Mind Your Own BusinessMind Your Own Business https://c-suitenetwork.com/advisors/wp-content/themes/csadvisore/images/empty/thumbnail.jpg 150 150 MIchael and Bonnie Harvey https://secure.gravatar.com/avatar/dfe7dbddd973f4b41b9f0e9b47ad6323?s=96&d=mm&r=g
Last week, Yitzchok Saflas hosted myself on the Mind Your Business radio show in New York on 77 WABC. Michael was honored to be in such great company—Yitzchok’s show is ideal for anyone who wants to hear from the best business minds of our time. This radio show is also number 5 in the top 10 Nielsen ratings. You can check out my interview online here: http://www.mybradio.com/michael-houlihan/
The show covered many topics when it comes to building a startup business, including “How to get from ideation to monetization,” and one of my absolute favorites, “How to decipher the true cost of sales.”
Many startups already understand cost of goods, or COGS. This is the cost to create, develop, or manufacture whatever it is you’re selling. Your budget will have a COGS line.
Other expenses could be lumped into the general budget, or maybe even “overhead”. We think that is, by far, the biggest mistake that startups can make. It could lead to a ton of misconceptions that can close your doors forever. The cost of doing business depends on the territory. Selling costs, including promos, shipping, tax, representation distribution management, and many more, could vary greatly depending on the market. We see many startups underestimating the true cost of sales in each market—not the cost of goods. This is a fatal mistake!
We knew there would be promotion, advertising, and merchandising costs involved when we started Barefoot Wine. But hotels, meals, car rentals, airfare, taxes, freight, sampling, salaries, and expenses—we definitely weren’t ready for that. We learned about those costs the hard way.
The good news: Since our product sold quickly, it completely sold out. The bad news: After it sold out, it wasn’t reordered. It stayed out of stock because we didn’t have someone in each territory looking for our brand. We were floored!
“So, even when distributors and retailers have a hot product that sells quickly, they won’t reorder it automatically?” we complained. Their behavior said everything we needed to know. We had to pay to have a representative in each territory, or else it could run out and never be reordered. This is a huge cost of sales. We wished we knew this when we started! It wasn’t enough for us to get in the store—we had to pay more to stay in.
There was one big Midwest chain that wanted to put our product on a promotion for $5.99 in 5 states. We were so excited! It would be a slam-dunk, we thought. But, as Bonnie recounts, “It was just a slam!” In order to get the sale price in two out of those five states, we had to lose money on each and every sale. The taxes were higher in those states than the others, and so was shipping and handling. So rather than making a killing, we were killed—completely by the cost of sales.
One of the final questions I was asked in that interview was, “What advice would you give new startups today?” I replied, “Start in a small place, learn from your mistakes locally where you won’t fatally hurt your brand. Learn the cost of sales. Hire a cost accountant to analyze those costs ahead of time for each expansion scenario. Then, ‘All ahead slow’ with your eyes wide open and your notepad at the ready. You might find out it’s cheaper to do business in South Carolina that it is in New York!”