Selling by the book - marketing through catalogs - includes related articles

Nation's Business, Sept, 1996 by Roberta Maynard

With Back in the Saddle, a catalog of products and gifts for horse enthusiasts, Geoff and Lynn Wolf are doing what at least one-third of catalog start-ups never do: breaking even.

Now in its third year of operation, the Durango, Colo., company has captured a silver of the catalog market, in which nearly $75 billion will be spent this year.

Sales by consumer and business-to-business catalog companies are expected to reach $74.6 billion, up from $47.8 billion in 1990, according to a Direct Marketing Association (DMA) study conducted by the WEFA Group, an econometric-forecasting firm in Burlington, Mass. In six years, revenues will reach more than $103 billion, the WEFA Group says.

Last year, more than 13 billion catalogs were mailed to consumers and businesses, according to the DMA, a trade group based in New York City.

Catalogs aimed at businesses are in a fast-growth mode, with revenues increasing at about 7.1 percent per year. Consumer catalogs, on the other hand, though enjoying rising revenues, are an increasingly saturated and fragmented business - a tough, competitive environment for start-ups.

With thousands of catalogs vying for customers, dollars, the challenge for new-comers is to find a niche in a marketing landscape of ever-smaller niches.

When Lynn Wolf resumed horseback riding in 1992 after 15 years away from the pastime, she and Geoff began doing research on whether there was a market for riding-related products and gifts. In their case, the niche was already well-documented. Geoff found a plethora of horse-related information from libraries, clubs and associations, and equestrian magazines geared to caretakers, owners, and riders.

The research was important when it came time to create a package of distinctive - and often exclusive - products ranging from riding clothes and grooming supplies to jewelry, books, and toys.

John McManus, creator of Magellans, a catalog of travel-related products, was a veteran of the airline industry who had often dealt with travel agencies. He was confident he knew about travelers, needs, but he backed up his intuition with careful research to answer these questions. Who will my customers be? Is anyone else doing this? Is this a real niche?

In fact, he toyed with the idea of starting a retail store rather than a catalog, but he decided that would be too limiting. "The smaller the niche, the more there is to argue in favor of a catalog, rather than the geographic limitations of a store," says McManus, whose business is based in Santa Barbara, Calif.

Requirements For The Start

A major reason that many catalog companies fail is one common to all businesses: insufficient capital. Producing catalogs is expensive. No matter how humble, each requires photography, descriptive copy, design and layout, printing, mailing, inventory management, and fulfillment of orders - along with creation and management of a database, an all-important factor.

There may be unforeseen costs, too. Catalog companies are still feeling the heat from dramatic increases in paper and postal costs over the past two years. And the postal rate restructuring that took effect in July may add costs for direct mailers by requiring them to bar-code and presort their mailings to qualify for the lowest rates. (See "Postal Changes Raise The Stakes," June.)

It usually takes from three to five years to make a profit from a catalog. Companies typically start with a rented mailing list - preferably of people who have bought from catalogs in the past - then gradually build a solid database of buyers they can call their own. The Wolfs, has grown to 22,000.

Dick Hodgson, president of Sargeant House, a catalog consulting firm in West Town, Pa., says that "the first year, you focus on establishing the right price points and products. The second year, you get as many first-time buyers as possible. The third year is the moment of truth: how many buy a second and third time. That's where you make your profit."

Careful maintenance of the database is necessary to track what is known as RFM (recency, frequency, and monetary), which is used to determine whether to keep people on the mailing list based on how recently they purchased, how often, and how much they spent.

How Much Will It Cost?

The amount of capital needed to start a catalog operation depends on the sales target and "how soon you want to see black," says catalog consultant Bill Dean, president of W.A. Dean & Associates, in San Francisco. He cites as an example a regional apparel store with a new catalog of 23 to 40 pages with three or four issues per year, mailed nationally. "Bare bones - it takes a half to a quarter of a million cash outlay in the first year to get up and running," he says.

John McManus, on the other hand, took a lower-cost approach when he launched his travel-products catalog seven years ago. He took an adult-education course on computer graphics, in which he learned how to do page layout. He photographed the items himself, and he worked with a local printer to produce a 32-page, black-and-white catalog. log. He still writes all the copy for the catalog, which is now in color and has grown to 68 pages.