From the February 1996 issue of Entrepreneur

Welcome to the winter of mail order's discontent. With paper prices and postal rates increasing simultaneously, most industry insiders are bracing themselves for the worst blow the mail order industry has weathered in recent memory.

"There have been periodic postal increases and cycles of paper price increases, but the convergence of both has created somewhat of a disaster," says Arnold Fishman, owner and president of Marketing Logistics, a Highland Park, Illinois-based direct-mail and mail order consulting and publishing firm. Specifically, mail order companies are dealing with a rise in paper costs totaling nearly 30 percent in two years. There's also a postage increase of approximately 9 percent expected in 1997-adding to the burden of the 10.3 percent hike last January.

This one-two punch has been "devastating for both large and small companies," says Fishman, "but it's especially unfortunate for entrepreneurs because they typically go through an entry cycle where they're not producing profits for up to three or four years. Under [current] conditions, they should expect to add maybe another year to the [time it takes to reach the] break-even point."

According to Evanston, Illinois, mail order consultant Maxwell Sroge, the cost of producing a mail order

catalog should increase by 15 percent to 20 percent in 1996. "This is the biggest double hit [mail order has experienced] in a short period of time," says Sroge, who has tracked the industry for three decades. "It has seriously affected profits."

Though the latest developments are bleak indeed, Fishman is quick to note all is not lost. "Mail order is still the quintessential entrepreneurial field," he contends. "Many success stories will continue to emerge in mail order, despite the general conditions. Mail order still represents a great opportunity for entrepreneurs; it allows people to go into a market more quickly and at a lower cost than if they were going into a retail outlet.

"In a market that's always changing, emerging and growing, this is a period in which new potential in mail order will be realized. While there are serious problems for conventional, traditional direct marketers, positive changes are occurring."

Like Fishman, Sroge considers the developments not purely threatening, but rather intriguing. "The interesting thing is that consumers seem to be buying more from catalogs than ever before," he says. "While catalogers are having a harder time making a profit, sales are increasing by 12 to 15 percent."

According to the Direct Marketing Association (DMA), more than half the adult population ordered merchandise by mail or phone in 1994. Research conducted by Simmons Market Research Bureau shows that the total number of American adults shopping by phone or mail increased 53 percent in the past decade, compared with an 11.9 percent population increase. The DMA estimates 1995 catalog sales at $62.6 billion and forecasts growth of 6.5 percent each year through the end of the decade. Sroge predicts total mail order sales at $306 billion in 1996.

What will ultimately save the industry are the players. Sroge believes many mail order companies aren't passively awaiting the blow of rising costs but are taking a proactive stance. "It's taken catalog companies a while to respond to these increases," he says. "But now they've adjusted their operations, and, while their profits weren't very good in the fourth quarter of 1995, they should see steadily increasing profits in 1996."

No one has to tell Paul Katzeff about the changing world of mail order. Katzeff, who founded Thanksgiving Coffee Co. in Ft. Bragg, California, with his wife, Joan, has been marketing gourmet coffee blends via mail order since 1987 and now mails to 75,000 customers. Katzeff says his company's decision to switch to a catalog printed on lightweight plastic instead of paper will "more than offset the [rise in] costs." By June 1997, he plans to completely eliminate the print catalog, instead advertising his products on the Internet.

Katzeff believes the current obstacles will not conquer the spirit of new mail order entrepreneurs. "Small-business owners are born; the economic environment can't stop them," he says. "That's how the marketplace changes for the better. The small-business owner gets into the market and overcomes the barriers to entry, change occurs, and the marketplace is dealt with."

Roll With It

For those mail order entrepreneurs who aren't going to let a few tough breaks get them down, one question remains: How exactly do they deal with the marketplace? "It's more difficult for the small-business owner to afford the kind of technology the larger, more established businesses use to cope with the double whammy of cost increases," says Fishman.

According to Sroge, some mail order companies are reducing their catalog dimensions, the quality of the paper stock and the number of pages; most mail order entrepreneurs are pruning their mailing lists and sending only to those customers who actually buy.

But many companies have tried these traditional, more obvious routes and found themselves still struggling. Therefore, mail order entrepreneurs need to adopt more innovative survival tactics.

These include:

  • Forming or joining co-ops. "As costs continue to be a factor, small catalogers are going to have to cooperate with each other by forming co-ops," says Sroge. "Print together, mail together, form telemarketing centers together-cooperate any way you can." By joining forces, small companies can mimic the purchasing power of a Land's End or L.L. Bean.

Because of the obvious benefits, John Schulte, chairman of the National Mail Order Association, believes we'll see "more consolidation, mergers, joint ventures and acquisitions. If you have a mailing of, say, 50,000, you'll be able to hook up with another company through a consolidator to qualify for further postal discounts."

The fastest and easiest way to find such consolidators, says Schulte, is to peruse your trusty Yellow Pages. "After you find companies listed under 'Mailing Services,' it's just a matter of finding out which companies do it and what size they'll go down to," says Schulte. "Usually, you're looking at a minimum of 50,000 pieces before a consolidator will even look at you." Other resources for those seeking a match are mail order associations and existing relationships.

  • Squeezing suppliers. Sroge suggests putting pressure on your suppliers for everything from merchandise to advertising. "Ask them for better prices, better terms on the purchase of merchandise," he says.
  • Downsizing. Like most of the rest of the business world, mail order businesses-even small ones-may have to consider downsizing. "In the past five years, American industry has reanalyzed where it's going," says Sroge. "Small mail order companies are going to have to do the same. It's better to reduce the size of your staff than to go out of business and leave your entire staff jobless. These are difficult decisions, but if they can save your business, they're decisions that have to be made."
  • Investigating classification reform. In what the U.S. Postal Service (USPS) has deemed the "most sweeping changes in mail in the last century," the proposed USPS Classification Reform calls for reform and restructuring of first-, second- and third-class mail rates, saving money for those who prepare mail for automated processing.

Though Tom Shimko, vice president of marketing for Pitney Bowes U.S. Mailing Systems, believes virtually every business will be affected one way or another if Classification Reform is implemented this year, a Pitney Bowes study of 1,000 companies revealed 72 percent of businesses responding were unaware of the reform. "With all the issues facing small businesses today, such as cash flow and increasing sales, mail ranked number 40 in terms of priority," says Shimko.

Basically, the reform covers the process of bar-coding mail so it can be handled more quickly and accurately by the USPS. Shimko says the USPS is "shifting all its discounts toward bar-coding mail and away from some of the areas for which they'd previously provided discounts, such as presorting." Fortunately, software, including Pitney Bowes' Addressright system, can make bar-coding classification a viable option even for small companies.

Yet Sroge warns, "The little guy may be left out of the picture. In many cases, small businesses will not be able to qualify for the additional discounts and therefore will be at even more of a disadvantage." In fact, he suggests every mail order entrepreneur write his or her congressperson, as well as the Postal Service and the Small Business Administration, and urge that the reclassification include benefits for small mailing companies.

  • Going global. Given the domestic catalog glut, Fishman says, more companies are starting to turn their attention to ripe overseas markets. He notes a current race to go into Japan, as well as substantial expansion by U.S. companies into Canada, the United Kingdom, France, Germany and the Pacific Rim.
  • Televising infomercials. The new kid on the mail order block has met with exceptional success, astounding many a marketing pundit. "Five years ago, this was a minuscule media form. Now it's an industry with billions of dollars in sales," says Fishman. "Through one successful infomercial, you can develop a database of half a million names, which would take you 10 years to do using paper media. Infomercials are becoming a major source of revenues for products sold without direct contact with the buyer."
  • Expanding into retail outlets. "Many mail order businesses reach the $10 million or $20 million level and start thinking about expansion into retail," says Fishman. "That's a healthy thing to do because it gives [entrepreneurs] the opportunity to switch back and forth between the different channels of distribution according to the conditions of the marketplace."
  • Developing plans for innovative positioning and product selection. "Innovative positioning and product selection are still and always will be the name of the game," says Fishman. "You have to create the perception that what you offer is not readily available in anyone else's catalog or retail store."

For example, the computer supply and accessory segment of mail order is growing rapidly, and demand for home improvement and home furnishings catalogs remains strong. Says Fishman, "The products [these catalogers] offer are so important to consumers that these catalogs are able to expand circulation, sales and profitability despite the burdens mail order merchants in other categories can't cope with."

  • Selling on the Internet. "Right now, everybody's talking about the Internet," says Sroge. "Some people have made ridiculous estimates of where [purchasing on the Internet] will be in the year 2000. I wouldn't get overenamored with all the new technology, but I would watch it carefully. Seek out the opportunities, do a little experimenting, but don't bet the store on it. It's going to take time, but it will happen."

In the long term, Sroge says, "We need the generation that's now in schools learning on computers to mature and become heads of households. Once [they are] at ease with all the technology and in a position to be major purchasers, [the Internet] will be a savior for the industry. It'll give mail order a whole new burst of life."

A New Day

While some see mail order hitting rock bottom, most believe the industry will soon be born again. In fact, some say the current hard times are only natural given the boom years of the 1980s, when mail order companies were coming out of the woodwork.

"There was a flurry of activity, but it had to end," says Paul Katzeff. "People are just getting too many catalogs. As a consumer, I look at my mail and say, 'This is insane.' " Now that prosperity has turned to glut, an industry shakeout may lead to temporary tribulations but should eventually create a golden age of mail order.

Forward-thinking mail order entrepreneurs have good cause for such long-term optimism. "The hope for mail order and for business in general is the way in which it will be perceived by this new generation," says Katzeff. "Right now, our marketplace is best understood by people in their mid-30s; by the year 2000, it'll be best understood by people in their mid-20s. The businesses that give these people the power to create and effect change are the businesses that are going to survive."

In the face of the market's evolution, mail order enjoys an advantage over retail outlets. "The irony is that retailers, too, are faced with a tough profit situation, but they seem to respond by giving less service," says Sroge.

Meanwhile, smaller mail order companies have more motivation than larger companies to innovate and consequently to shape the direction of mail order. "The big guys are already in there," says Katzeff. "Their profits lie not in growth but in cost-cutting."

"Once companies get so big, they tend to lose focus," says Schulte. "They can't control everything, orders get shipped late, customers drop off. Meanwhile, small companies can come in and fill those niches by making up for the weaknesses of the big guys."

Picking up where larger companies and retail stores fall short is the secret to success for small mail order businesses agile enough to keep up with the market's twists and turns. "Very few [small] companies are generalists," says Schulte. "[They have to] focus on a specific niche, an area that they become experts in and become known for."

Thanksgiving Coffee personifies this new wave in mail order. Offering more than just quality coffee, Katzeff invites customers to sample the flavor of his company. With warm introductions to the Katzeffs and their employees, personable copy and an appealing design, the Thanksgiving Coffee catalog provides more ambience than most retail stores. "When you talk about appealing to a certain lifestyle, small catalogers have an advantage," says Katzeff. "Since they don't have the money to hire people to write the copy, they can't be anything but personal."

Katzeff sees his catalog not just as a sales medium but as a way to bond with customers. "It's about more than the bottom line. You can integrate the values that you hold dear," says Katzeff, who exhorts customers to be socially and environmentally responsible.

It's this personal touch that will keep small mail order entrepreneurs above water not only in 1996 but through the coming mail order revolution. "Entrepreneurs can think five years ahead, while the big corporations can't," says Katzeff. "And in this fast-paced, changing marketplace, the field is open to the swift."

Just My Size

Many of the newest mail order products are custom-made for small companies-and the Thin-Paper Tolerant 7735 Desktop Folder Inserter from Neopost is no exception. Ideal for small mail order businesses with low volume, this new product folds and inserts up to 1,100 pieces per hour. Its feeder accommodates documents on 12.5-pound to 25-pound paper, so it can be used for a variety of tasks-from processing invoices and order forms printed on NCR paper to folding and inserting paychecks and documents printed on computer paper. The 7735 Folder Inserter also offers nine job presets and a 100-envelope-capacity tray. Cost: $5,295. -Heather Page

Economies Of Scale

Besides the added benefit of moving out of the Dark Ages and into the high-tech '90s, trading your mechanical scale for an electronic model can also save you money. Electronic scales, such as the B530 Electronic Scale from Pitney Bowes, help eliminate costly weighing errors that result in overposting. This 3-pound-capacity scale contains a wide selection of postal rates and fees so you can find the most cost-effective routing for standard mail, large envelopes and small parcels. Soft-touch keys and an easy-to-read display make it user-friendly. Cost to lease: $21 per month. -H.P.

All In One

Few of us relish using one software program to access a mailing list database, then using a second program to create an address label. With Envelope Manager for Windows 2.0 by Envelope Manager Software, you can perform both tasks-and many more.

The well-rounded program is a handy tool that allows mail order companies to manage address lists, produce mail pieces and presort mail. You can create databases for address lists that handle an unlimited number of records; design mail pieces, fax cover sheets, professional envelopes, labels and fliers; and access pop-up rate charts for first class, first-class oversize, postcard, express, priority mail and more.

System requirements include a 486 or higher PC, Windows 3.1 or higher, 8MB RAM and 10MB hard-disk space. Cost: $295.

Sort It Out

With the recent postage hike, who can pass up the chance to save on postage costs? Using ProSort 3.0 from Group 1 Software as a companion to your existing database, you can take advantage of maximum postal discounts by adding complete Postal Service certified mail presorting, printing and bar-coding to your mail. ProSort 3.0 is the first Windows version of this program that presorts first-, second- and third-class mail. It also lets you print postal forms for each respective presort type to include with the mailing.

A 386 or higher PC with 4MB of RAM, 2MB of disk space, and Windows 3.1 or higher are required. Cost: $595.

Bar None

If you're looking for a way to speed up your fulfillment process and eliminate errors, bar-coding technology may be the answer. American Microsystems Ltd.'s M1002-WAND allows you to scan your invoice numbers, customer numbers and package ID codes accurately and quickly. This handheld bar-coding accessory, available through The Haven Corp., features a rugged steel case and tapered tip that glides smoothly across labels and withstands large amounts of pressure and wear. Just use Quick Bar software ($195) to print numbers in bar-coded format onto invoices, shipping labels and other forms-and you're in business! M1002-WAND price: $299.

Shape Up

Besides a glossy catalog and unique product line, the right mail order management software can also position your business for success. Dydacomp Development's new 5E version of DOS-based Mail Order Manager lets you look up a customer or order by name, phone or customer number, ZIP code, or company name; print invoices, packing slips and box labels; and create complete inventory reports showing quantities in stock, low-level items and back-order products.

New features handle accounts payable functions, including paying vendors, printing checks and running accounts payable reports. Plus, Dydacomp also offers a List Management Module for Windows upgrade ($595) to create and maintain address lists. Cost: starting at $1,195.

Many of the newest mail order products are custom-made for small companies-and the Thin-Paper Tolerant 7735 Desktop Folder Inserter from Neopost is no exception. Ideal for small mail order businesses with low volume, this new product folds and inserts up to 1,100 pieces per hour. Its feeder accommodates documents on 12.5-pound to 25-pound paper, so it can be used for a variety of tasks-from processing invoices and order forms printed on NCR paper to folding and inserting paychecks and documents printed on computer paper. The 7735 Folder Inserter also offers nine job presets and a 100-envelope-capacity tray. Cost: $5,295. -Heather Page

Contact Sources

American Microsystems, 2190 Regal Pkwy., Euless, TX 76040, (800) 648-4452;

Envelope Manager Software, 247 High St., Palo Alto, CA 94301-1041, (800) 576-3279;

Group 1 Software, 4200 Parliament Pl., #600, Lanham, MD 20706-1852;

Marketing Logistics, 1460 Cloverdale Ave., Highland Park, IL 60035, (708) 831-1575;

Maxwell Sroge Co. Inc., 522 Forest Ave., Evanston, IL 60202, (708) 866-1890;

National Mail Order Association, 2807 Polk St. N.E., Minneapolis, MN 55418-2954, (612) 788-1673;

Pitney Bowes, 1 Elmcroft, Stamford, CT 06926-0700, fax: (800) 688-2728;

Thanksgiving Coffee Co., (800) 462-1999, tcc@mcn.org.