It's tough being
the guy who has to tell an entrepreneur that his business isn't
sustainable (or at least not as profitable as they thought it would
be.) I mean, if you can make a product that retails for $20, you
should be sitting pretty if you can manufacture it for 10 bucks, right?
Wrong. Way wrong.
Getting a product into retail is tough. Nothing puts a self-assured
executive in his place faster than a 20 minute meeting with a major
retailer's merchandising manager. In those 20 minutes you'll learn
- your product has to be shipped to their distribution center
(shipping and import duty included) at a per unit price of less than $7
(or perhaps $8) if it's going to be put on the shelf for $20.
- you carry the risk of returns,
they'll deduct the cost of returns (and shipping) from future payments
without asking you about it. Or you can choose to have them destroy the
returned merchandise, in which case you will pay the destruction /
- they will provide 2%-10 payment terms (meaning they'll cut the
check with the 2% discount in 10 days, and mail it to you 45 days
- you have to PAY THEM for online
placement and co-op advertising in their store circulars.
- You'll have to provide end-cap displays at a cost to you of
about $50-100 per store.
- order management - be prepared to invest in
IT technology / people. Most leading mass merchants have automated
their order-entry process.
- The retailer will start you off in a trial at a select group of
stores. This means that the initial order (which may be the only order)
will probably not be big enough to cover the cost of your airfare to
(Of course, all of this comes about only after having secured
a meeting with the buyer in the first place. To get a merchandiser from
a major retailer interested in your new product is a topic for another
After the potential vendor digests all of this, he comes
to the conclusion that he needs to have a manufactured goods cost of at
most $5 per unit to be able to make a profitable business from the
product. If you can't get there, even with some reasonable volumes, you
don't have a retail product.
So what do you do with your nifty product now? There
are several solutions, provided you have the time and money to follow
through on one or more of them.
Sell it direct online. This sounds like a great idea, you can
sell HUNDREDS of units of your product this way. Nice if you want to
build a hobby, not so nice if you want to build a large business
quickly. Do this if you have the time and patience and are willing to
establish a supply chain infrastructure. We do help clients with direct
selling including establishing the back-end; beware that selling direct
can create channel conflict problems later if you try to expand your
Reduce the cost. It can be done; it
takes a serious "Design for Manufacturing" approach, and
typically requires a good deal of investment and gnashing of teeth. MPE
offers interim execs who lead re-design efforts for manufactured
products on an efficient "as-needed" basis. A well-managed
DFM effort can reduce the variable cost per unit by 30-40%.
Find specialty distributors who can sell it at a higher price.
We've done this with products that are too expensive for retail and fit
well in a less cost-sensitive "high-end" environment. This
takes a good deal of time and specialty knowledge and experience.
Make it a licensed product. (Think NASCAR or other popular
Sports leagues.) This works. Licensing takes some time and money as
well. It involves details ranging from negotiating the agreements to
the type of insurance carried to meeting "Social compliance"
audits. Licensed products sell at much higher prices through niche
sales channels. This may be the solution to making a worthwhile profit
on a product that can't be cost reduced enough for generic mass retail
MPE Consultants help companies work through the best sales
channels for their products. Often we have to uncover a lot of
disappointing information before we can design a successful sales
channel strategy. Our consultants are mature and experienced enough to
guide an existing management team through a solution process that
brings profitability to the bleakest of scenarios. Give us a call if we
can help your business.