Had Ed Wiegman and his colleagues not fixed the profitability problems plaguing American Marketing Services Inc. a couple of years ago, chances are the company would still be among the INC. 500 today. Nice job, Ed -- but now you're off the list.

American Marketing uses the telephone to sell advertising and promotional premiums to small, usually local businesses -- the kinds of companies, as Wiegman puts it, that don't have purchasing agents and where you don't have to go through six secretaries to get to the owner. The customers buy such items as key chains, ball-point pens, plastic mugs, and glow-in-the-dark Frisbees that say, "Give us a whirl -- Sam's Insurance Agency."

In 1982, its fifth year in business, American Marketing sold $10.7 million worth of the giveaways. Its sales growth for the previous five years made the company #383 among the 1983 INC. 500. Last year, sales plunged to $6.8 million, a decline that disqualified American Marketing from this year's list (see "How the INC. 500 Were Selected," page 136). But in 1982, the company had earned only $198,000, or less than 2% of revenues. In 1983, pretax profits jumped to $575,000, or 8.5%. So was the company in better shape, or worse? Better, Wiegman argues.

The problems went back a couple of years. Sharon Maybee and Ken Fairthorne started the business in 1978, when they moved to Fort Lauderdale, Fla. They had spotted their market (tiny businesses with no advertising or marketing expertise) and their sales technique (telemarketing) while working in Las Vegas, and their original blueprint is still in use. But Fairthorne now spends much of his time racing cars, and Maybee spends much of her's with Fairthorne. Wiegman, whose official title is vice-president for administration -- but who might better be called chief operating officer -- saw the profitability problem land right in his lap.

Mostly it was tied to telephone costs. Back in 1980, an undivested Ma Bell imposed healthy rate hikes on users of national WATS lines, which are American Marketing's largest expense after sales commissions and salaries. Yet the company couldn't easily cut back: Its growth hinged on more phone lines, not fewer. So it began to expand geographically. The first move was to Atlanta, which Wiegman says has an exceptionally large local dialing area; a roomful of telemarketers there could service the entire region without incurring toll charges or leasing WATS lines. Subsequent expansion took the company to New Orleans, Las Vegas, and New York City.

Sales, as expected, took off. Trouble was, it didn't take long for a good telemarketing crew to saturate the Atlanta market -- and what were they to do then? American Marketing salespeople work strictly on commission, with the best making $100,000 or more a year. So they needed a lot of fresh numbers to dial.

To keep its sales force happy and busy, the company was soon installing WATS lines in Atlanta and its other telemarketing outposts. Sales went up again. But so did costs, and at an alarming rate. In 1981, American Marketing's telephone bill consumed 25% of every revenue dollar. And other costs -- travel expenses, shipping, and so on -- were rising as well, reflecting the difficulty of managing salespeople working far from Fort Lauderdale. Before the rate hike, profits were 7% of revenue. After the expansion, they had fallen to less than 2%.

Wiegman spent six months looking at every cost he could identify, every way he could imagine either to cut an expense or to produce more revenue from the same expense. "Eventually," he says, "I decided that all the other costs -- salaries, product costs -- were right in line. It was just the telephone that was killing us."

In one respect, shrinking the company's telephone bills was no more than a technical challenge. A computerized PBX in the Fort Lauderdale office could manage outgoing calls to extract maximum use from minimum expense.

Beyond the technical problem, however, cost reduction was a challenge to the company's managerial sophistication: It meant abandoning the geographical expansion undertaken just two years earlier, and it meant incurring an inevitable decline (36%) in revenues when salespeople in outlying centers were terminated.

"It obviously hurt all of our egos to have tried something and failed," Wiegman says.

On the other hand, look what admitting failure got him. Revenues will probably reach $7.5 million this year, up from last year's $6.8 million, and there is plentry of capacity for future growth in the new system. Moreover, last year's profitability figure of 8.5% is headed this year toward Wiegman's 10% goal.

"I get no ego trip from revenue growth," says Wiegman. "It's the bottom line I'm proud of."

Even if he doesn't get another plaque from INC.