September 09, 2014

Now It's Time To Negotiate With The Co-Ops, Dear Catalogers

Remember yesterday's example (click here to remember the post)? You invest 8,500,000 catalogs with your printer, and with your co-op, in order to transform your business from a business that generates $2,500,000 of pre-tax profit on $50,000,000 in annual sales to a business that generates $55,950,000 in annual sales at break-even.

It's time for you to have a heart-to-heart discussion with your vendor partners. Think about the co-ops, for instance. How much additional work do they have to do to put the last 100,000 of the 8,500,000 co-op catalogs in the mail? None. No additional work whatsoever. Zip. Zero. It's all profit.

So why are you paying them $0.06 or $0.05 or whatever they are charging you for those additional, incremental names?

The co-ops have your spending history - meaning they know, by year, what your investment level has been. So if you want to put an incremental 8.5 million catalogs in the mail, for crying out loud, they should be charging you just a penny a name to do it. They should be encouraging you to greatly overspend, shouldn't they?

Profit for 8,500,000 catalogs at a 40% profit factor and $0.50 catalog cost and $0.06 co-op cost and $0.70 per book estimate = ($2,380,000).

Profit for 8,500,000 catalogs at a 40% profit factor and $0.50 catalog cost and $0.01 co-op cost and $0.70 per book estimate = ($1,955,000).

Look at that! You make an additional $400,000 because of co-op concessions. If you cannot afford to mail the names, they make $0. If they give you the incremental names at a penny each, they make $8,500,000*0.01 = $85,000 ... enough to hire one additional analyst or enough to simply pocket profit.

Why are you not negotiating with the co-ops in this fashion?

And the same thing goes for your printer. Yes, your printer. If your printer gives you a $0.02 concession, and your co-op charges you just a penny a name, then you've got something:
  • Profit for 8,500,000 catalogs at a 40% profit factor and $0.48 catalog cost and $0.01 co-op cost and $0.70 per book estimate = ($1,785,000).
You keep telling me that you'd rather grow than to generate pre-tax profit. Did I not outline a path for you to grow, throwing away all your profit in the process?

This avenue causes three things to happen.
  1. Your business grows, and that's what you are telling me you want.
  2. Co-ops increase net sales.
  3. Printers increase net sales.
Explain to me why this is bad for your vendor partners? I'm not asking them to lower prices on your base expenditure ... just every incremental dollar beyond your base expenditure.

Explain to me why this is bad for your business? You keep telling me you'd rather grow top-line sales than profit. In this case, you grow top-line sales. Sure, you have no profit left, but you keep telling me you want to compete against Amazon - they don't generate profit - and they grow. You keep telling me that sales growth and customer file growth is more important than profit. Well - how important is it to you? This is your moment. Put your chips in the middle of the table and grow, or have me put an algorithm together for you to greatly increase profit. Pick one, or the other.

But again, if you want to grow, then what I outlined here allows your business to grow, allows the co-ops to generate more profit, and allows your printer to generate more profit.

Pick growth, or pick profit. It's time to choose.