Starting a Mail-Order Business

Industry Notes

Mail-order businesses sell through catalogs, direct mailings or advertisements in magazines and newspapers. They usually receive orders by mail, phone and fax. There are three types of mail-order operations:

• General merchandise catalog houses offering a full line of products.
• Specialty merchandise catalog houses selling items of limited demand.
• Stores offering telephone shopping.
  Although the industry is not regulated, 80% of Canadian mail-order firms belong to the Canadian Direct Marketing Association. The CDMA has a Code of Ethics and Standards of Industry Practice and offers information for mail-order start-ups.

Some mail-order businesses are franchise operations. For specific information on franchising, refer to the Manitoba Franchise Guide .

Advantages of mail-order

• You can cover a large geographic area.
• Your costs are reduced (especially start-up investments) and you can keep inventory levels to a minimum.
• You can offer lower prices and a convenient shopping method.
• You do not need a prime location. Mail-order businesses are often home-based. Contact the City of Winnipeg Zoning Department, and Licensing Branch. In rural areas, contact your municipal office.
• You do not need fixtures and displays or to keep store hours.
• You do not need professional sales staff. Often one or two people can run the business, sometimes part-time. Consult lawyers, accountants and ad agencies.

Selecting a product

A good mail order product satisfies a need, is reasonably priced with high mark-up value and is usually not found in stores. In addition, it is:

• Easily described by words and pictures and easily sent by mail.
• Reliable, to avoid costly exchanges or returns.
• Encourages repeat sales and goes well with other products you may sell.

Direct mail advertising

Advertising is critical to mail-order businesses-- it is the single largest expense. There are three types: direct mail, publications and catalogs. Direct mail consists of sending an information package to possible customers, including a cover letter, brochure and order form. It is best when you want to:

• Send a personal, confidential, detailed or complicated message.
• Reach a specific target market or time the frequency of contact.
• Obtain initial responses to spark further inquiries.
• Include a brochure, samples or coupons.
• Conduct controlled research.
• Supplement other forms of advertising.

Tips:

• Consider help from a professional, qualified Direct Mail/Marketing House.
• Consider renting or buying customized mailing lists or compiling your own (most economical). To select those on the list, many use a formula which combines recency and frequency of purchase plus money spent.
• Response to mailings may increase with follow-up phone calls, using addressed envelopes, longer letters instead of shorter ones, testimonials, colourful product illustrations, computer personalization and tokens.
• Most mail-order firms use third-class mail. And timing is crucial, especially for seasonal items. Avoid holidays and tax time.
• A series of mailings one after another should be multiplied by five or less. If a test segment of 10,000 works, mail to 50,000 the next time, not 500,000.
• Most importantly, remember to include the order form!

Publication advertising

Place ads in magazines and newspapers read by your target market. Ask about discounts  and for the upper half of pages and outside columns. See the Canadian Advertising Rates and Data Publication. Generally, there are two types of ads:

• Classified ads containing minimal information to spark inquiries or test interest.
• Display ads containing more information to allow ordering by phone or mail.

Put codes on order forms to identify where orders come from. For example, an ad in the Winnipeg Free Press on August 22 could have the code WFP8-22 on the accompanying order form. Called 'keying', this allows you to track an ad's success.

Catalog advertising
Catalogs need not be fancy. Place faster selling items at the front and include only items which cover mailing and catalog production costs. Monitor all sales to decide whether to revise listings, move items or remove items from the catalog.

Pricing

Pricing is important in mail-order as you cannot readily change the price of goods without advertising again. When setting prices, look at product costs, returns, the market's ability to pay and competitors' prices. Traditionally, mail-order businesses have had mark-ups of about 200%, margins of 67%.

Test marketing
Test the:

• Product -- interview possible buyers.
• Mailing lists -- make initial offerings to a sample to see the returns.
• Publications -- place the same ad in different publications.
• Prices, terms, advertising -- send trial mailings to selected people. Ask about 'split-run' advertisements which place two different ads in the same issue of a publication which is then delivered to two different sets of customers.
  In all testing, calculate valid sample sizes based on expected returns, mail test pieces at the same time, wait for the final results and test again and again.

Acquiring and controlling inventory

Estimate demand carefully. Avoid too much inventory or making customers wait. Stock the bare minimum in the first few weeks. Obtain inventory in three ways:

• Make your own product or purchase from manufacturers or other suppliers.
• Buy on consignment from smaller firms and individual artisans.
• 'Drop ship', in which you buy product only when ordered and it is shipped directly to the customer from the supplier. This is unique to mail-order, and allows a beginner to offer product without investing money in inventory.
  Keep accurate reports to minimize lost sales and inventory costs. For example, use an Inventory Status Sheet to record stock levels at all times. No more than 3% of total products sold should be back-ordered (10% is acceptable in fashion). Contact the CDMA for information on methods of controlling inventory.

Procedures

Mail-order firms thrive on repeat business. Design a clear, concise order form. Set up procedures for recording orders, establishing payment plans (such as C.O.D.), checking credit, filling orders, billing, collecting and handling returns.

Human Resources

If your mail-order business expands, you must be able to hire and keep excellent employees. Educate yourself in all areas of human resources -- how to recruit, interview, motivate, train and develop personnel policies (wages, benefits). Promote continuous training and upgrading through related courses and programs. Refer to the Human Resources fact sheet for more information.

DISCLAIMER
Information contained in this document is of a general nature only and is not intended to constitute advice for any specific fact situation. Users concerned about the reliability of the information should consult directly with the source, or seek legal counsel.

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