In general, we provide the Enablement model through our PFS and Supplies Distributors
subsidiaries, the Agent or Flash model through our PFS and Supplies Distributors subsidiaries and the Retail model through our Supplies Distributors subsidiaries and our PFSweb Retail Connect subsidiary.
Growth is a key element to achieving our future goals, including achieving and maintaining sustainable profitability. Growth in our
Enablement and Agent models is driven by two main elements: new client relationships and organic growth from existing clients. We focus our sales efforts on larger contracts with brand-name companies within two primary target markets, online brands
and retailers and technology manufacturers, which, by nature, require a longer duration to close but also have the potential to be higher quality and longer duration engagements.
Growth within our Retail model currently is primarily driven by our ability to attract new master distributor arrangements with IPS or
other manufacturers and the sales and marketing efforts of the manufacturers and third party sales partners. Ricoh has advised us that it is restructuring its IPS business, which will include certain realignment and operational changes in the sale
and distribution of IPS products. We are continuing to evaluate the impact of these changes to our business, though we expect the changes to result in reduced revenues and profitability under our Retail model in 2012.
We continue to monitor and control our costs to focus on profitability. While we are targeting our new service fee contracts to yield
increased gross profit, we also expect to incur incremental investments in technology development, operational and support management and sales and marketing expenses.
Our expenses comprise primarily four categories: 1) cost of product revenue, 2) cost of service fee revenue, 3) cost of pass-through revenue and 4) selling, general and administrative expenses.
Cost of product revenue consists of the purchase price of product sold and freight costs, which are reduced by
certain reimbursable expenses. These reimbursable expenses include pass-through customer marketing programs, direct costs incurred in passing on any price decreases offered by vendors to cover price protection and certain special bids, the cost of
products provided to replace defective product returned by customers and certain other expenses as defined under the master distributor agreements.
Cost of service fee revenue consists primarily of compensation and related expenses for our web-enabled customer contact center services, international fulfillment and distribution services
and professional consulting services, and other fixed and variable expenses directly related to providing services under the terms of fee based contracts, including certain occupancy and information technology costs and depreciation and amortization
Cost of pass-through revenue the related reimbursable costs for pass-through expenditures are
reflected as cost of pass-through revenue.
Selling, General and Administrative expenses consist of expenses
such as compensation and related expenses for sales and marketing staff, distribution costs (excluding freight) applicable to the Supplies Distributors business and the Retail model, executive, management and administrative personnel and other
overhead costs, including certain occupancy and information technology costs and depreciation and amortization expenses.
Monitoring and controlling our available cash balances and our expenses continues to be a primary focus. Our cash and liquidity positions
are important components of our financing of both current operations and our targeted growth.