In last week's blog, DIY – Keys to Venturing Your Invention – Part I, we considered the 100,000 foot view of venturing your product. If you haven't already read that post, I recommend you read it first and then return to this post, Part II.
In this post, we will get into the ‘nuts and bolts' of venturing your product by looking at two crucial elements of any successful product based venture:
- Your business must have a solid profit margin to succeed
- You must be willing to manufacture overseas and to assemble an effective team
Don't forget to grab your FREE – Manufacturing Resource – Cheat Sheet – just click the red button.
Your Business Must Have a Solid Profit Margin
No one would disagree with the above statement, but what comprises a solid profit margin? The ‘devil is in the details.'
The key element that will make or break your profit margin is your mark up from manufacture cost to retail sales price.
Your mark up should be 5X or your business will fail!
What? That seems really excessive. Why must you have so much mark up?
Let me illustrate with my thin wallet product that I manufactured and sold on my own for 8 years.
- Wallet manufacture cost = $5.00 (landed cost, including packaging, ready for retail sales)
- Suggested retail price = $25.00
- Wholesale price = $12.50 (roughly half of retail price)
The retailer will generally buy from you at keystone pricing (50% or retail price) approximately. This means your gross revenue from selling a wallet to them is $12.50. Let's do a quick estimate of your gross profit margin:
- Wholesale price = $12.50
- Your cost to purchase the wallet = $5.00
- Gross profit margin = $7.50
But wait, there's more.
Guess what has to be taken out of your gross profit ($7.50)? All of your overhead and labor costs. This could cover warehousing costs, pay to yourself or employees, general and administrative expenses (G & A), taxes, insurance, etc.. After all of that is factored in, you might have $2.50 net profit per wallet for your business. It could be even less.
Now you see why a 5X mark up is really important. Run the same numbers with a 4X mark up and your next profit margin is very slim. If inflation increases your costs 10%, that could be a real challenge.
Why Do I Have to Manufacture Overseas? Why Not Here in the US?
Here is the simple answer to that question. You must maintain a solid profit margin or your business will fail (see above).
Costs to manufacture almost all consumer goods in the US are considerably higher, due to higher labor costs, than to manufacture overseas, principally in China (as I did). Many products require molds. A mold in the US may cost $25,000 whereas the same mold in China could cost $5,000.
This is why most athletic shoes are manufactured in Vietnam, clothing is frequently manufactured in Bangladesh, and many other consumer goods, especially small leather goods (like wallets) are manufactured in China.
I investigated manufacturing my wallets in the US – and would preferred that route if the economics could have worked. I discovered there were 3 factories that still made wallets in the US and they were principally exotic leather wallets (much higher retail price). The best price I could get in the US to manufacture my wallets was $12. Using the 5 X mark up, my retail price would have been about $60.
There is no way consumers would pay $60 for a wallet brand that wasn't called Gucci or Hermes or other luxury brand.
Manufacturing overseas means you will have a significant logistics and supply chain. For me, it took about 4 months to turn a new wallet order from initial order to delivery to Hong Kong, then Port of Long Beach and ultimately Dallas (where I live).
You will need to have a good team to assist you that consists of 3 members:
- Your manufacturer
- Your US Customs broker
- Your freight forwarder
In my case, the manufacturer in China “delivered” the shipment to Hong Kong – FOB (free onboard). In Hong Kong. Then, my US Customs broker would work closely with the manufacturer and my freight forwarder to assemble a document called the ISF before US Customs would allow my freight to be loaded onto the ship. From there, my freight forwarder handled the logistics of ocean freight, arrival in Long Beach, worked with US Customs broker again for release of the shipment, then they loaded it onto a truck to be shipped to its final destination in Dallas, where I would then pick it up and bring it to my warehouse.
Sound complicated? It is not really complicated, but it is a process that has to be followed carefully for each new order of product.
Want to know more? Make sure to grab the FREE – Manufacturing Resource – Cheat Sheet – the red button below.