Marketsmith, Inc. - Article From Newsletter

Ben Franklin once said "Industry need not wish." In the last year I have listened to more than one Vice President of Marketing preface a presentation of the "current plan" to the Executive Team with "We hope…"

At that point I pull out my calendar and start to figure how much time my team has to reconstruct the historical data. I then assess how much information the Chief Financial Officer has regarding the variable numbers driving costs in the warehouse, the call center, and general operating expenses. Next I turn to the head merchant to see if the margin percent is up or down. And I do a quick calculation to determine what percentage of projected sales fixed costs represent.

Hope is not a strategy which delivers bottom line results. But more often than not these days, I find people couching their projections and expectations.

EBITDA is earnings before interest, taxes, depreciation, and amortization. It is what is commonly referred to as the bottom line, the number used to calculate return. It is what is left after the company's operating expenses have been subtracted from the gross margin. In our currently embattled industry facing rising costs, declining response rates, and shrinking margins, it is the new frontier for exercising leadership.

Marketing produces the revenue; however many departments generate expenses. Mistakenly, too many executives think that by reducing costs in marketing alone, EBITDA will improve. While it is important to control costs and not unreasonable to ask service providers "to sharpen their pencils", it is critical to understand how each and every person and function contributes to an organization. Chief Executives must "sharpen their pencils" and calculate the value and contribution of each department to the business operation.

We have developed a blueprint that looks at the business in five areas and then syncs them together to derive the full picture. These benchmarks provide a perspective for evaluation, and must be tempered by individual company realities.

1.	Circulation should be mailed to a contribution positive number based on an acceptable return on investment calculated for a 12-month period; that is, using a 12-month time frame (often called Lifetime Value Analysis) for determining the overall return on the initial investment.
2.	Shipping and handling should be a net revenue generator and ideally grow every year.
3.	Fixed overhead should be less then 20% of your gross revenue, assuming a gross margin of 55-60%; if the gross margin is lower, fixed costs need to be lower or ROI will be reduced.
4.	Variable cost increases need to be balanced by reducing other costs. Depending on the company's infrastructure, those decreases could be in personnel, technology, or other expenses.
5.	Marketing and technology spend should be highly audited and ROI mandated annually. Offers should be considered marketing spend. We look hard at offers which drive the top line but chip away at the bottom line.

The 2007 postage increase was devastating for the industry that was already dealing with the rising costs of overhead from employee benefits, corporate taxation, and costly underused and over promised technology. Additionally many mailers have been experiencing failing prospecting efforts. And all these factors are being compounded by a skittish economy reacting to the fall of the sub-prime market.

Departments within an organization should not be operating within siloes. Finance and marketing need to communicate regularly and understand the driving forces behind the reporting each generates. Finance should feed accurate data points monthly to marketing to be used to ensure that good calls are being made on contact decisions.

As companies try to find stability with the ground shifting beneath their feet, the world of takeover becomes obvious and sometimes welcomed.

There are certainly economies of scale which can be achieved by a merger, if performed well. However, the underlying issue remains the same: How to exercise leadership while creating a cost structure that will support the business operation and ultimately lead it to growth. Managing overhead and operating expenses as part of a total understanding of the business model is critical to a successful company.

A focus on managing to EBITDA becomes the root from which all plans grow. For instance, a company needs to understand the cost to fulfill a package at every break, whether weight or price point, and then determine whether the shipping schedule generates money on each package out the door. If the company is losing money on the package you have to stop right there and look to understand why. Can you raise the rates? Is the cost to fulfill out of sync with the size of the business? Should you outsource or bring in-house? At that point you may look to offsetting costs or making decisions to co-share space. In order to make co-sharing or buying back-end a viable option, mandate that the cost to fulfill will be at least 15% per package less than your original cost. This example will ring true for many mailers. However, companies with a strong retail presence may accept a loss on fulfillment because that loss is more than made up in increased retail sales.

This kind of rigorous analysis needs to be applied to every cost factor in an operation - identifying where efficiencies can be implemented and revenues generated. It is necessary to review productivity constantly. Monitor all expenses to ensure there is not an uncontrolled spike. When an employee leaves, consider whether or not roles can be consolidated or processes changed instead of replacing the person. Overhead, call center, finance, and printing, all must come under this scrutiny.

Technology is another area of spend that affects EBITDA. Marketing technology includes databases, license fees, analytic tools (software), paid search, and email deployment services. When these areas are underutilized or overpaid, the monthly drain is felt on the bottom line. These costs must be subjected to an ROI expectation, and providers of these services must be held accountable for performance. A company can not afford abandonment or dramatic underutilization of technology services. Before these services are purchased, it is necessary to do a cost-benefit analysis to determine an expected return. If the calculation does not show the required ROI, do not make the purchase.

After the cost centers have been reviewed and tightened, we come to the marketing department and the ability to make decisions with full sight of the ramifications of those decisions. As a leader, the questions you need to ask your team are:

1.	What is the contribution per order you are mailing to and why?
2.	Are you including all of the variable costs that need to be included (e.g. list costs, returns, cancels)?
3.	Can you show me the trend by segment year over year?
4.	At what point did you begin using matchback logic? Walk me through those business rules.
5.	If you take away the offers - what does the business look like?

It is critically important to move to stabilize a business that is seeing degradation of its response rate. While the business is driven by marketing decisions, merchandise, relevancy of price points, and voice, the inability to affect EBITDA positively is the cause of much turn over in executive roles.

Affecting EBITDA takes leadership. It takes a global view of not only the business model, but of the customer and how the customer interacts with the brand. Champions of EBITDA know that being smart at moving quickly to allow brands to share fixed overhead is the new game. Consolidation and co-sourcing can be viable alternatives to toughing it out alone.

Catalogers that are in the black will know that this is how the game of EBITDA works. Finally, marketing, merchandising, and finance should speak to this challenge in the same way, from the same play book, and in unison about the areas to be under constant surveillance. All departments have a joint mandate to get better at forecasting and merchandise trends, with a sharp pencil on the expense side. There at the root lies how EBITDA will grow.

Call me if you are interested in talking further on this subject. We recommend that in the next 12 months, the first question to ask any new hire is, "How can you affect my EBITDA?"