A few months ago I needed a fax machine. I rooted around online (first stop: Google) and found one for about $100 at a place called Viking Office Products. I ordered it by phone in the afternoon. The next morning a Viking deliveryman showed up with my fax machine. What's more, the delivery was free.
I was so impressed with the company that I wasn't bothered when I started getting Viking's phone-book-size catalogues in the mail. But after discarding several of these leaden publications, I began to wonder how this company makes any money. It seemed to me the combination of printing and mailing costs, delivery expenses, and low prices was a recipe for disaster.
What I've found, however, is that Viking is a classic example of how office products retailers operate, and do so profitably. It's one of the more complex retail niches: With so many different consumers of office products -- homes, small businesses, big companies and schools -- there are many channels of distribution, and each one is perfectly suited to its customer base.
That's exactly why it works. Office products dealers know their customers so well that they can price and market their products in the most productive, and profitable, way.
At its core, the office products industry makes money the way many retailers do, with a high-low pricing strategy. Though the industry operates in two distinct arenas -- retail and commercial sales -- the high-low approach works in both. And perhaps nowhere is it as obvious as in a catalogue operation like Viking, which is owned by the huge office supply chain Office Depot.
"It's very similar to what you see in supermarkets," said Simon DeGroot, an industry consultant for independent office supplies dealers. "The big players will focus on the kind of high-visibility items -- it would be stick pens or legal pads -- to create a low price perception. And meanwhile, in another part of town. . . . "
He's right. In my Viking catalogue, plenty of items seem to be great bargains: pens, Post-it notes, file folders, White Out and even my fax machine. But the "other part of town" DeGroot mentions might be the section in the back of the book that offers the kinds of household products I buy regularly when I go grocery shopping, such as dishwashing liquid and Kleenex. There, the prices are astounding.
In the catalogue, I find a 28-ounce bottle of Palmolive soap for $6.48 -- almost exactly twice what I'd pay at my neighborhood Safeway. Or there's the small box of extra-soft Kleenex for $2.69, which is 50 percent more than the current non-sale price at CVS. Bounty paper towels can be bought from Viking in a case of 30 for "as low as $66.87," if you buy three cases. That works out to $2.23 a roll. Last weekend I paid 75 cents a roll for an eight-pack of Bounty paper towels at Giant Food.
How can they do that? Why would anybody pay that much?
In fact, many of Viking's customers will. Most orders to the big office products direct-mail companies, like Viking, are not coming from individuals like me ordering things for their homes. The real customer for Viking is a busy office manager who is not only ordering traditional products for the office but also cleaning products and break-room supplies. For that person, it's better to pay for the convenience of having those items delivered with the file folders than to send someone to Target to pick them up.
"Anytime you get in your car you want to be able to write off those miles because you're on your way to see a client, not because you're going to get paper towels," said Ray Denison, director of marketing for the School, Home & Office Products Association of Dayton, Ohio. Office products dealers know this and capitalize on it.
But Viking isn't going to write me off as a customer, which is why I'm getting so many catalogues. Industry experts say the office products operators have such vast amounts of data on customers and their buying habits that they can tailor their mailings to make it more likely that you will buy again, and that you'll buy something with bigger profit margins.
The president of one independent office products dealer explained the process like this:
"You will either get electronically or through a catalogue a very targeted marketing piece that will offer some very, very, very competitive prices. The next catalogue you get is going to selectively step you up. The catalogue after that is going to step you up more. . . .
"Let's say you order a certain Uniball pen. They may keep that pen at the very competitive price because you have experience at buying that particular pen. But they're going to step you up on price in everything else. So the first-time buyer, or the early buyer, those first, second and third purchases are priced more competitively. Once you're a seasoned buyer, in effect, you're paying more."
Viking also has figured out, apparently, that I'm not an easy target beyond my fax machine. The last catalogue I got from the company was the March Blowout Sale that said in big print on the cover: "Margaret Pressler, you tried us once -- we want you to try us again!" It also offered me 20 percent off any order. Interestingly, in this sale catalogue are the pink, heart-shaped self-stick notes I'd seen in the bigger book and thought would be cute for my daughter. Maybe that's an accident, or maybe Viking was able to glean something about my buying habits and sent me the catalogue with all the "cute" things in it. And it worked: I've marked several things I'd like to buy!
Marketing this way requires mailing an awful lot of catalogues (in 2001, Viking produced 180 different versions of its catalogue, with total mailings of 307 million, according to Office Depot's annual report). But it also requires intimate knowledge of the customer, much more than is necessary in a traditional retail store with mostly anonymous buyers streaming in and out the door.
Even in the traditional retail arena, however, there is a payoff for knowing the customer. Walk into any office products store and you'll see lower prices on many of the products that a small-office or home-office buyer might know well. But the rest of the goods are highly profitable.
"There are key common items where Office Depot or Staples play to your knowledge of low pricing," explained a former executive with one of the nation's biggest office products wholesalers. "In the front, you walk in and you see copy paper at a very competitive price. But in the back of the store when you buy the purple folder, you're paying a 65 percent gross margin. Their hope is when you come you don't just buy the paper."
It seems to be working. Last week Staples (which also has a huge catalogue operation) announced net income of $417 million for 2002, up from $307 million the year before. Last month, Office Depot said its annual net income was $311 million, up from $201 million. Both companies attributed their good results in part to a better mix of merchandise and higher profit margins.
Clearly here's a retail segment that has figured it out: They know who their customers are, why they're buying, what they're buying and what they're willing to pay. It's refreshing, and the results are obvious.
If you have a question, comment or concern about what you see when you shop, write to Margaret Pressler at email@example.com.