Dinner conversations with friends very typically revolves around talking entrepreneurial shop. Often times it’s about the latest tech startup or perhaps a friend of a friend who is “killing it”. Another popular activity is the idea brainstorming game which I immensely enjoy because it has all the excitement of a new idea without any of the tireless hours of had work and financial risk. A friend recently asked me at one of these dinner conversations, “How did you know your product business was the one to pursue?” It was a great question and I was actually surprised by my response.
I first explained how had started with multiple exclusively online businesses and each of the struggles I had ran into. Having my own product and selling both online and offline had become my focus. So how did I choose my product? First, it was the the path to least resistance. Second, the product was cheap to manufacture. Third, I had some initial success with the product that propelled me to devote 100% of my time into it. I am the first person to admit that these reasons are not the prescribed method to success. In fact, there were flaws in each one of these reasons.
1st. Never go into business because it’s the easiest. Almost always you will fail with this reasoning, and for me, this reason alone has cost me dearly (more on this later). As much as I would never advise this route for any one considering turning an idea into a business, for me it gave me my start, a product to make mistakes with and to learn immensely from.
2nd. The product was cheap to manufacture. This was key to getting the business off the ground as I was self funding the inventory purchases and had very limited funds. I had grossly under estimated the amount of money required to purchase inventory. I was lucky that I had built in enough margin into the product that allowed me to grow inventory purchases without more capital injection. I would have lost bad if my product would have cost $5 to manufacture. After my lessons learned with a low cost product, I I now look for products that sell in the $25 to $100 and have 5-7x margins. It takes the same about of work to build a $1 million dollar business as it does a $20 million. It’s REALLY hard to build even a $1million dollar business when you sell your product for $4 to $8 dollars.
3rd. I had some success early. I made some personal/business decisions based off some early success of selling the product. I thought the demand for the product was much higher than it actually was and got caught up with the “spreadsheet masturbation”. If the product sold x amount of units and Bob’s store then there are 40,000 more of Bob’s stores across the country. OMG! We’re going to be rich!