Tom and I say this a lot: “Hope is not a plan.” There are a lot of concerns to address and factors to consider before selling your product. As a business owner, it is your responsibility to make sure that money and time spent from product research, market study, product development, licensing, prototyping, manufacturing and marketing is worth every penny. In the long run, all mistakes committed in the process of launching and marketing your product will add up and can greatly impact your success, that is why developing a solid game plan is of utmost importance for all stages of your product launch journey. We can help you there through our resident experts, who have a wealth of product development, manufacturing, intellectual property, marketing and advertising knowledge to share with you.
Listen to the podcast here:
We’ve got another great Office Hours for you. This one is with Brenda Crimi. She is our Amazon seller expert in all things on how to sell on Amazon, how to learn, how to know if your products are right.
We are on Plan It. We like to say that hope is not a plan. This is a critical point to do early. In planning, we’re going to talk about quite a few things. Planning as to the life cycle of the product like where are we going to start selling it, where is it going to sell next, where is it going to sell after that, watching what happens, when it’s successful, where do we go with it. Also, keeping in mind that we have a long-term plan of where we want to go from A to Z. If that’s the case, we might want to go from not selling anything to all the way to mass market retail and a huge brand that gets acquired so keeping those things in mind. Those are part of our planning cycle.
The reason why we do this as our step three and early on is because this is one of those things that informs how we make something. Sometimes, we have to make things in phases. Maybe we make it a beta version. We make a beta version and we plan to add features to it. That also plans our cost structure, like how much budget do we need for each of these things, maybe how much capital we need to raise. We want to go on all of those things. It’s going to have a budget impact, a cost impact, an impact on our overall success. We build up success in one channel and then we move on to another. In this case, we were talking to channels. Channels might be mass market retail, might be club stores, might be HSN and QVC or a channel might be eCommerce, Shopify, Amazon, Jet.com, any one of those places. There are advantages and disadvantages to both ways. One other of the sides I’m going to talk about is licensing. Just straight going that that’s your plan is to get it licensed as soon as possible so that you never have to make much. That’s another goal in the process and there might be a different plan to make that happen.
We essentially have to start with, “Where do you plan to sell or pitch your product first? What is the first place you plan to go to? What is the last place you plan to go to? Where is it that you want to no longer be selling the product anymore? You want somebody to buy you out and take it over. For some of you, you want to go all the way through eCommerce, get bought out before you go to mass market retail, had to totally find plan. You need to have that factored in. Some of you want to build up enough sales volume and enough track record so that you can get yourself licensed and sold to a bigger brand. Maybe you want P&G, Procter & Gamble, to buy you out or something like that.
Thinking about that budget, we have to think about where it is because it has different inventory implications. It has different time cycle implications. I know that sounds like too much to be thinking about before you’ve even made the product, but it’s important to make sure that we plan our budget accordingly so that we don’t use too much of our capital too soon, especially if we have a bigger plan here or if we need a larger inventory, or we need to last longer on that capital and that happens very frequently when we go to mass market retail. Getting that right from the very get-go is the most important thing. You want to sit down and think about the trajectory of your product and your brand and where you want to go with that.
Also, be thinking about the cost of marketing and lead generation. If you’re going into mass market retail, if you’re going into Target, it’s Target’s job to draw in customers. It’s not as much your job. You do have to support that, you have to brand build, you do have to do that in general, build yourself a better brand, but it’s not as critical as if you’re trying to do it in your own Shopify shop where you have to draw in customers yourself or if you’re going in a direct response marketing model of selling your product over an info page on the internet. An HSN model is, for the most part, they’re drawing the audience in for you. Your job is to have a great product to pitch and demo. Your cost factor is different. Your budget factor is different in each one of those cases.
I’m not going to make judgement on which one’s a better one. I can tell you from experience, the Amazon first model is the least capital-intensive because Amazon draws a model for you. They already have their customer base. They are very strong in that. While they want you to draw people in and you do need to have some marketing costs to be able to do that, Amazon is doing 90% of the work for you. It makes it very easy to gain traction and success. Get yourself listed, get yourself ranking, make sure you have a good product market fit and building somewhat that is relatively quick revenue because you’re typically paid within 30 days. Whereas, if you go into mass market retail and you are on the shelf at Target, you might have to last 120 to 180 days before you would get paid back.
From the time you shelled out money and then had it shipped from Asia all the way to 180 days later, it might be before you get a check for the product. You have an extreme lag time, a very long amount of time that you have to last and be able to fund inventory replenishment. We think about that when we plan because it means that we have to have a bigger budget for an inventory by than just the initial amount, just the minimum order. We need to think about our overall budget and what we have working for us in order to make sure that we have the right plan in place and we’re starting in a place that is actually feasible with the capital we have on hand.
There are lots of very important costs in the overall scope of things, but for me, it’s the inventory carrying costs, like how much inventory am I going to have to buy over the course of time before I’m going to get paid by whatever retail process it is, so how much time before it’s in my account and paid to me? We have a formula for that. It’s tooling, cost of goods, plus quality control, packaging, all of those things that we talked about. Quality control is added onto that because you will have returns and other things. There’s a little bit other factor here that we consider that has to do with the retail process of it and of how you’re selling it. We do that plus, and this is in parentheses, landing of the first run. How much does it cost to get it to my door and in my warehouse and ready to sell or in Amazon’s warehouse and ready to sell times nine months lead time if you’re going to mass market retail? Three months lead time, except for the holiday time, that’s the only time you might want to have a little bit more, one extra month, but typically, three months lead time is what we allow. That’s assuming that you have a 30 to 60-day manufacturing lead time. Sometimes, it takes you longer to make a product in your first run; but subsequent runs are only 30 days or something like that. You could shorten that cycle up. If it’s 30 days and you are air shipping, you can always shorten that time up a little bit.
Essentially, what you would want to look at is basically three turns of your product, three orders. In a mass market retail, you want to look at nine orders of that before you ever get money in your pocket. If you have enough cashflow for all of that, then you’ve got a fairly good plan and good budget. That’s the way we do it. It gives us the most buffer, gives us the most ability to be flexible for things that go wrong, and there are lots of things that go wrong. Runs take longer, shipments get rerouted, ports have strikes. All of these things can happen to you and affect your cashflow in such a negative way that because you don’t have a lot of runway, because you don’t have as much deep pockets as bigger brands, you can get really hurt quickly and you can find yourself out of business fast. This is the best way for us to preserve the capital.
[Tweet “Licensing product is extremely difficult. It’s not an easy thing to do without some amount of market proof or sales proof.”]
I’m going to talk about our different steps. We’ve already talked Prove It, Price It and Plan It. That’s what we’re here. I’m going to talk about the percentages that I assigned to it. If I have $100,000 budget, what do I assign it to? I want to talk about licensing your product. I’ve stated that licensing product is extremely difficult. It’s not an easy thing to do without some amount of market proof or sales proof. When we look at that, we need to make sure that we are probably selling something that gives us some indication of market proof. We used an example before of someone who might make an A product, a product that they’re just private labeling. They’re just taking a product that exists on the market and they’re putting their logo on it and/or adding a couple of bundled items with it. That, in and of itself, is some success model and then you make an ad, your prototype, and you might have renderings and this might be something that you go and you say, “Manufacturer or big brand, I’ve got this product idea. This is already really selling well over here. I know that you have make products in this category. Here’s what I’ve got to offer.” It’s still a hard row because they’re like, “We invented this product category. Who are you coming into this?” We call it not-invented here syndrome so you have a lot of that.
We have to evaluate the potential for licensing, as to how long it’s going to take and would we be better making that and selling it as proof and making revenue from it in an Amazon model or a Shopify model and using that along the way as the time it takes for us to convince someone to license our product. Because the more sales we have, the more members we have, the more fans we have, all of those things make it very easy to convert into a licensing model and let someone bigger take it over because it already is successful. Starting from scratch, you just need to be able to say in a budgetary standpoint and a planning standpoint, expect to take a year to license a product that you have already good indicators, good proof on. If you can’t last that long, then maybe licensing is not the right path for you.
Really be thinking about that and budget. It’s a hard road to hole right now. The licensing model is not as easy as it used to be because it’s way too simple for our brands to go and do what you’re doing already and source things and just modify them and they have much deeper pockets to be able to do that. It has to be exceptional and/or already have traction for them to want to license it from you. Just be thinking about that and make sure that you have a plan to last a year and/or it’s a side job. There’s another option of paying someone to go out there and license it for you. However, we see that not as successful. Even counting that percentage or cost, we see it not as successful nowadays, because they don’t have the same passion that you do for your product idea and for the new invention that you’ve created.
We’ve talked a lot about the budgetary plan, but we also want to talk about forecasting. Forecasting is looking at what’s going to happen and how much am I going to have to buy scaling up. You’re also looking at the seasonal effect or promotional effects. If you’re going to do a direct response marketing campaign on month three of your product launch, then you have an idea that I’ve got to have a little boost in inventory here. If you’re going to do an Amazon lightning deal, you’re going to run out of inventory and you need replenishment right away. Looking at that forecasting and plan for those spikes and then inevitable dips. You do have inevitable dips that will happen at various times of year.
Retail as a whole, consumer retail, is very seasonal. Always heavy in the last fourth quarter of the year gearing up towards the holidays. It’s always like that. There’s a big drop off in January except for certain categories. We see a big boost in sports related items in January. We see a big boost and gift card usage so anything that might be discounted and on sale or something that’s very personal that you wish you bought. Those things tend to go in January. TV stands and televisions go big in January as you gear up for Super Bowl. There’s always a seasonal cycle that happens for every product category. This is one thing that I want you to be really careful of. Those of you who are out there studying the Amazon sales, doing jungle scout or any of those other Unicorn Smasher, any one of those other tools out there, when you’re looking at those tools, be sure that you’re not looking at them at the wrong time. Be sure that you weren’t looking at them. Post a promotion or post-holiday or during the holiday. If you were looking at them at Black Friday and use those numbers as your benchmark and you’re forecasting and your plan, your numbers are going to be way overstated and you will never achieve those goals.
[Tweet “Forecasting is looking at what’s going to happen and how much am you’re going to have to buy scaling up.”]
You want to look at them at organic times of year. That’s what I like to do is like say, if it were selling in the middle of March and if we’re selling at this rate and that’s still viable business for me, then that’s perfect, or the middle of summer for a winter product. Something that might be outdoor related for winter sports or something. You want to look at it in the off season and say at its minimum turn level, is this still viable for me? Is this worth it and/or am I happy with just gearing up to fourth quarter sales and doing it with big spikes at those times and just not worrying about my inventory levels and keeping it really low for the rest of the year. It depends on how you want to run your business. It depends on how fast you want to grow and are you building a bigger brand. Really be thinking about those. Those of you who are doing multiple products, here’s another thing to really look at as the overlay of those forecast in making ones that don’t spike all at the same time, but ones that have different seasons involved in them. These are many factors that we look at when we are looking at our plan.
The most important one is for us to preserve capitals. Our percentage plan with reasonable timing expectations. A reasonable Prove It timeframe, and this assumes that you might go through multiple iterations of proving. You might try something, it doesn’t work, you try it again. I say you need to have five to 10% of your overall budget. 5% if you’re funding it yourself and 10% if you have capital investment already. The reason for that is because if you have capital investment, you have a bigger plan so you need a little bit more market proof. We’re looking at it in context as to that. I also think if you spend less than three months in that cycle of proving it, you’re likely not get great information. You really want to be trying something out and making sure it’s working, making sure the market wants to spend some time in that area. Spend 90 days to make sure that you’re right about your idea that the dogs really will eat the dog food.
You also don’t need to spend any money on pricing it. This isn’t something you should hire a consultant for. It shouldn’t cost you anything. However, if you do want to hire someone to do some financial analysis for you, I would just lump it into your budget for Prove It; but we don’t allocate any budgetary amount for Price It. It’s just like one of those things. We do a study in a week and we make a decision about it and we analyze the numbers and we set benchmarks. That’s an internal thing. This planning cycle though, I would allocate another 5%. The reason we do that is because we want to really think about. We might want to get an outside opinion. We might want to pay for some more better forecasting services. We might want to pay to make sure that we have premium plans on some of the tools instead of free plans.
Prototyping it, you want to reserve quite a lot of it for the prototyping at which we haven’t talked about. That’s coming up next. We want to reserve 30% if we’re funding it ourselves and 60% if we’ve got outside funding because if you’ve got outside capital, it’s likely that it has much higher innovative features and things like that that we will need a higher prototyping budget on. This still isn’t a tremendous amount of money in prototyping. If you think about this, this is research and development. Overall, between the two stages, you’re spending 40% on all your research and development. That’s very small if you consider big brands that do really well and have the highest profitability margins like Apple and other places like that.
[Tweet “You need to keep that cost low as possible in the early days until you know you have a product that’s worth it.”]
The next area is Protect It. Protect It as patenting and trademarks and all of those things. Initially, if you spend more than 10% on your patent costs and all your legal fees and all of those, then your way overspending in these early days. You need to keep that cost low as possible in the early days until you know you have a product that’s worth it. After then like one year, be spending additional money; but you know you have a market, you know you have a product that’s selling. If though you have investors or capital, you might want to go up to 20% because they may insist, since they want international distribution, that you file your international patents which can be costly.
Then we go to Produce It. 50% of your budget or a very large new capital funding. This is the time to get more capital in. 50% of your budget needs to be in the production phase. The reason why you need to do that is because you need to make sure that you’ve got those inventory-carrying costs we talked about be able to last three months or nine months. In addition to all of that, consider that your launch budget. If that’s $100,000, you’ve broken it all out, 5%, 5%, 30%, 10%, 50%. That adds up to 100%. You need one more. You need 10% additional minimum on advertising and promotion every single month. Whatever your sales are, you need to allocate at least 10% of it. That is the smallest I would go. I’d say probably 20% is more likely in today’s world that you need to spend more money, but you need to in the early days to make sure it’s converting. Expect 10% of your sales to be going constantly back into marketing and brand building and advertising and all of those things to get your brand known. It’s the best way to get your brand acquired at the end of the day. I hope that helps you think about the plan and the structure of everything so that you can make it into a plan that is viable and gets you to your end goal of an acquirable brand.