MISTAKE #54: You don’t do your homework when setting your product cost
One of the first clients I had after leaving my job at a big CPG company was a Texas-based importer of home and bath goods.
They had a couple of great product designers providing what I considered very sellable collections. The products were high quality and very trend-right.
Over several months, I prepared line review decks telling the story of how the products were intelligently designed with shopper trends and habits in mind.
I presented to eight different buyers, attempted to find common ground, do value-added follow-ups and wait for a request to send samples for the retailers to have available while working on their next modular design.
Unfortunately, those calls never came.
I then got one more meeting with a warehouse club buyer which revealed why I had struck out.
STICKER SHOCK
As I was presenting the cost sheet, the buyer stopped me to ask for clarification.:
“This must be a typo…these numbers are suggested retails, not my cost, right?”
WRONG. It turned out the costs my client had given me were ridiculously out of line with the competition…and the client was completely unaware of it.
Now, this was not a new company. They had been importing for decades. Which meant they had a lot of experience, but they also had developed some crippling bad habits.
After I took this comment back to a confused and surprised client, we spent some time doing research to figure out if the buyer was bluffing or if the client had a bigger issue.
During this process, we discovered three critical issues:
The client had long ago established a relationship with a mainland-based middleman that connected them with local factories. It turned out this middleman was adding a 30%+ markup to all items for their services. This was far more than other middlemen charged.
This middleman had also gotten smart (or lazy or greedy) and realized they actually made even more margin by putting less effort into aggressively bidding down factories for my client. They had established their own group of ‘preferred’ factories that gave inflated bids (and probably an additional kickback to the middleman).
The client compounded this cost disadvantage by expecting to maintain the same profit margin on items sold at club stores or mass discounters as they were getting from specialty stores.
The sum of these three issues was self-evident.
higher product cost + higher middleman fee + higher client profit margin
= 2x cost versus competition
COULD YOU BE MAKING A SIMILAR MISTAKE?
While the particular situation described above most likely applies to few readers*, the lesson still should:
Make sure you put enough attention into understanding and controlling your production costs so you’re sure to be as competitive as possible.
This means asking the following questions:
How many contract manufacturers did you contact before settling on one?
Did you negotiate or just accept their offer?
Did you ask what you could do to take any extra costs out of the system?
Have you studied your competition to identify any ways to copy or improve upon their approach to controlling cost?
Now might be a great time to do a little more homework on your cost. Getting it right could be the tipping point to gaining the distribution you’re hungry for while getting it wrong will make the rest of your sales pitch irrelevant.
We don’t specialize in the production side of things but would be happy to connect you with people in our network that are experts. Let us know what exactly you'd be looking for and we’d be happy to make some connections.
*If you are a new company with a completely new product, I understand how volume discounts for higher production quantities can be a huge variable in this equation. Both the rewards and risks are significant. In this case, I’d suggest being transparent with the buyer and giving them an incentive to help you make the right decision. Some retailers will commit to driving higher sales volume if it gets their costs significantly lower.