We”™re launching a new product, and we think that the first year we might not make any money. What are your recommendations for how long we should go, investing in new product development and funding losses?
Thoughts of the Day: Be clear about why you”™re launching this product. There”™s a difference between product testing phase and product launch phase. Lay out a plan to make a profit early on. Question assumptions when things don”™t look like they”™re going to go the way you want.
There are lots of reasons to launch a new product: to sell more to current customers, attract new customers, sell something at a higher margin, increase current customer loyalty and make it easier to sell another product or service, to name a few. Be clear why you”™re launching this product. It”™s really about making a profit.
The most profitable new sales happen when new products are sold to existing customers. Existing customers are more likely to work with you when problems show up. Get enough experience with existing customers so that you”™re confident about pricing and product support before you go after a new group of customers.
Do your product testing well before you go into production. Find out if the marketplace wants what you have. Know if people will pay enough and buy enough quantity, so that you can eventually make a profit. Monitor competitors ”“ is anyone else developing something that could hurt your plans?
Check that all production costs including labor are included in cost of goods sold. Check that gross profit is positive ”“ that you”™re making money on the product itself. If that”™s the case, keep going with the product launch. If not, stop and figure out what has to be done to make a positive gross profit.
Decide upfront on funding. Using up cash flow or cash reserves could jeopardize the rest of the company if something goes wrong. Getting a loan requires making enough profit to both pay off the loan and the cost of financing. If possible, get early stage customers to fund development. Give them some kind of down line advantage as an incentive. Factor funding into the product cost.
During the first one to three years of product launch, you may not want to burden the new product with having to fully cover its share of overhead costs. Do lay out a plan that shows how eventually this product can contribute its share to overhead and net profit. Start out by allocating specific sales and marketing costs to this product”™s launch.
In the first year, try to get as close to making money as possible. Add together cost of development, production, funding, plus a small profit. Decide how many items you can sell the first year and divide the cost of production by that number. That”™s your goal for the lowest per unit selling cost. Add in a per unit carrying cost for at least some of the overhead including marketing and sales, and that”™s your median selling cost. Add in standard profit/unit ”“ that”™s your high selling cost.
Set specific check points during product launch to test your assumptions. Are customers buying in the quantities you expected? Are they paying the price you wanted? Do you have to make any concessions to get the product out into the market? Is the product holding up as planned? Is there any additional production, selling or support costs?
If you see problems, don”™t be afraid to stop until you can figure things out. The money you”™ve spent to get the product launched is gone. Sometimes it may be smarter to quit and go on to another product. Be sure you”™re continuing to make a wise investment.
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Andi Gray is president of Strategy Leaders Inc., strategyleaders.com, a business consulting firm that specializes in helping entrepreneurial firms grow. She can be reached by phone at (877) 238-3535. Do you have a question for Andi? Please send it to her, via email at AskAndi@StrategyLeaders.com or by mail to Andi Gray, Strategy Leaders Inc., 5 Crossways, Chappaqua, NY 10514. Visit AskAndi.com for an entire library of Ask Andi articles.
