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CASE STUDY RELIABLE CORPORATION
JOHN S. WAGLE Professor of Marketing Northern Illinois University
John S. Wagle Debra L. Zahay j
DEBRA L. ZAHAY Doctoral Student University of Illinois
Reliable Corporation President Rick Black stopped at Woodfield Mall on his way back to his office after a meeting with the Planning Committee of Boise Cascade Office Products. Reliable had been purchased by Boise Cascade Office Products (BCOP) several years previously and Rick was part of the Planning Committee. Woodfield, one of the largest shopping malls in the United States, was only a few blocks from Reliable’s office building and the stop would allow Rick to review the outcome of the planning meeting before returning to his office. Besides, the restaurants in Woodfield were usually fast and Rick had a lot of work to do. Rick looked out over the busy mall and thought about the planning meeting he had just attended. The result of the Planning Committee meeting with parent company BCOP was that Rick and Reliable were free to target the ‘‘middle market’’ for office products if Reliable could develop adequate information to indicate the venture would be successful and profitable. Reliable’s primary customer to date had been small businesses with 1–4 employees, many of them not in convenient driving distance of an office superstore; Reliable had reached this target customer through direct mail. This move into
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This case was prepared as part of the DePaul University Direct Marketing Case Writers’ Workshop. The Workshops are presented annually by DePaul’s Direct Marketing Institute, Dr. J. Steven Kelly, Director. To become involved, please call 312-362-5913 or email: [email protected]. The authors would like to thank executives of Reliable and Boise Cascade Office Products: Rick Black, Carol Moerdyk, and Art Hanover, J. Stephen Kelly, DePaul University and the students of Marketing Management, Phase II MBA, Spring 1996, Hewlett Packard Campus of Northern Illinois University, who first evaluated this case. Copyright q 1996, John S. Wagle, Debra L. Zahay This paper is distributed for purposes of instructional use only. It may not be reproduced without permission of the copyright holders. Additional copies of this paper are available from the authors at 217-356-4810.
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the direct market would mean substantial changes, both in Reliable’s methods and its target customers. Using Reliable instead of BCOP to target the middle market meant that direct marketing tools, especially catalogs and inbound telemarketing, would play a major role in the marketing strategy. Since the ‘‘middle market’’ represented more than 600,000 companies in the United States, the Planning Committee decision was a significant opportunity for Rick and for Reliable. At the same time, Rick wanted to make certain the strategy would be successful. A lot of work was needed before a final marketing plan could be completed or a final proposal made to the Planning Committee. Rick wondered if the middle market could be broken up into segments and how many of those segments should be targeted? He suspected that expanding his operations to larger-sized companies might require the addition of outbound telemarketing as an expansion of the direct marketing strategy. Rick also wondered if he could obtain enough information to estimate a breakeven point for catalog and inbound telemarketing efforts and if he could estimate the lifetime value of a middle market target customer.
plies. In the 1930s it was acquired by the Zenner family and marketed office supplies throughout the Midwest, with Chicago as its largest market. For many years Reliable used wholesaler catalogs with the Reliable name printed on them as its direct mail promotion device, a technique shared throughout the industry. With continued growth, Reliable created its own catalog in 1973 and became large enough to deal directly with the manufacturers, substantially reducing its purchasing costs for products. In 1983, Reliable executives decided to concentrate all of their business acquisition efforts into direct mail methods. Computerization, information systems, and procedures were refined and redefined and direct mailings were significantly increased. Reliable grew at 30% a year until the mid 1980s. Office superstores began to successfully compete with contract stationers in the early 1990s and Reliable’s growth slowed significantly. Reliable management decided to move into the retail store channel in 1993. Direct mail was reduced as the number of retail stores expanded to 18 by 1994. In late 1993 Boise Cascade Office Products Division executives began to talk with Reliable executives about a possible buy out of the direct marketing part of the operation. It was agreed that the retail stores would stay with the original owners and Reliable would
RELIABLE CORPORATION The Reliable Corporation began business in 1917 as a stationery company selling office supTABLE 1
Metromail Business Information File Selection Variables for Business to Business Targeting Geography
SIC Codes
State MSA County SCF ZIP Code Area Code Number of Employees
New Contacts
Population Range
2 digit 4 digit 6 digit
Year Code
Contact Name
First year in Yellow Pages
Ad Size (Yellow Pages) Projected Sales Volume
Note: In agreement with American Business Information, Metromail and ABI offer access to ABI’s Business Information file of over 9.2 million American and 1 million Canadian businesses. The ABI file, updated monthly, was initially a compilation of every Yellow Pages listing in the country expanded by telephone surveys to every phone number listed. The surveys provided the above information.
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keting companies such as Eddie Bauer and Fingerhut, to head Reliable. The original Reliable executives decided that store retailing, facing the category killers of Office Max, Staples, and Office Depot, was the best market strategy. In contrast, the BCOP executives felt that Reliable’s direct marketing capability was an excellent complement to their own capabilities and corporate culture. Reliable’s strength in direct marketing was also an answer to Boise Cascade’s own competitors (contract stationers) and an avenue of expansion to new customer targets. BCOP also liked Reliable’s direct marketing capability because direct marketing was a centralized operation like the selling and distribution functions in BCOP. There were many more opportunities for synergy between BCOP operations and direct marketing than there were with store retailing. Also, direct marketing could target customers more easily than the retail channel. This targeting included factors such as the customer’s buying patterns, products needed, and industry classification. With the renewed focus on direct marketing techniques, Reliable began to grow substantial profitable orders. Reliable’s growth rate increased from 3% per year to 25% per year in sales in the first year after Rick’s management of the company. Reaching out for larger customers in the middle market might be one way to sustain this high growth for several years.
TABLE 2
Boise Cascade Office Products: Strategy for Growth • Expand through acquisitions Goal: to more than double the number of major metropolitan areas in the United States in which BCOP has a significant local presence and to expand its presence in existing locations. • Increase national accounts business Goal: to continue to grow the contract stationer channel of large multisite national account customers, capitalizing on the growing trend to customers to consolidate purchases and use fewer suppliers. • Broaden the customer base Goal: to serve medium and small businesses through the 1994 acquisition of Reliable. There are significant opportunities to increase sales through the direct mail channel and to increase overall profitability by exploiting the operating and marketing synergies between the two different selling methods used by BCOP’s businesses. • Increase sales in existing product categories and add new categories Goal: to increase sales in product lines that are highly profitable or which particularly support the corporate mission. These include copier, fax paper, and office furniture. New product categories may include computer hardware, software, and advertising specialties.
become part of Boise Cascade and concentrate on direct marketing. In 1994 Boise Cascade bought Reliable and brought in Rick Black, who had considerable experience with direct marTABLE 3
Distribution of Private Sector Employment by Firm Size and by Number of Establishments, 1993 Firm Size by Number of Employees
Midpoint of Size Range
Average Number of Office Workers
Number of Establishments
Share of Establishments
Share of Total Employees
3 7 15 35 75 175 375 750 3,000
1 3 7 17 37 86 184 368 1,474
3,716,982 1,176,563 724,605 481,391 164,634 93,445 23,675 9,129 5,178
58.1% 18.4% 11.3% 7.5% 2.6% 1.5% 0.4% 0.1% 0.1%
6.8% 8.7% 10.9% 16.4% 12.7% 15.8% 9.1% 7.1% 12.5%
1–4 5–9 10–19 20–49 50–99 100–249 250–499 500–999 ú1,000
Source: Bureau of Labor Statistics and BPIA Estimates.
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TABLE 4
Financial Statements Reliable Income Statement 1994 (EST).
1995
Net sales Cost of sales Gross profit Selling and warehouse expense Corporate general and administrative expense Goodwill amortization Total operatng expense Income from operations Other income (expense), net Income before income taxes Income tax expense Income before accounting changes Net income
1994
201,348 130,118 71,230 54,243
158,166 102,213 55,953 42,609
0 0 71,230 1,572 72,802 27,665 45,137 45,137
0 0 55,953 1,235 57,188 21,732 35,457 35,457
Boise Cascade Office Products
1995
1994
1993
1992
Net sales Cost of sales Gross profit Selling and warehouse expense Corporate general and administrative expense Goodwill amortization Total operating expense Income from operations Other income (expense), net Income before income taxes Income tax expense Income before cumulative effect of accounting changes Effect of accounting Net income Shares Distribution centers Inventory turns
1,316,000 980,000 336,000 239,000 25,000 2,000 266,000 70,000 2,000 72,000 28,000 44,000
909,000 676,000 232,000 172,000 15,000 1,000 188,000 44,000 1,000 45,000 17,000 28,000
682,000 506,000 177,000 133,000 13,000 500 146,500 30,500 600 31,100 11,000 20,100
626,000 465,000 161,000 133,000 12,000 0 145,000 13,600 600 14,200 6,000 8,200 02 8,198
36 9.7
27 8.7
21 7.6
Viking
1994
Net sales Cost of sales Gross profit Selling and warehouse expense Corporate general and administrative expense (continued on next page)
1993
1992
1991
565,055 365,159 199,896
449,687 292,489 157,201
320,066 205,984 114,082
266,345 145,627 80,718
152,224
127,843
93,172
66,700
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TABLE 4
Continued Viking
1994
1993
1992
1991
47,672 4,412 52,084 20,304 31,780
29,358 2,771 32,129 14,972 17,157
20,910 1,514 22,424 9,599 12,825
14,018 0558 13,460 5,684 7,776
40,212
39,077
38,748
8,624
Staples
1995
1994
1993
1992
Net sales Cost of sales Gross profit Selling and warehouse expense Corporate general and administrative expense Goodwill amortization Total operating expense Income from operations Other income (expense), net Income before income taxes Income tax expense Income before cumulative effect of accounting change Outstanding shares
2,000,149 1,534,360 465,789
1,308,634 1,013,010 295,624
1,041,636 807,167 234,469
611,281 469,537 141,744
383,306
250,339
197,012
124,800
82,483 018,578 63,905 23,965 39,940 62,810
45,285 012,933 32,352 12,900 19,452 35,246
37,457 06,239 31,218 12,900 18,318 35,246
16,944 011,252 5,692 5,000 692 34,491
Office Depot
1994
1993
1992
1991
Net sales Cost of sales Gross profit Selling and warehouse expense Corporate general and administrative expense Goodwill amortization Total operating expense Income from operations Other income (expense), net Income before income taxes Income tax expense Income before cumulative effect of accounting change (continued on next page)
4,266,199 3,283,498 982,701
2,836,787 2,185,145 651,642
1,962,953 1,512,304 450,649
1,300,847 1,001,484 299,363
784,387
527,379
378,745
261,306
198,314 (19,384) 178,930 73,973 104,957
124,263 (8,313) 115,950 45,118 70,832
Goodwill amortization Total operating expense Income from operations Other income (expense), net Income before income taxes Income tax expense Income before cumulative effect of accounting change Net income Outstanding shares
Quill (Privately held, estimated to be 2.5 times the size of Reliable)
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71,904 (1,314) 70,590 25,345 45,245
38,057 (11,185) 26,872 12,495 14,377
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TABLE 4
Continued Office Depot
1994
1993
1992
1991
149,373
146,951
1,396 46,641 35,246
614 14,991 34,491
Officemax, Inc.
1995
1994
1993
1992
Net sales Cost of sales Gross profit Selling and warehouse expense Corporate general and administrative expense Goodwill amortization Total operating expense Income from operations Other income (expense), net Income before income taxes Income tax expense Net income Outstanding shares
1,841,212 1,422,400 418,812
1,421,794 1,108,992 312,802
528,205 441,429 116,776
65,100 51,200 13,900
353,755
284,146
111,742
12,400
65,057 8,725 56,332 25,975 30,357 50,945
28,656 08,734 19,922 9,073 10,849 50,945
5,034 03,874 1,160 1,881 0721 23,381
1,500 0300 1,200 300 900 n/a
Effect of accounting changes Net income Outstanding shares
Note: All amounts in thousands, except shares and distribution centers
BCOP’s management knew that one basic reason a direct marketing strategy can achieve results of this magnitude is that direct marketing is an effective targeting mechanism, especially for those with smaller customer sets, such as business-to business marketers. By buying multivariable lists from list brokers, direct marketers can target just those prospects who have characteristics most likely to be associated with needing (and therefore buying) a product (Table 1). Through testing of lists and selection criteria, those prospects least likely to need the product are largely excluded. A general industry guideline is that a direct marketer using a list from a list broker may expect from 1%–3% of the list to buy the product from a catalog in any given promotion. Outbound telemarketing cold calls must result in higher cash sales to be cost justified. If outbound telemarketing is attempted after a catalog mailing to the prospect, industry figures indicate the catalog/telemarketing combination
will result in a 6%–7% sales rate. The actual percentage of buyers varies by industry, by season, by mailing, and by the offer. Still, an experienced direct marketer can successfully project sales, breakeven, fixed costs, variable costs, profits, life-time customer value, and return on investment for any specific mailing. This direct analysis of return tied to promotional investment is also true for telemarketing or other direct marketing devices. In fact, no other form of promotion can associate or predict sales from promotional effort as well as direct marketing. Even personal selling, the next best predictive promotional tool, suffers from the comparison to direct marketing because of its much higher per prospect contact cost and direct marketing’s greater reach. To BCOP management, another clear advantage of direct marketing is its ready adaptability to database marketing. Direct marketers accumulate substantial amounts of information about actual customers and store this as data in
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databases. Targeting a direct marketing effort to known customers from a marketing database will often result in a purchase response rate of 20%–25% of those prospects contacted. These figures are extremely favorable when compared to advertising, sales promotion or publicity/ public relations and are also favorable when compared to personal selling, especially when factoring in relative costs. A database that is constantly updated, refined, and improved can become the most important tool a company can own. Not only is a database valuable for immediate sales, but it is also the most important feature in developing a relationship marketing strategy. These are the factors which, together with good management, explain Reliable’s expanded growth rate since its return to direct marketing techniques. It has been estimated that the average office supplies direct mail customer purchases four or five times a year with an average order size of $85–$125. Direct mail buyers have an average life of five years before shifting to a new supplier. Noncontract order sizes would not be expected to increase in dollar size per order with sales to the middle market. However, middle market customers could be expected to purchase twice as frequently or to produce more orders per firm. Because of the competition in the middle market segment, the average customer is expected to remain three years. It is not known if firms in the middle market allowed each department to buy office supplies separately or if each department was required to order from preferred suppliers.
(20% of sales), office supplies, computer supplies, furniture and stationary to larger, Fortune 1000 firms, primarily through fixed, negotiated contracts. Contract periods often last from one to three to five years. Boise Cascade is the largest contract stationer in the industry and sells more than 11,000 separate products. It has more centralized control than its competitors and is very well regarded by the financial reporting community. BCOP relies almost exclusively on a highly professional sales force to develop its contracts. Boise Cascade Office Products continued to grow within the industry by acquisition, partly to develop its channels of distribution and partly to acquire loyal customer bases. A recent acquisition was Neat Ideas, Ltd., a direct marketer of office supplies in the United Kingdom (1995). Additional acquisitions included Sierra Vista Office Products, Inc., a contract stationer with headquarters in Albuquerque, New Mexico (1996); Grand & Toy, Ltd. (1996), a Canadian contract stationer purchased for $140,000,000; Office Essentials, a contract stationer and office furniture dealer with headquarters in Milwaukee, Wisconsin (1996); and Loring, Short, & Harmon, Inc., a contract stationer in Portland, Maine (1996). These acquisitions, the direct marketing strategy, and targeting sales growth as a corporate goal are all part of the Boise Cascade Office Products growth strategy (table 2). The acquisition strategy is consistent with industry trends. In 1995 the ‘‘Big Six’’ contract stationers acquired many smaller regional independents whose total sales had together exceeded 2.5 billion. There are approximately 3,000 contract stationers selling more than a million dollars each per year. Consistent with price pressure and acquisition strategy, the total number of companies in the industry has dropped from 13,000 in 1987 to 6,800 in 1994. Rapid industry consolidation is likely to continue.
ORGANIZATION In 1995 Boise Cascade decided that market and financial considerations dictated that the pulp and paper mill side of the company should be organizationally separated from the rest of the company. Boise Cascade Office Products was created and most of the marketing, wholesaling and sales organization went with it. Boise Cascade retained an 80% interest in the office supply company. Reliable went with BCOP. Boise Cascade Office Products is a contract stationer that supplies large amounts of paper products
MARKETS Boise Cascade Office Products, except for special customer needs, sold only Boise Cascade manufactured paper products to approximately
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25,000 customers, targeting companies with 100 or more employees. Reliable, on the other hand, sold many different office product brand names (while emphasizing Boise Cascade paper products). The Reliable target market had been defined as the small business, roughly those companies with 20 or fewer employees. At any given time Reliable had more than 400,000 customers on its mailing list. Boise Cascade Office Products, on the other hand, targeted the Fortune 1000 companies with a full-fledged sales force. These firms purchased goods over a specific contract period and engaged in lengthy service and price negotiations, but once under contract were unlikely to deal with competitors. In contrast, Reliable customers ordered out of catalogs or through inbound telemarketing and their customers were not bound by contract so that customer loyalty considerations were important for every order. Both companies made use of the Boise Cascade Office Products inventory control system. This was possible because individual orders were about the same size for a department within a large company as for a small business. In other words, BCOP bulk breaks inventory down to small order size as one of its primary marketing functions. The middle market was defined as firms who had more than 20 but less than 100 employees (Table 3). This was the new market segment Reliable needed to study in order to make its proposals to Boise Cascade Office Products.
The retail side of the business generated between 40–45 billion dollars each year. These retailers primarily served small companies up to medium sized customers. Office Max, Office Depot, and Staples were significant contenders. Direct mail suppliers accounted for 4–5 billion dollars in sales per year. They served mostly small and medium sized customers and often targeted home offices. There were a number of these companies, but the largest included Viking, Quill, and Reliable (Table 4).
TARGETING STRATEGY Every organization in the country uses office supplies, paper products, office furniture and the other products Reliable sold. Rick Black, deep in constructing his proposal to the BCOP Board, was worried about the industry-wide tendency to use only one or two variables to identify market targets. While Reliable had significant financial backing from BCOP it was still necessary to define the targets so they could be marTABLE 5
Cost Estimates Small Catalog Telemarketing Catalog Costs Per Thousand
Costs Printing Costs Catalog Order form Return envelope Total Printing Mailing Costs Letter shop Computer processing Postage Total Mailing Total CPM
COMPETITION The office supply industry for contract stationers was, as of 1996, a 30 billion-dollar a year market. Although the largest in the industry, Boise Cascade Office Products only commanded a 4% market share. The major competitors in the industry were the ‘‘big six’’ which included: BCOP, Corporate Express, Office Depot, BT Office Products International, US Office Products and Staples. Together they accounted for about 14% of the industry sales volume. While industry competitors, many of these firms were not direct competitors of Reliable; the typical Reliable customer is not within driving distance of an office superstore.
50,000 CPM
100,000 CPM
300,000 CPM
$44 23 18 85
$34 19 16 69
$33 18 15 66
45
45
45
24 198 267 352
24 198 267 336
24 198 267 333
Telemarketing Costs Per Prospect Outbound Cost Per Hour ($) Number of Contacts Inbound Cost Per Hour ($) Number of Contacts
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26–40 12–15 18–38 0–18
RELIABLE CORPORATION
TABLE 6
Reliable Catalogs Home Office Catalog (For Catalog Covers See Exhibit) Item
Actual
Circulation Orders % Response Average Order (Rounded)
575,000 25,763 4.48% $38.11
Gross Salesa Net Sales (1) Gross Margin (2)
$981,731 $925,772 $357,811
Fulfillment Premium (3)
$362,743
Gross Selling Expense (4) Less: Adv. Allowance Net Selling Expense
$168,751 $0 $168,751
Contribution Contribution/order Sales/M (1) Net Sales (2) Gross Margin (b) (3) Fulfillment/Premium (4) Catalog Cost/M
$36,467 $1.42 $1,707 94.30% 38.65% $14.08 $333
Item Circulation Average Order Adj to Net Margin Fulfillment/Order Net Selling Expense Cost/M
Low, Low Catalog
Year-end Catalog
301,248 $94.78 88.45% 32.93% $14.08 $389,059 1,291.49
319,071 $65.02 94.65% 35.37% $14.08 ($62,249) (195.09)
$9,049 $2,725,850 28,766 9.55% $0 1.43%
($1,641) ($523,753) 08,033 2.52% $0 11.90%
Breakeven Summary
a b
Sales/M Gross Demand Sales Total # of Orders % Response Contribution Cost/Sell
Net Sales and Gross Margin taken from Dec/Jan Sales Reports. Based on net sales.
keted to as efficiently as possible. Within ‘‘the middle market’’ were those organizations best suited to Reliable’s business approach and those most likely to become good customers. Rick wondered which variables in addition to number of employees suggest the most likely customers. There seemed to be two factors of greatest importance: 1) demand for the Reliable product line, and 2) compatibility with the Reliable buying procedure. In the former case the Reliable product line was very broad, but it could be customized for the best prospects in the middle market if these companies had needs specific to themselves. Specific catalogs, promotional devices, and special mailings could be used to target the best prospective customers. It would be ironic if the middle market strategy failed because Reliable could not make use of the marketing technique that direct marketing does
than all promotional devices: target the market. In the case of compatibility, the greatest concern was that large amounts of prospect promotional effort not be wasted on organizations whose buying procedures made it impossible or very difficult to buy from new suppliers or from catalogs or from telemarketers. It was essential to direct the promotional effort away from these firms and toward compatible ones. Recent industry information about the costs of producing catalogs versus telemarketing expenses (Table 5) indicated the relative expense of catalogs versus telemarketing. Several of Reliable’s recent catalogs to the small business/ home office Market (Table 6) had fared well and Reliable knew the catalog business much better than the telemarketing business. Determining which variables predict the best customers was a direct marketing spe-
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cialty. Direct marketers had a unique and powerful database marketing tool called decile analysis. Their customers were divided into segments called deciles using statistical analysis of actual past sales data. The factors that separate the deciles were then identified. The top decile of most frequent purchasers might be in a particular industry or location in the country. The analysis would continue until each decile had been analyzed. Unique promotion and separate mailings could be developed for each segment. In reaching for the middle market, however, Rick Black and the staff at Reliable had no historical database from which to identify target segments. Yet targeting within the middle market was potentially of critical importance, especially when attempting to market to a target for the first time. Added to this lack of historical information was the risk of using a new direct marketing
method, outbound telemarketing. Rick knew that he would have to make some assumptions about the new market, its customer and other factors in order to make the calculations necessary for the estimates. He also knew that such estimated quantitative figures were essential in order to make an informed decision. Rick pondered whether to enter the middle market and whether Reliable’s traditional direct mail techniques could be used to do so. As he weighed the pros and cons of entering the middle market, Rick pulled open a file drawer full of literature from business to business list brokers. There were thousands of companies to pursue, which hundreds of database variables to choose for each company. Perhaps there would be some guidance in the kinds of variables the database companies have used to construct their databases. Perhaps one of the database marketers had already found, identified, and listed ‘‘the middle market.’’
EXHIBIT 1
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JOHN S. WAGLE Professor of Marketing Northern Illinois University
John S. Wagle Debra L. Zahay j
DEBRA L. ZAHAY Doctoral Student University of Illinois
Reliable Corporation President Rick Black stopped at Woodfield Mall on his way back to his office after a meeting with the Planning Committee of Boise Cascade Office Products. Reliable had been purchased by Boise Cascade Office Products (BCOP) several years previously and Rick was part of the Planning Committee. Woodfield, one of the largest shopping malls in the United States, was only a few blocks from Reliable’s office building and the stop would allow Rick to review the outcome of the planning meeting before returning to his office. Besides, the restaurants in Woodfield were usually fast and Rick had a lot of work to do. Rick looked out over the busy mall and thought about the planning meeting he had just attended. The result of the Planning Committee meeting with parent company BCOP was that Rick and Reliable were free to target the ‘‘middle market’’ for office products if Reliable could develop adequate information to indicate the venture would be successful and profitable. Reliable’s primary customer to date had been small businesses with 1–4 employees, many of them not in convenient driving distance of an office superstore; Reliable had reached this target customer through direct mail. This move into
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This case was prepared as part of the DePaul University Direct Marketing Case Writers’ Workshop. The Workshops are presented annually by DePaul’s Direct Marketing Institute, Dr. J. Steven Kelly, Director. To become involved, please call 312-362-5913 or email: [email protected]. The authors would like to thank executives of Reliable and Boise Cascade Office Products: Rick Black, Carol Moerdyk, and Art Hanover, J. Stephen Kelly, DePaul University and the students of Marketing Management, Phase II MBA, Spring 1996, Hewlett Packard Campus of Northern Illinois University, who first evaluated this case. Copyright q 1996, John S. Wagle, Debra L. Zahay This paper is distributed for purposes of instructional use only. It may not be reproduced without permission of the copyright holders. Additional copies of this paper are available from the authors at 217-356-4810.
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the direct market would mean substantial changes, both in Reliable’s methods and its target customers. Using Reliable instead of BCOP to target the middle market meant that direct marketing tools, especially catalogs and inbound telemarketing, would play a major role in the marketing strategy. Since the ‘‘middle market’’ represented more than 600,000 companies in the United States, the Planning Committee decision was a significant opportunity for Rick and for Reliable. At the same time, Rick wanted to make certain the strategy would be successful. A lot of work was needed before a final marketing plan could be completed or a final proposal made to the Planning Committee. Rick wondered if the middle market could be broken up into segments and how many of those segments should be targeted? He suspected that expanding his operations to larger-sized companies might require the addition of outbound telemarketing as an expansion of the direct marketing strategy. Rick also wondered if he could obtain enough information to estimate a breakeven point for catalog and inbound telemarketing efforts and if he could estimate the lifetime value of a middle market target customer.
plies. In the 1930s it was acquired by the Zenner family and marketed office supplies throughout the Midwest, with Chicago as its largest market. For many years Reliable used wholesaler catalogs with the Reliable name printed on them as its direct mail promotion device, a technique shared throughout the industry. With continued growth, Reliable created its own catalog in 1973 and became large enough to deal directly with the manufacturers, substantially reducing its purchasing costs for products. In 1983, Reliable executives decided to concentrate all of their business acquisition efforts into direct mail methods. Computerization, information systems, and procedures were refined and redefined and direct mailings were significantly increased. Reliable grew at 30% a year until the mid 1980s. Office superstores began to successfully compete with contract stationers in the early 1990s and Reliable’s growth slowed significantly. Reliable management decided to move into the retail store channel in 1993. Direct mail was reduced as the number of retail stores expanded to 18 by 1994. In late 1993 Boise Cascade Office Products Division executives began to talk with Reliable executives about a possible buy out of the direct marketing part of the operation. It was agreed that the retail stores would stay with the original owners and Reliable would
RELIABLE CORPORATION The Reliable Corporation began business in 1917 as a stationery company selling office supTABLE 1
Metromail Business Information File Selection Variables for Business to Business Targeting Geography
SIC Codes
State MSA County SCF ZIP Code Area Code Number of Employees
New Contacts
Population Range
2 digit 4 digit 6 digit
Year Code
Contact Name
First year in Yellow Pages
Ad Size (Yellow Pages) Projected Sales Volume
Note: In agreement with American Business Information, Metromail and ABI offer access to ABI’s Business Information file of over 9.2 million American and 1 million Canadian businesses. The ABI file, updated monthly, was initially a compilation of every Yellow Pages listing in the country expanded by telephone surveys to every phone number listed. The surveys provided the above information.
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keting companies such as Eddie Bauer and Fingerhut, to head Reliable. The original Reliable executives decided that store retailing, facing the category killers of Office Max, Staples, and Office Depot, was the best market strategy. In contrast, the BCOP executives felt that Reliable’s direct marketing capability was an excellent complement to their own capabilities and corporate culture. Reliable’s strength in direct marketing was also an answer to Boise Cascade’s own competitors (contract stationers) and an avenue of expansion to new customer targets. BCOP also liked Reliable’s direct marketing capability because direct marketing was a centralized operation like the selling and distribution functions in BCOP. There were many more opportunities for synergy between BCOP operations and direct marketing than there were with store retailing. Also, direct marketing could target customers more easily than the retail channel. This targeting included factors such as the customer’s buying patterns, products needed, and industry classification. With the renewed focus on direct marketing techniques, Reliable began to grow substantial profitable orders. Reliable’s growth rate increased from 3% per year to 25% per year in sales in the first year after Rick’s management of the company. Reaching out for larger customers in the middle market might be one way to sustain this high growth for several years.
TABLE 2
Boise Cascade Office Products: Strategy for Growth • Expand through acquisitions Goal: to more than double the number of major metropolitan areas in the United States in which BCOP has a significant local presence and to expand its presence in existing locations. • Increase national accounts business Goal: to continue to grow the contract stationer channel of large multisite national account customers, capitalizing on the growing trend to customers to consolidate purchases and use fewer suppliers. • Broaden the customer base Goal: to serve medium and small businesses through the 1994 acquisition of Reliable. There are significant opportunities to increase sales through the direct mail channel and to increase overall profitability by exploiting the operating and marketing synergies between the two different selling methods used by BCOP’s businesses. • Increase sales in existing product categories and add new categories Goal: to increase sales in product lines that are highly profitable or which particularly support the corporate mission. These include copier, fax paper, and office furniture. New product categories may include computer hardware, software, and advertising specialties.
become part of Boise Cascade and concentrate on direct marketing. In 1994 Boise Cascade bought Reliable and brought in Rick Black, who had considerable experience with direct marTABLE 3
Distribution of Private Sector Employment by Firm Size and by Number of Establishments, 1993 Firm Size by Number of Employees
Midpoint of Size Range
Average Number of Office Workers
Number of Establishments
Share of Establishments
Share of Total Employees
3 7 15 35 75 175 375 750 3,000
1 3 7 17 37 86 184 368 1,474
3,716,982 1,176,563 724,605 481,391 164,634 93,445 23,675 9,129 5,178
58.1% 18.4% 11.3% 7.5% 2.6% 1.5% 0.4% 0.1% 0.1%
6.8% 8.7% 10.9% 16.4% 12.7% 15.8% 9.1% 7.1% 12.5%
1–4 5–9 10–19 20–49 50–99 100–249 250–499 500–999 ú1,000
Source: Bureau of Labor Statistics and BPIA Estimates.
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TABLE 4
Financial Statements Reliable Income Statement 1994 (EST).
1995
Net sales Cost of sales Gross profit Selling and warehouse expense Corporate general and administrative expense Goodwill amortization Total operatng expense Income from operations Other income (expense), net Income before income taxes Income tax expense Income before accounting changes Net income
1994
201,348 130,118 71,230 54,243
158,166 102,213 55,953 42,609
0 0 71,230 1,572 72,802 27,665 45,137 45,137
0 0 55,953 1,235 57,188 21,732 35,457 35,457
Boise Cascade Office Products
1995
1994
1993
1992
Net sales Cost of sales Gross profit Selling and warehouse expense Corporate general and administrative expense Goodwill amortization Total operating expense Income from operations Other income (expense), net Income before income taxes Income tax expense Income before cumulative effect of accounting changes Effect of accounting Net income Shares Distribution centers Inventory turns
1,316,000 980,000 336,000 239,000 25,000 2,000 266,000 70,000 2,000 72,000 28,000 44,000
909,000 676,000 232,000 172,000 15,000 1,000 188,000 44,000 1,000 45,000 17,000 28,000
682,000 506,000 177,000 133,000 13,000 500 146,500 30,500 600 31,100 11,000 20,100
626,000 465,000 161,000 133,000 12,000 0 145,000 13,600 600 14,200 6,000 8,200 02 8,198
36 9.7
27 8.7
21 7.6
Viking
1994
Net sales Cost of sales Gross profit Selling and warehouse expense Corporate general and administrative expense (continued on next page)
1993
1992
1991
565,055 365,159 199,896
449,687 292,489 157,201
320,066 205,984 114,082
266,345 145,627 80,718
152,224
127,843
93,172
66,700
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TABLE 4
Continued Viking
1994
1993
1992
1991
47,672 4,412 52,084 20,304 31,780
29,358 2,771 32,129 14,972 17,157
20,910 1,514 22,424 9,599 12,825
14,018 0558 13,460 5,684 7,776
40,212
39,077
38,748
8,624
Staples
1995
1994
1993
1992
Net sales Cost of sales Gross profit Selling and warehouse expense Corporate general and administrative expense Goodwill amortization Total operating expense Income from operations Other income (expense), net Income before income taxes Income tax expense Income before cumulative effect of accounting change Outstanding shares
2,000,149 1,534,360 465,789
1,308,634 1,013,010 295,624
1,041,636 807,167 234,469
611,281 469,537 141,744
383,306
250,339
197,012
124,800
82,483 018,578 63,905 23,965 39,940 62,810
45,285 012,933 32,352 12,900 19,452 35,246
37,457 06,239 31,218 12,900 18,318 35,246
16,944 011,252 5,692 5,000 692 34,491
Office Depot
1994
1993
1992
1991
Net sales Cost of sales Gross profit Selling and warehouse expense Corporate general and administrative expense Goodwill amortization Total operating expense Income from operations Other income (expense), net Income before income taxes Income tax expense Income before cumulative effect of accounting change (continued on next page)
4,266,199 3,283,498 982,701
2,836,787 2,185,145 651,642
1,962,953 1,512,304 450,649
1,300,847 1,001,484 299,363
784,387
527,379
378,745
261,306
198,314 (19,384) 178,930 73,973 104,957
124,263 (8,313) 115,950 45,118 70,832
Goodwill amortization Total operating expense Income from operations Other income (expense), net Income before income taxes Income tax expense Income before cumulative effect of accounting change Net income Outstanding shares
Quill (Privately held, estimated to be 2.5 times the size of Reliable)
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71,904 (1,314) 70,590 25,345 45,245
38,057 (11,185) 26,872 12,495 14,377
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TABLE 4
Continued Office Depot
1994
1993
1992
1991
149,373
146,951
1,396 46,641 35,246
614 14,991 34,491
Officemax, Inc.
1995
1994
1993
1992
Net sales Cost of sales Gross profit Selling and warehouse expense Corporate general and administrative expense Goodwill amortization Total operating expense Income from operations Other income (expense), net Income before income taxes Income tax expense Net income Outstanding shares
1,841,212 1,422,400 418,812
1,421,794 1,108,992 312,802
528,205 441,429 116,776
65,100 51,200 13,900
353,755
284,146
111,742
12,400
65,057 8,725 56,332 25,975 30,357 50,945
28,656 08,734 19,922 9,073 10,849 50,945
5,034 03,874 1,160 1,881 0721 23,381
1,500 0300 1,200 300 900 n/a
Effect of accounting changes Net income Outstanding shares
Note: All amounts in thousands, except shares and distribution centers
BCOP’s management knew that one basic reason a direct marketing strategy can achieve results of this magnitude is that direct marketing is an effective targeting mechanism, especially for those with smaller customer sets, such as business-to business marketers. By buying multivariable lists from list brokers, direct marketers can target just those prospects who have characteristics most likely to be associated with needing (and therefore buying) a product (Table 1). Through testing of lists and selection criteria, those prospects least likely to need the product are largely excluded. A general industry guideline is that a direct marketer using a list from a list broker may expect from 1%–3% of the list to buy the product from a catalog in any given promotion. Outbound telemarketing cold calls must result in higher cash sales to be cost justified. If outbound telemarketing is attempted after a catalog mailing to the prospect, industry figures indicate the catalog/telemarketing combination
will result in a 6%–7% sales rate. The actual percentage of buyers varies by industry, by season, by mailing, and by the offer. Still, an experienced direct marketer can successfully project sales, breakeven, fixed costs, variable costs, profits, life-time customer value, and return on investment for any specific mailing. This direct analysis of return tied to promotional investment is also true for telemarketing or other direct marketing devices. In fact, no other form of promotion can associate or predict sales from promotional effort as well as direct marketing. Even personal selling, the next best predictive promotional tool, suffers from the comparison to direct marketing because of its much higher per prospect contact cost and direct marketing’s greater reach. To BCOP management, another clear advantage of direct marketing is its ready adaptability to database marketing. Direct marketers accumulate substantial amounts of information about actual customers and store this as data in
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databases. Targeting a direct marketing effort to known customers from a marketing database will often result in a purchase response rate of 20%–25% of those prospects contacted. These figures are extremely favorable when compared to advertising, sales promotion or publicity/ public relations and are also favorable when compared to personal selling, especially when factoring in relative costs. A database that is constantly updated, refined, and improved can become the most important tool a company can own. Not only is a database valuable for immediate sales, but it is also the most important feature in developing a relationship marketing strategy. These are the factors which, together with good management, explain Reliable’s expanded growth rate since its return to direct marketing techniques. It has been estimated that the average office supplies direct mail customer purchases four or five times a year with an average order size of $85–$125. Direct mail buyers have an average life of five years before shifting to a new supplier. Noncontract order sizes would not be expected to increase in dollar size per order with sales to the middle market. However, middle market customers could be expected to purchase twice as frequently or to produce more orders per firm. Because of the competition in the middle market segment, the average customer is expected to remain three years. It is not known if firms in the middle market allowed each department to buy office supplies separately or if each department was required to order from preferred suppliers.
(20% of sales), office supplies, computer supplies, furniture and stationary to larger, Fortune 1000 firms, primarily through fixed, negotiated contracts. Contract periods often last from one to three to five years. Boise Cascade is the largest contract stationer in the industry and sells more than 11,000 separate products. It has more centralized control than its competitors and is very well regarded by the financial reporting community. BCOP relies almost exclusively on a highly professional sales force to develop its contracts. Boise Cascade Office Products continued to grow within the industry by acquisition, partly to develop its channels of distribution and partly to acquire loyal customer bases. A recent acquisition was Neat Ideas, Ltd., a direct marketer of office supplies in the United Kingdom (1995). Additional acquisitions included Sierra Vista Office Products, Inc., a contract stationer with headquarters in Albuquerque, New Mexico (1996); Grand & Toy, Ltd. (1996), a Canadian contract stationer purchased for $140,000,000; Office Essentials, a contract stationer and office furniture dealer with headquarters in Milwaukee, Wisconsin (1996); and Loring, Short, & Harmon, Inc., a contract stationer in Portland, Maine (1996). These acquisitions, the direct marketing strategy, and targeting sales growth as a corporate goal are all part of the Boise Cascade Office Products growth strategy (table 2). The acquisition strategy is consistent with industry trends. In 1995 the ‘‘Big Six’’ contract stationers acquired many smaller regional independents whose total sales had together exceeded 2.5 billion. There are approximately 3,000 contract stationers selling more than a million dollars each per year. Consistent with price pressure and acquisition strategy, the total number of companies in the industry has dropped from 13,000 in 1987 to 6,800 in 1994. Rapid industry consolidation is likely to continue.
ORGANIZATION In 1995 Boise Cascade decided that market and financial considerations dictated that the pulp and paper mill side of the company should be organizationally separated from the rest of the company. Boise Cascade Office Products was created and most of the marketing, wholesaling and sales organization went with it. Boise Cascade retained an 80% interest in the office supply company. Reliable went with BCOP. Boise Cascade Office Products is a contract stationer that supplies large amounts of paper products
MARKETS Boise Cascade Office Products, except for special customer needs, sold only Boise Cascade manufactured paper products to approximately
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25,000 customers, targeting companies with 100 or more employees. Reliable, on the other hand, sold many different office product brand names (while emphasizing Boise Cascade paper products). The Reliable target market had been defined as the small business, roughly those companies with 20 or fewer employees. At any given time Reliable had more than 400,000 customers on its mailing list. Boise Cascade Office Products, on the other hand, targeted the Fortune 1000 companies with a full-fledged sales force. These firms purchased goods over a specific contract period and engaged in lengthy service and price negotiations, but once under contract were unlikely to deal with competitors. In contrast, Reliable customers ordered out of catalogs or through inbound telemarketing and their customers were not bound by contract so that customer loyalty considerations were important for every order. Both companies made use of the Boise Cascade Office Products inventory control system. This was possible because individual orders were about the same size for a department within a large company as for a small business. In other words, BCOP bulk breaks inventory down to small order size as one of its primary marketing functions. The middle market was defined as firms who had more than 20 but less than 100 employees (Table 3). This was the new market segment Reliable needed to study in order to make its proposals to Boise Cascade Office Products.
The retail side of the business generated between 40–45 billion dollars each year. These retailers primarily served small companies up to medium sized customers. Office Max, Office Depot, and Staples were significant contenders. Direct mail suppliers accounted for 4–5 billion dollars in sales per year. They served mostly small and medium sized customers and often targeted home offices. There were a number of these companies, but the largest included Viking, Quill, and Reliable (Table 4).
TARGETING STRATEGY Every organization in the country uses office supplies, paper products, office furniture and the other products Reliable sold. Rick Black, deep in constructing his proposal to the BCOP Board, was worried about the industry-wide tendency to use only one or two variables to identify market targets. While Reliable had significant financial backing from BCOP it was still necessary to define the targets so they could be marTABLE 5
Cost Estimates Small Catalog Telemarketing Catalog Costs Per Thousand
Costs Printing Costs Catalog Order form Return envelope Total Printing Mailing Costs Letter shop Computer processing Postage Total Mailing Total CPM
COMPETITION The office supply industry for contract stationers was, as of 1996, a 30 billion-dollar a year market. Although the largest in the industry, Boise Cascade Office Products only commanded a 4% market share. The major competitors in the industry were the ‘‘big six’’ which included: BCOP, Corporate Express, Office Depot, BT Office Products International, US Office Products and Staples. Together they accounted for about 14% of the industry sales volume. While industry competitors, many of these firms were not direct competitors of Reliable; the typical Reliable customer is not within driving distance of an office superstore.
50,000 CPM
100,000 CPM
300,000 CPM
$44 23 18 85
$34 19 16 69
$33 18 15 66
45
45
45
24 198 267 352
24 198 267 336
24 198 267 333
Telemarketing Costs Per Prospect Outbound Cost Per Hour ($) Number of Contacts Inbound Cost Per Hour ($) Number of Contacts
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26–40 12–15 18–38 0–18
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TABLE 6
Reliable Catalogs Home Office Catalog (For Catalog Covers See Exhibit) Item
Actual
Circulation Orders % Response Average Order (Rounded)
575,000 25,763 4.48% $38.11
Gross Salesa Net Sales (1) Gross Margin (2)
$981,731 $925,772 $357,811
Fulfillment Premium (3)
$362,743
Gross Selling Expense (4) Less: Adv. Allowance Net Selling Expense
$168,751 $0 $168,751
Contribution Contribution/order Sales/M (1) Net Sales (2) Gross Margin (b) (3) Fulfillment/Premium (4) Catalog Cost/M
$36,467 $1.42 $1,707 94.30% 38.65% $14.08 $333
Item Circulation Average Order Adj to Net Margin Fulfillment/Order Net Selling Expense Cost/M
Low, Low Catalog
Year-end Catalog
301,248 $94.78 88.45% 32.93% $14.08 $389,059 1,291.49
319,071 $65.02 94.65% 35.37% $14.08 ($62,249) (195.09)
$9,049 $2,725,850 28,766 9.55% $0 1.43%
($1,641) ($523,753) 08,033 2.52% $0 11.90%
Breakeven Summary
a b
Sales/M Gross Demand Sales Total # of Orders % Response Contribution Cost/Sell
Net Sales and Gross Margin taken from Dec/Jan Sales Reports. Based on net sales.
keted to as efficiently as possible. Within ‘‘the middle market’’ were those organizations best suited to Reliable’s business approach and those most likely to become good customers. Rick wondered which variables in addition to number of employees suggest the most likely customers. There seemed to be two factors of greatest importance: 1) demand for the Reliable product line, and 2) compatibility with the Reliable buying procedure. In the former case the Reliable product line was very broad, but it could be customized for the best prospects in the middle market if these companies had needs specific to themselves. Specific catalogs, promotional devices, and special mailings could be used to target the best prospective customers. It would be ironic if the middle market strategy failed because Reliable could not make use of the marketing technique that direct marketing does
than all promotional devices: target the market. In the case of compatibility, the greatest concern was that large amounts of prospect promotional effort not be wasted on organizations whose buying procedures made it impossible or very difficult to buy from new suppliers or from catalogs or from telemarketers. It was essential to direct the promotional effort away from these firms and toward compatible ones. Recent industry information about the costs of producing catalogs versus telemarketing expenses (Table 5) indicated the relative expense of catalogs versus telemarketing. Several of Reliable’s recent catalogs to the small business/ home office Market (Table 6) had fared well and Reliable knew the catalog business much better than the telemarketing business. Determining which variables predict the best customers was a direct marketing spe-
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cialty. Direct marketers had a unique and powerful database marketing tool called decile analysis. Their customers were divided into segments called deciles using statistical analysis of actual past sales data. The factors that separate the deciles were then identified. The top decile of most frequent purchasers might be in a particular industry or location in the country. The analysis would continue until each decile had been analyzed. Unique promotion and separate mailings could be developed for each segment. In reaching for the middle market, however, Rick Black and the staff at Reliable had no historical database from which to identify target segments. Yet targeting within the middle market was potentially of critical importance, especially when attempting to market to a target for the first time. Added to this lack of historical information was the risk of using a new direct marketing
method, outbound telemarketing. Rick knew that he would have to make some assumptions about the new market, its customer and other factors in order to make the calculations necessary for the estimates. He also knew that such estimated quantitative figures were essential in order to make an informed decision. Rick pondered whether to enter the middle market and whether Reliable’s traditional direct mail techniques could be used to do so. As he weighed the pros and cons of entering the middle market, Rick pulled open a file drawer full of literature from business to business list brokers. There were thousands of companies to pursue, which hundreds of database variables to choose for each company. Perhaps there would be some guidance in the kinds of variables the database companies have used to construct their databases. Perhaps one of the database marketers had already found, identified, and listed ‘‘the middle market.’’
EXHIBIT 1
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