Before Mail-Order, Try Online

If you want to start a catalog company, you stand a better chance of success if you first use the Web to create a brand and establish a solid customer base

I am interested in starting a mail-order catalog company. How would I go about this? —J.S., Emeryville, Calif.

Starting a catalog business is not a project for the faint of heart, says Mark Lee, a veteran catalog marketer who recently began consulting. In his experience, most successful catalog startups are offshoots of established retail or Internet businesses. "At the moment, I am working with a true, from-scratch startup client, but I believe they will have spent more than $1 million by the time their first catalogs arrive in homes. The principals have years of experience in the catalog and Internet industries and have solid capital behind them," says Lee, of Mark Lee Group, based in Charlottesville, Va.

Your first order of business may be to rethink your plans and start your company online (BusinessWeek 9/5/06), where the costs are smaller and risks lower. "The basic framework for an e-commerce Web site can be had for $10,000 to $15,000—without the copy or photos," Lee says. If you can get an online customer base established, you'll also have a customer mailing list, which is crucial when your catalogs may cost you more than $1 each to create, print, and mail.

While mail-order catalogs are not going extinct, successful kitchen-table startups are a rarity these days because of increased competition from offline and online retailers and the thousands of established catalogs already crowding the market. "Catalog response rates have been in a more or less steady decline since the 1950s," Lee says. "Its not unusual—even for an established catalog—to experience response rates below 1% from noncustomers. The catalog companies all lose money on sending to prospects, hoping to gain it back by getting lifelong customers, whose response rates are more like 5% to 8%." Along with competition, postal rate increases have been outpacing inflation, which particularly hurts small catalogs that can't take full advantage of bulk-mail discounts, and paper costs are currently very high.

Starting from Scratch

So, if you can get started online, establish a brand, and find customers in a niche that is underserved, your likelihood of success with a mail-order catalog is going to be much greater than if you try to mail a print version immediately. Eventually, a print catalog can be a good method for getting your products in front of new customers who would not find your Web site on their own. Lee says that manufacturing products yourself, or being a direct importer, will improve your gross profit margins once you do get started. And two other things are likely to help: Getting some experience working for a catalog company, and raising enough capital to help you through the three years or so it may take to break even.

Once you're ready to put your catalog in circulation, or even start selling online, make sure you understand how to fill orders. "I believe a number of dot-com retailers ran aground 10 years ago because they underestimated the importance of handling orders, payments, shipping, and returns. Customers are accustomed to first-class treatment and feel they have a right to fast shipping, knowing whats in stock before they order, and liberal return policies. There are soup-to-nuts fulfillment houses that can handle the phone calls, packing, and shipping, but of course this all costs money," Lee says.

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