in shoes or other products with a more tailored, size-oriented or multiple-color SKU base — and apparel has an even higher return rate of 20 percent to 35 percent.

In conclusion
Non-profits have made good use of catalogs and fulfillment for fund development, donor solicitation and mission advancement. But merchandising and mailing catalogs means that you have to run the operation by the rules and metrics of businesses in the for-profit world.

Curt Barry is president of F. Curtis Barry & Co., a consultancy specializing in direct marketing operations and fulfillment, business strategies and benchmarking. E-mail him at cbarry@fcbco.com.