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Better be well-funded, or your
first catalog could be your last
By Alicia
Caldwell • Bankrate.com
 It
used to be that with $10,000, a great idea and a whole lot of hard
work you could launch a catalog business from your kitchen table.
Catalog consultants and those in business will
tell you those days are gone. The market has become more sophisticated,
and is dominated by big-money companies that can offer their wares
on paper-thin margins via paper and online.
A
tough racket
It can take years to make a profit -- it takes that long to build
up a customer base. For the first few years, you have to buy someone
else's mailing list while you develop your own -- or pay for expensive
advertising to carry your message to the public.
If you clear that hurdle, though, the money
picture turns around. You have your own mailing list of people who
have bought from you and are likely to buy again -- a list that
you can now sell to the next fledgling catalog retailer.
Katie Muldoon, who has 25 years of direct marketing
experience and has written a book called How to Profit Through
Catalog Marketing, says new catalog businesses may take up to
five years to break even.
"I've seen too many small companies not plan
out properly and have some success, but not be able to continue
because they don't have enough money," says Muldoon, president of
Muldoon
& Baer, a catalog consulting firm based in Sugarloaf Key,
Fla. "It's heart-breaking."
Two
routes to success
Muldoon says there are two ways to get into cataloging. One is the
big-money path: You rent a mailing list of people who are likely
to buy your products, print more than 100,000 catalogs and mail
nationally.
 That
method takes about $1 million in upfront money and it takes about
three years to break even, Muldoon says.
The second method, which Muldoon preaches in
the seminars she puts on for the Direct
Marketing Association, is a more gradual approach with a lower
upfront capital outlay. The downside is that it takes up to five
years to break even, she says.
The lower-cost approach, which can get off the
ground for several hundred thousand dollars, would have you send
catalogs only to interested parties found through magazine and newspaper
ads and an Internet site.
Jim Padgitt, president of Direct
Marketing Insights of Mount Pleasant, S.C., has a similar estimate.
It takes $150,000 to $200,000 to get into the business on a small
scale and about three years to turn a profit, he says.
"This is not a good business for impatient people,''
Padgitt says.
Typical
costs to start
He gave this breakdown for the major startup costs:
- $30,000 to design a 32-page catalog
- $25,000 to $40,000 to print 100,000 copies
- $15,000 to $20,000 for photography
- $22,000 postage for each of three mailings
- $9,000 for prospective customer list rental,
for each of three rentals
The temptation, Padgitt says, is to trim costs
to the bone. Don't do it.
"You can always do it cheaper," Padgitt says.
"You can always get your brother-in-law to do the photography. But
it's almost always a bad investment."
It won't look professional, he says.
"It's like sending out a salesman with dirty
fingernails and food on his tie," Padgitt says.
The two big costs to keep in mind are paper
and postage. Economies of scale can be cruel to the startup entrepreneur:
A 24-page color catalog costs $1 each to produce in small quantities,
say less than 100,000, Muldoon says. But produce 500,000 or more,
and the cost goes down to 40 cents each.
Another highly variable cost to keep in mind
is production: Photography, written copy, layout -- everything up
to printing -- costs from $3,500 to $9,000 a page, depending on
the agency. Muldoon counsels entrepreneurs to hire an agency that
has experience in catalog production.
Bulk
rate snail mail, jackrabbit prices
Paul Miller, senior news editor for the industry magazine Catalog
Age, says another important issue for anyone considering starting
a catalog is a pending bulk rate postal increase. It's anticipated
to be in the 10 to 14 percent range, he says.
"That's a huge increase and that's going to
be tough for a lot of small catalogers," Miller says.
Postal hikes in the past decade, as well as
paper price increases, have contributed to the increasingly competitive
catalog market, he says.
"It's not so cheap any more," Miller says. "There's
nowhere to hide from all that."
Those economic pressures, as well as the blossoming
of the Internet as a mode of commerce and communication, have led
many catalogers to contemplate an online catalog.
The
online alternative
Steve Leveen began his business off his kitchen table 13 years ago
with $21,000. Today, he and his wife, Lori, run Levenger,
a Delray Beach, Fla., company that mails 30 million catalogs a year
and employs 320 people selling "tools for serious readers," such
as desks, chairs, filing systems and reading lamps.
"I guess if I were starting a business today,
it probably would be a Web business," says Leveen.
"The real catalog is increasingly becoming online,"
Leveen says. "I do think direct marketing will be dominated by the
Internet in the future. It's hard for me to imagine a direct marketing
company that would not have a Web site."
Muldoon and others counsel catalog entrepreneurs
to start a Web site in conjunction with a paper catalog business.
An online catalog is "relatively cheap to do,"
says Padgitt. "The downside is that you can't approach people for
impulse purchases the way you can with paper catalogs."
It's a difficult business either way, Padgitt
says.
"Only the people who have the best ideas and
are going to execute them in a professional way are going to succeed,"
he says.
In some ways, Leveen says, that's just.
"I do believe you have to go into the business
pursuing something you really believe in," he says. "If it's just
about money, well that's not what it should be about. You have to
have a passion for it."
Alicia Caldwell is a freelance
writer based in Florida
To comment on this story, please e-mail
the Bankrate.com
editors
-- Posted: May 19, 2000
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