MISTAKE #56: Your product cost is too low

It is far more common for companies to present the buyer with a cost that is too high rather than too low.  However, there are times when products are initially presented to buyers at a cost that is so low, and it is bad news for both the retailer and the vendor. 

This is separate from the fact that production or raw material costs go up over time and price increases eventually need to be passed through.

This is particularly troublesome when no one realizes the cost is too low and it gets further complicated by the fact that the unusually low pricing can increase the retailer’s interest in carrying the item. 

Consider whether you’re at risk of making any of the following mistakes that could find you in this position:

You don’t have firm production costs:  Make sure you’ve got manufacturing commitments to maintain production costs for 12 months and you’ve accounted for possible raw material fluctuations.

You can’t maintain cost as volume increases:  Increased production volume doesn’t always equate to lower per-unit cost.  In reality, costs related to switching facilities or modifying the manufacturing process can cause a temporary increase in per-unit cost as you transition from low-volume to high-volume production.

You haven’t incorporated all logistics costs:  Companies frequently estimate warehousing and shipping costs only to find out their assumptions were way off (such as considering which of the retailer's distribution centers you will need to deliver to).  Make sure you’ve got firm estimates, not guesstimates.

You don’t accrue sufficient support funds:  It takes money to make money and this includes investing in sales or marketing support.  In the race to launch a product, inexperience frequently surfaces in the tiny amount of money allotted to drive awareness and interest in your new product.  Underfunding leads to lower sales which further reduces those funds. 

You have cut too many corners:  While the term has morphed into other meanings of devastating dominance, Walmartizing was originally coined in reference to vendors that striped out every possible expense in a product or design products to an absurdly low cost that Walmart specified.  Equity and reputation and sometimes safety (you didn't want to own a Walmartized lawnmower) were sacrificed in pursuit of lower and lower costs.  While controlling costs is important, excessive cost constraints might put you in a position where you've paid too high of a price to be the lowest bidder. 

Few companies get the chance to go back to a retailer and fix an error in their cost.  Others eventually go bankrupt when they realize every unit they sell just loses them more money.

COUNT YOUR COSTS

Controlling costs is very admirable and generally very beneficial.  Underestimating costs or underfunding key launch components is dangerous.  Not accounting for all the necessary costs to grow your business is deadly. 

Make sure you’re getting into the details, working closely with manufacturing, and using the right assumptions as you determine what is needed to cover your costs and fund your business growth.