Pricing and Business Models
Here’s a dose of reality you should take
before leaping into business abroad.
THERE ARE MULTITUDES OF WAYS you can structure your business to reduce product and distribution costs and operating expenses. But, just as with your domestic business, it really comes down to what makes the most sense for your particular product or service and market area abroad. However, even if your initial, long-term goal is to grow into a model that utilizes products and services from all over the globe, it isn’t necessary to start that way.
Building a better mouse trap, in stages
Many small businesses start with basic business models as they gear up to provide their “mouse trap” to customers in their local area. This can be helpful when you are still trying to build your brand, determine the viability of a product or service and to prove the concept to others, including investors. Once you have a business that is self-sustaining and generating revenue, however, it’s a good idea to begin revisiting the different elements of the business to identify where you can create efficiencies, how to reduce major cost centers and how to grow the revenue of your business. These are great ways to use the resources that are already available to further enhance your balance sheet.
So what follows is going to seem like I’m throwing cold water on your plans to get into international business. Read on and consider how points below might apply to you.
The trap part of your mousetrap’s model
What happens all too often is that business owners try to apply what they know to be true generally about their industry’s products or services and its processes, and it sets them on a path that they cannot afford. I know, it’s fun to dream, but you have to start small and focus on the core business. Get customers, make sales and turn a profit. The other activities and focuses can bog you down to the point where you’re spending all your time worrying about things that haven’t happened yet in an effort to combat every shortcoming that you foresee. This stage can be deadly for an entrepreneur, because the business can grow stagnant while every pea on the plate gets analyzed and forward momentum stalls out.
I know this flies in the face of what most people were taught, but it’s the way the real world works. Only in textbooks is time, money, the cost of money and credibility theoretical. You can spend an eternity working and reworking your strategic plan until it’s perfect and you get an “A” on your homework. But the real world is hard on dreamers. I see it every day: great ideas, smart people—but spinning their wheels until they burn out, taking along their supporters. The business either gets shelved, shuts down or flames out.
A friend once said that until you get to the equivalent of ten million dollars per year in revenue, you have a hobby, not a business. That may be a little extreme, and there is nothing wrong with having a small business that is profitable, but the moral of the story is to get your business going and start making some money, then worry about how you can leverage technologies and the global economy to maximize the results of your activities.
Getting real about theoretical “improvements”
Think about this: What if you have a start-up in the US that is bringing in $50,000-$100,000 per year and your current cost of goods (COG) is 35 per cent of your total revenue. You think that by spending thousands of dollars and hundreds of hours, you could reduce the cost of your products by 15 per cent.
Let’s check that out. At $100,000 revenue, you would have $35,000 in product cost. Say the improvements would save you $5,250 over the course of 12 months. That’s $437.50 per month, or around $14.00 per day. Now, what would have a greater impact on your business: finding ways to save, or going out and getting MORE Business, MORE customers, etc.?
In contrast, think about a ten-million dollar per year operation. You would have $350,000 in COG and you would be saving $52,500 annually. Now that’s a number worth considering. That’s the fully loaded cost of an employee whose job could be to identify, implement and track efficiency opportunities for the business. Which one sounds like a better plan? At the risk of being repetitive, let me say that the first and highest hurdle of a small business is to get off the ground high enough that you actually have a cash-flow positive operation. Get there first and don’t get hung up on all of the fun analysis paralysis and research. Once you’re there, then go back and improve on your business, once all of the facts are in and you have the appropriate historical data to make impactful decisions.
The value of international business
This can add a level of complexity to a business that most entrepreneurs don’t see in their day-to-day lives. Have you ever wondered why soft drinks are only a few pennies in some countries and over $1.00 in others? When companies get large enough to operate in multiple countries, it can become difficult to find viable sources for resources at price points that work with the local economy. If you want to make an audio speaker, for example, you may have to source raw materials from local suppliers and use local labor to manufacture your product, in order to make it affordable in that specific market area. You also may have to change the materials or ingredients to maintain cost-effective manufacturing and reach the wholesale or retail price point the local marketplace needs.
Let’s assume that you are a manufacturer based in the United States and you are located in a state with a strong labor union presence. So it would be impractical for you to hire non-union employees. Also, let’s pretend that your company manufactures table lamps, and these lamps are built from materials that are sourced from suppliers who are also located in the United States. Now, you might have high quality US steel, brass, glass and wiring all being assembled by union factory workers at, let’s say, $20 per hour. Plus, you have to gross that number up for all of the benefits, contributions, health care and other insurance. So you really have $30 per hour in line labor. If the average table lamp requires $15 in materials and two hours of labor ($60), then you would have a raw cost of $75, not including packaging, quality control and other peripheral items.
What if you decided to start building and selling similar lamps in Vietnam? First, you could use lower-cost metals, since the market is more competitive and the material specifications are often different. Also, the same two hours of shop labor would only cost around $2.50. So if the materials could be acquired for 33 per cent less and the labor was $2.50, then the same lamp in theory could be manufactured for $12.50. In this model, you could export the lamp to the country that represents your largest customer base and sell it for much less, with even better gross margins.
Finally, remember not to automatically discount your products or services based on what you’ve seen in the market abroad. If what you offer is truly unique, then people will pay. Period. Think about all of the oddball items, custom services, luxury goods, technology, specialty retail products, etc. that you may have bought in the past. People will pay surprising prices if it’s something they haven’t seen, or it’s something they need, or if their friends, family and coworkers don’t have it (or conversely, if they all have it). Once you establish your business and can be fairly confident in its future, that’s the best time to go out and try to find ways to reduce cost and make the offerings more affordable for a larger market.