Invent It, Sell It, Bank It!: Make Your Million-Dollar Idea Into a Reality (13 page)

You need to be able to communicate the kernel of your idea quickly. If you find yourself making long-winded presentations, people won’t understand; or if you have to explain things more than once, or if people are staring at you confused and bewildered, your product probably isn’t a hero.

4. You want to make a neutral presentation of the facts. You’re not trying to convince people to like your invention;
you want them to come to the conclusion that it’s terrific on their own. You don’t want to pressure people to give you the answer they think you want to hear. When you’re speaking to people about your invention, just outline what the product is and what it does, and observe your consumers’ reactions. Watch them handle your product. Read their eyes, if you can. Does it make them smile? Do their brows furrow? Do they press it into their friends’ hands so they can try it, too? All of this information is useful.

5. The way you ask questions matters. Sometimes when I would ask people whether they liked the organizer or thought it was cool, the answer would be an emphatic yes, but when I pressed forward and asked whether they would
buy
the organizer, if they said no it was usually because they didn’t like having anything on their dresser or countertop. So sometimes if people say yes it’s because they like something, so it’s smart to ask another question that digs deeper, such as whether they would purchase it, and if not, why? It helps you gain a better and broader perspective of your product and consumer.

Now, what people say and how people behave don’t always necessarily line up. Your market research can’t guarantee sales; all it can do is give you a fairly good idea of how consumers feel in general and at first flush about your product. You can use your market research to figure out your best strategy and determine whether people will want to buy your product, but you can’t count on the results 100 percent.

Often, your product’s performance in the market will take
you completely by surprise. When I did my own research, overwhelmingly the majority of women I approached who said they liked jewelry also said they would buy the organizer. Yet in the areas where people most said they’d buy it is where the organizer sold the least, while where consumers said they’d least buy it is where it sold in retailers the most. This is an excellent time to be testing, analyzing, and questioning your product and your sales strategy from every angle so that you can address any issues well before you start to pitch retailers, or place an order with your manufacturer. The sooner you figure out the flaws or weaknesses and fix them, the better.

At the end of your market research, you should be able to answer the following:

1. The percentage of people who liked my product: _____

The percentage who did not like it: _____

The percentage who were neutral: _____

2. The percentage of people who felt my product was something they wanted: _____

The percentage of people who felt it was something they needed:_____

3. The percentage of people who said they would buy it:_____

4. Overall, consumers said they would pay between _____ and _____ for the product.

5. Where they said they would expect to find it:_____

Quantifying your feedback forces you to objectively weigh the likelihood of your product’s success on the market.

PRICING YOUR PRODUCT

Pricing is tricky. In fact, big companies often hire huge consulting firms to research the ideal prices for their products. Major brands raise and lower their product prices all the time to see how the changes affect their market share. The results can be eye-opening. Often, you’d think the cheapest laundry detergent would sell the best, but when you mix in the effects of marketing campaigns and brand loyalty, that’s not always the case. Prices fluctuate regionally, too. On the East Coast, the highest priced detergent may be the same one that is the lowest priced on the West Coast.

A word of caution: Often inventors go overboard, trying to add as many bells and whistles to their product as possible, and then find themselves priced out of the market because all of those whistles made it too expensive to produce.

I have a friend with a vineyard who actually raised his prices so his wines would be some of the most expensive on the market, and they then started selling better. The competition at the lower end of the market was just too fierce to break in. So, pricing strategies can be crazy and really interesting. When your business gets huge, you’ll have to learn about pricing strategies in detail, or you’ll hear about it from your wholesale customers when they say your sales aren’t pacing with where they need to be. As a new small business, however, you’ll start with the basics.

To me, the pricing basics break down to a simple three-pronged approach that relates to three key bits of information:

Cost to manufacture and distribute

Competition

Gut feeling

1. Consider Your Cost

First, you have to know your manufacturing, labor, and operating costs: how much it costs to make and distribute your item. This number is not limited to just what you pay a factory for each part; you need to add in the cost of packaging and some overhead for the trucking (if produced locally), shipping (if produced overseas), storage, and systems involved to account for it or the EDI (electronic data interchange) that must be established if you’re going to do business with big retailers. Make sure to also include any sales or rep commissions, if you have to pay them. Don’t forget the instruction sheets you have to include with the product (they typically only cost a few cents, but that’s still a cost). What is your overhead? And how much do you plan to spend on marketing? (Hint: not much. See
Chapter 11
.) Some costs will be fixed, like rent, which doesn’t change from month to month, and some costs will be variable, like your monthly utilities. Other costs will fluctuate based on your production levels at any one time.

Your cost calculation should look like this:

Materials + labor + overhead + transportation = total product cost.

After you total your costs, add on an acceptable profit margin, which establishes how much profit you’re going to earn. For example, if your product’s total costs were $6, and you added on a profit margin of $4, which would translate to a 40 percent
margin, you could price your product at a $10 wholesale cost.

($6) Total product cost + ($4) desired profit margin = $10 wholesale cost.

Then you need to know how much your wholesale customers mark up their items so you know how much profit
they
want to make when they sell your invention. Each store works on a different margin and even within a store, different product categories have different required margins. Typically, items with high return rates like clothing have higher margin needs than do consumables like soap and paper towels. Many stores set their prices by “keystoning” the wholesale cost, meaning they double it. So if you sell to them at $10, they will sell it to the consumer for $20, which is a 50 percent margin. Other stores might sell the same product for $12.99, which is a 23 percent margin, and others may sell it for as high as $32.99, for a 70 percent margin.

You need to determine which stores you’re going to sell to in order to know what margin to use. For this example, let’s say you are going to sell to local boutiques that typically use 50 percent as their margin. That would mean that if you suggest the stores retail it at $19.99, you need to be able to sell it to them for $10. In our example, at a $6 cost and a $4 margin, this pricing allows you a comfortable profit.

Note: In this example there are no freight costs. However, there may be some fine-tuning of your wholesale costs to your retailer to allow them to account for their freight in (what they pay to truck your product to their locations) and any extra charges they incur.

Wholesale cost to store + freight in/ (1 - store margin) = retail price.

Using the example, this becomes: $10 + 0 /.50 = $19.99.

Do your research and familiarize yourself with each retail customer you want to sell to. Understand all you can about them and how they operate. The more knowledgeable you are, the more appealing you become. Buyers like to work with people who know what they are doing.

2. Consider Your Competition

You need to scout out your competition. Competition should be viewed as anything else in the marketplace that solves the same problem as your product. If you don’t have a direct competitor, examine the prices of other products that fall into your category. You’re going to walk a fine line. What do their products retail at in your target stores? If yours is priced much higher or much lower than theirs, you could be at a disadvantage unless you can offer a good reason for the price difference. What features or benefits does yours have or not have that theirs do? If they are priced less than your product is calculating out to be, can your packaging or marketing overcome the difference? If your price is significantly less than theirs, maybe you can raise your price.

A lot of new businesses will try to sell for cheaper than the competitor, believing that new customers will automatically gravitate toward a new brand if it is less expensive. That’s not necessarily true, because perception is everything. Also, brand loyalty is a powerful thing. On the other hand, if your product is priced a lot higher than the competition’s, you may have to lower your margin expectations or rethink how or where you make your product to trim costs. You have to anticipate what will happen to your product’s sales if you place it at its current price right next to your competition at its higher or lower price. That’s where your gut comes in.

3. Pay Attention to Your Gut

What does your gut tell you? I don’t employ those big consulting firms to study my pricing and give me price-range impact studies and elasticity reports. It helps that I have quite a few years selling products in a lot of categories, but I basically trust my gut as a consumer. It comes down to a basic feeling: what is this worth to the average consumer, and how badly do they need it? I imagine my product sitting on the shelf or shown on the TV screen with a range of prices under it. When I see one that makes me want to jump off my seat and pick up a phone to call in my order, or I imagine reaching out to grab the item, I go for that price. (My gut told me that my earring organizer needed to be under $20.) If my gut price is about the same as the target selling price I calculated, I know I’m almost there. If it is not, I know I need to look for another supplier or even possibly lower my margin expectations.

MAGIC PRICE POINTS

Magic price points are $9.99, $14.99, $19.99, $24.99, $29.99, and so on. Hitting the magic price point is key to getting people to reach for your product. If your pricing calculates to $20.73, do all you can to get it to $19.99. Psychologically, it is so much easier for a customer to reach for a $19.99 item than for an “over $20 item.” On the flip side, if your item is calculating out to $23.32, think about rounding up to $24.99. Customers won’t see the $1.67 difference as a bargain, really, and may actually think the $24.99 price has a higher perceived value. Of course, competition and your ultimate margin have to be taken into account before you make your final decision.

Then again, I sometimes find that despite the fact that a
product is superior to other options out there, people won’t pay the extra couple of dollars for it. When they know that there is something else out there a little bit cheaper that will do the same thing, the majority will buy the cheaper one—unless you can offer brand status or a clear benefit over the other item. I once made an umbrella that looked and functioned much better than anything else on the market, but I discovered that the majority of people would rather spend $10 over and over for cheapie umbrellas than buy a superior umbrella for $20—and so the product failed.