As the Client Services Manager at a technology based business incubator I have watched a number of product based startup companies launch with high ambitions only to struggle along for years because they can’t reach a sales volume that is sustainable. I have observed 3 major struggles that most product based startups encounter, and they all revolve around “VOLUME.”
- Shipping Costs – I see many business owners attempt to sell their product directly to the consumer from their website. They might do this because they think they can earn higher margins by cutting out the middle man of the retail store, or distributor. The problem is now you have to ship each product individually to each customer. If you sold to distributors or retail stores, you would be able to ship multiple units per shipment and drastically cut shipping costs. Until you reach a certain volume you will get terrible deals on shipping that will probably eat away your entire profit margin.
- Raw Material Costs – You are looking at a similar problem with raw material costs. There are major efficiencies to be gained when you can buy raw materials in bulk. But until you reach a certain sales volume you probably don’t have the cash flow to support purchasing excess inventory.
- Outsourced vs In House Production – Lastly, you will probably feel the struggle between outsourcing production or hiring to produce the product in house. Initially, you will probably have to outsource production because you won’t have the sales to support purchasing the building, equipment, and hiring the employees to build the product. Eventually, it may actually become more cost effective to do some or all of the production in-house. This can cause problems as your volume fluctuates. You might have a busy month, hire 3 people to fulfill orders, and have to let them go the next month because sales dropped. If/when this becomes a pattern you are going to have a hard time hiring and retaining good employees. Your only alternative is to outsource which may reduce quality and ultimately cost you more.
Are there any other product companies out there that have overcome these challenges without millions of dollars in investment? I would love to hear your thoughts on why it is so difficult to launch a successful product company, and understand what you have done to overcome the challenges.