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 that:
- 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 / condemnation fee!
- 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
later.)
- 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 the meeting.
(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 newsletter!)
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 you business.
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 channels.
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. |
