Chapter Three. How to Figure Costs

A common question asked by newcomers to mail order is, "What should my mark-up be if I'm to succeed?'* The most frequent answer heard is "At least 2-to-l, or better still 3-to-l, and for real safety 4-to-l." In dollars and cents, this means that a pipe nor­mally retailing for $2.00 should cost a maximum of $1.00, but to be really sure of succeeding, not more than 50¢.

These ratios and prices are nonsense. It is possible to pay nothing for an item and still take a beating. For exam­ple, a well-meaning uncle, retiring from a sporting goods business, makes a gift of 500 hunting knives to his young nephew. Mr. Young Nephew, fired by the stories of quick killings in mail order, decides to run a half-page ad in one of the men's magazines. He manages to scrape together the $600.00 for the ad. "Shrewdly," he cuts the price of the knives from $7.50 to $6.00. He does some quick arithmetic; the figures look good. We peek over his shoulder and see:

That profit looks good on paper.

Let us wait and see what actually happens. The scene is eight weeks later; we're back at the nephew's shoulder. This time we note:

"But the knives cost nothing—how can that be?" we hear him mumbling.

The Advertising Order Cost

The lesson is clear. The principal factor that deter­mines mark-up in mail order is the pull in relationship to the cost of the advertising (advertising order cost). What confused the nephew was the assumption that the knives cost him nothing. Actually each one sold carried a $6.00 advertising tag. The tale might have had a sadder ending. What if only 50 had been sold?

Now let us examine another case. "Mail Order" Casey is the lucky bidder at an auction on 1,000 fishing rods. He too buys a half-page ad in the same men's magazine. Casey's bid of $2.00 per rod gives him a 3-to-l mark-up because his selling price, like the nephew's, is to be $6.00. There is plenty of time to uncrate the boxes containing the fish­ing rods and Casey goes about his other mail order duties.

When the first orders start to come in, the crates are opened and the rods connected. The count is true—1,000— but to Casey's consternation, 400 of the rods are broken. This is a black day for him. He has paid $2.00 per rod or a total of $2,000.00, but now only 600 are saleable, which means that each saleable rod actually costs him $3.33 and his mark-up will be less than 2-to-l. To Casey this fact makes a loss inevitable.

But let us wait a few weeks. Here is Casey again por­ing over his records for this particular ad and we see:

Casey is pleased but puzzled. "But the mark-up was less than 2-to-l," we hear him wonder aloud as we leave.

Theoretically, it is possible to make money on an item selling for $2.00 even though it cost $1.90. Here is an ex­ample. An inventor of a new lightweight slide rule buys a page ad costing $1,000.00 in one of the science books. Esti­mated cost of manufacturing the device was 50¢, but as a result of unforeseen manufacturing difficulties, the cost was actually $1.90. It was too late to cancel the ad or change the selling price—there was nothing to do but wait or declare bankruptcy. Now the miracle happens—100,000 cash or­ders come in (no C.O.D.'s in this offer) from the one ad. The orders are filled, and the profit and loss statement shows:

Naturally, this is a hypothetical case, not likely to oc­cur in real life, although the writer knows an actual case where a page ad on another product produced almost as many orders.

How then is the newcomer to determine his mark-up or costs? The answer is, by testing. Here are several simple illustrations.

Finding the Right Buying Price

Bill Handy has perfected a home paint sprayer. Sim­ilar sprayers retail for $12.00 and Bill decides to market his at $12.00, too. Not having the cash for manufacturing machinery, he makes arrangements with a contractor to furnish the sprayers at $6.00 each. Bill sends out his first mailing to small home owners. The cost of the mailing (5,000 pieces) is $200.00. After 40 days of pull, Bill has 50 orders. His tally sheet shows:

Bill feels that this is not enough. He decides to shop around and finally finds a contractor who will produce the sprayers for $5.00. This will now give a profit of $100.00 per 5,000 mailing. Bill prepares to circularize a million home owners, and if his big mailing does as well as the test, a neat $20,000.00 profit awaits him for each million mailing. It was testing that showed Bill what he could af­ford to pay.

Obviously, once a successful promotion has been found, the cheaper the costs, the more the seller makes— but this is not the same as setting up an arbitrary mark-up ratio.

Testing for the Right Selling Price

Mary Grey decides to go into mail order, selling a hair coloring. A druggist friend has agreed to supply the coloring @ 20¢ per 8-ounce bottle. Mary feels that the $1.00 price affords a decent mark-up (actually 5-to-l). Her first ad in an older women's magazine produces 100 orders. Mary's profit and loss sheet shows these figures:

Undaunted, Mary decides to retest with a different price and larger bottle. This time, the selling price has been jacked to $1.75, but the costs too, have gone up to 40¢. Her mark-up has gone down from 5-to-l to about 4½-to-l. Again a $100.00 ad is purchased and this time the tally sheet shows only 90 orders. But what does the profit and loss sheet show?

Still not too good. Mary has more testing to do. The point, however, has been made—costs and selling price are to be determined in the process of testing.

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