Birth of a Product Company

Part 1

A friend of mine is a stylist to the stars. If there is a movie or TV show shooting in the region, she’s on the set, making hair magic. She gets flown around the world at times. She’s in demand. She also runs a boutique high-end salon in Memphis. People await her return and pay 2x-5x normal rates for a new hair-do because going to her is an experience.

She not only knows her craft well, but is also a genuine inspiration and joy. Passion exudes from her like a form of electricity. In an odd way, she is the premium product, offering a service but wrapping it into a unique, touching experience.

When I entered her enchanted lair—dance music at an inviting level, lights just right, art deco appointments—last week the experience was further enhanced with strong, attractive smells of well-mixed essential oils, new products.

Touching the tester items felt so good, silky, not sticky, and not greasy. I felt drunk in the best way, not woozy, but uninhibited. The sensory overload was heady and bewildering.

I came to my senses holding some hand-crafted objects, lovely designs, beautiful packaging with hand-tooled wood filled with small batches of shaving solids, solid shampoos, and a small selection of other wonders. Perhaps it was the environment, perhaps it was the novelty, but I knew I must take some home.

Until I saw the price, handwritten on a sticker on each object. As I imagined my bank balance draining instantly with each possible purchase, my friend walked into the room.

“Congratulations on creating these products!” I proclaimed, “smells, looks, and feels sublime. Did you make them with nectar of the Gods?”

“What do you think?” she asked, knowing I have helped hundreds of companies conceive, create, and launched new products into the marketplace. Her question was loaded; she was looking for real advice from experience.

“It’s too late. You’ve made several critical errors,” I said, sensing the need to be helpful and honest, as she is clearly devoting time and energy to this project. “You’ve fallen in love with your products, are unmindful of what the market will pay and how much they will cost to manufacture them at scale, and I assume you created all of these stunning works of art without writing a business plan.”

“A business plan? I don’t know how to do that,” she responded.

“My advice would be to back up, stall your product development and prototype creation—you have enough as a proof-of-concept. You’ve put enough attention and care on the products; however, you have fallen in love with the products and are smitten with your creation. This love will endure only if you fall in love with the business-side of the equation. May I ask you a few questions?”

“Of course,” she said, “you are the one who helps people go to market,”

“That’s only partly true. I also help product developers find new areas of opportunity around which they can create new solutions. You didn’t start with people, or a plan, you started with the products. Now, you’ve fallen in love with your creation. Hemingway said ‘kill your darlings’ and the same advice holds true for the product development cycle.”

Part 2

“Think of it this way,” I continued. “Look at these early product concepts as prototypes, a proof-of-concept,” I continued, “you can test pricing, sales, returns, which SKUs sell at the fastest clips, and general desirability for the whole line.”

She had a lost look on her face. Then, I unintentionally made the lost look sour by asking, “Where did you plan on test marketing these?”

“Brother,” she said in her bewildered-yet-trying-to-stay-cool tone, “I know not of what you speak, test marketing.” Silence engulfed us.

“Well, you have to see if anyone will buy it. Based on the local angle and high-end, hand-crafted sensibilities, maybe you should try a few boutiques, gift shops, and even a farmer’s market,” I said. “You’ll know in a few days if you there is a market for your products.”

“How do you do that?” she asked. “Who has time to do it?”

This question made it clear to me that she was thinking like a creator, a craftsperson, and not a like a business person.

“My dear friend, how long did it take you to gather all the materials, discover the right mix of ingredients, and price what you have?”

“My whole life.”

“And you can’t take a few mornings and do a little business development?”

“I thought I’d just set up a free web site and sell it through it.”

“How are people going to know you exist? Once you tap your social media connections and email list—your low-hanging fruit, you’ll have to set up SEO, pay-per-click advertising, produce and update a blog, and more, just for starters, but,” I added, “you’ll need to understand the market first. Where are the watering holes where your tribe hangs out—what web sites, what Pins on Pinterest—who are your competitors? What are their costs, who are the brands, what are their strategies? What are the trends in this segment of the marketing? And, what happens if you do only a handful of these tactics, according to written strategy, and your sales take off? Can you produce enough to meet demand?”

“Then, when it is time to scale growth, you’ll have to have a distribution plan. What are the channels? What are your wholesale margins? What is your plan for manufacturing at scale? Have you modeled out your costs? Do you have a formal pricing strategy? Marketing plan? What about capital? You’ll need money to make all of these moves and hit growth milestones. Also, you should benchmark companies you like.”

“Wow, wow, wow—that’s a whole lot. How would you suggest I even start?” she asked.

Part 3

At this point in the dialogue, I felt the need to break down the conversation into helpful actions in two main categories: test marketing and business planning.

“You asked what to do first. First: stop working on your products. You have beautiful prototypes built. Now, focus on the business,” I said. “In time you’ll need to think about capital, but first you have to prove yourself, so go and see how the market reacts and also draft a business plan—this way potential investors will know you are serious. Remember, they are betting on you, not on the products.”

“Whoa—how do I do all of that? Where do I start?”

“You already have begun test marketing by displaying your products on your shelf. Now, keep good records of what each one cost to make, which ones sell faster, and what the profit margins are.”

“Then, expand the test a little. Try to selling a few of the pieces you’ve created at your current asking price at the farmer’s market and a local gift shop or two for a set period of time, keeping good records on what sells, what doesn’t, and any feedback you get from people.”

“Most important, write a thorough business plan.”

“A business plan?” she sounded as crestfallen as someone just told they have been diagnosed with a terminal illness.

“I know this point sounds rough, but if you want to be successful, focus on the business. You have great product prototypes, but from this point forward it is not about the products—as long as quality is consistent—it is about growing a business.”

“A business plan …” she uttered this phrase with sour contempt, sounding defeated before a match.

Silence deafened us both. I couldn’t take it any longer, as she’s a friend, but she beat me to it.

“Can’t I hire someone else to write it?” she asked.

“That’s like asking who are you going to trust to raise your baby,” I responded, then switched metaphors: “do you know that old saying ‘you can’t hire anyone to do your push-ups for you?’ well, the same is true with business planning. You have to own it and do the hard work and homework to own it. That is, if you want to grow this effort into a business and you want to control it and be able to make the decisions.”

Her head nods affirmatively.

“There is one alternative,” I add, “if you want to take on a business-minded partner whom you trust and with whom you can work closely, you can focus on products. Still, you’ll have to have a deep, visceral understanding of costs, materials, manufacturing, distribution, marketing, business development, sales, cultural trends, the competition, and adapt your strategy according to these dynamic forces once you have a grasp of them.”

Part 4

“After you have a solid business plan and actual market feedback on your product concepts, including revenue,” I continued, “you’ll want to think about raising capital.”

“You don’t want your company to wither on the vine before it ripens, so we’ll need to raise a round of Friends and Family money.”

“How do I do that? Just ask them for a hundred bucks each?” she asked.

“First, you need to figure out what you’re willing to give up in exchange. Are you willing to give up part of your company already? Are you willing to give up equity and report to a board yet? Or should you just consider a loan or structuring it as debt?”

“Equity. Debt. Board. Man, these are things I haven’t thought about at all,” she confessed.

“Have you heard of Old Wives’ Tales?” She nodded affirmatively. “This is one from the world of business ‘Most companies die of digestion rather than starvation,’ meaning they got a bunch of orders, hit a certain level of success, and then imploded –couldn’t produce and deliver quality at the rate the market desired. Think of all the struggle, the goodwill burned, the heartbreak of having to let people go, the taste of failure.”

She nodded, as this vision was one potentiality.

“The reasons they fail are two-fold, and unavoidable. First, they didn’t have a viable plan for scaling their growth. A plan cannot predict every possible pitfall, but it gives you a roadmap for finding your way and highlights key assets and resources you’ll need at certain levels of growth. You’ll be able to have a sense of what’s needed and can adapt more readily, more creatively with this plan. It pays to do your homework.”

I took a minute and made sure she was listening. She was, deeply.

So, I added, “the other reason is simple: money. Growth takes capital, investment; think of it as fertilizer. You have to spread it around pretty thick and generously, until it hurts, really. This is why you’ll need those Friends and Family dollars, to have something to put to work before you can either get a bank loan or raise what they call ‘more institutional money.’ Without ready capital, you can get trapped in a death spiral, a painful spot, which is why you want to plan for growth, account for it, and have money on hand when it is time to grow. I’ve had too many friends—all good people—who grew for a few years then got in over their heads, couldn’t handle their loan service or the price of production, then screech and grind until they finally close shop, still owing taxes, others. It’s a tragic end, but it is avoidable.”

Don’t focus on just the products. Write a business plan. Test market. Raise some money. Then, build with your plan as your guide. What a grand adventure.

image credit: sys-tao.org

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Michael Graber is the cofounder and managing partner at Southern Growth Studio, a Memphis, Tennessee-based firm that specializes in growth strategy and innovation. He speaks and publishes frequently on best practices in design thinking, business strategy, and innovation and earned an MFA from the University of Memphis. His new book, Going Electric is now available in eBook and paperback.