This is part 3 of the mini course on starting your own supplement company. Previously we’ve covered how to design your product and how to choose your manufacturer. Today we’re going to cover how to choose your business model.
In many ways your choice of a business model will shape the direction your company takes more than your other the other two, especially after you’ve gotten started. In its simplest form your business model is how you plan on amplifying your comparative advantage to make money. Arbitrage.
Comparative advantage is tricky, because it’s at once beguiling but usually pretty simple. Almost by definition it has to be unique, but in my opinion underestimate how unassuming it can be in order to be successful.
Here are a few easy ones that come to mind:
- You have access to a unique clientele that other companies can’t reach as easily (doctor, acupuncturist, or someone else who occupies a consumer facing position)
- A well developed skill that allows you to do on your own that other companies have to pay a lot of money for. (This could be a technical skill, some sort of industry knowledge, or something as simple as knowing somebody who can give you free rent at a community farmers market).
- You’re part of a group that’s well versed with a particular type of product but disgruntled with current offerings. These people can be reached by emphasizing features that typically don’t make business sense because they don’t pass conventional cost/benefit analysis.
- A willingness to make less money than other people. This might seem silly, but it probably means more than you think. Lots of companies have their business processes rooted inside a variety of conflicting interests that leaves them no choice but to be as greedy as possible. This creates a profit opportunity simply by being nice where others are mean.
There are certainly more. The first step is finding one, and the second is making sure you repeat it incessantly until the market gives you a signal that it needs to stop. As I’ve noted before, recursion is one of the most awesome powers in the universe. The most distinct benefit of being a business owner is that you’re in a position reap its benefits instead of paying rent to the recursion-maker (your employer).
Your Three Choices
For most supplement companies the choice of business models kinda boils down to three options:
- Retail: Getting the product stocked on grocery shelves.
- Mid-Level Marketing: P2P distribution networks where people sell the product and recruit others to sell the product for them, and getting a commission for their sales.
- Direct: Going straight to the consumer. Usually through the internet but perhaps through other channels such as demonstrations, booths at different events, or through your own place of work.
The distinct benefit of the first two is that you’re leveraging other people’s distribution channels. However, increasingly the yellow brick road leads to option number 3.
But let’s give each option its fair share.
Retail is stiffly competitive. Grocery stores operate on 1-3% profit margins and are very stingy about what goes on their shelves. The health food industry is also notoriously sensitive to trends. What this means is that if you find the right in-road you can make it really big, but for every success story there’s a graveyard of failed companies that couldn’t make it past their local grocer.
For about 6 months I tried to go through the retail channel before I gave up and decided it wasn’t worth my time. I went door-to-door to about 4-5 dozen grocery stores and after lots of hours and haggling with grocers found that I wasn’t getting enough return on my time as I liked and decided to put it to rest.
The retail scene is heavily dominated by large conglomerates and the occasional fad product that’s on the shelves for 6 months before something else takes its place.
I like to think about the looooonnngg term when it comes to business and when it comes to retail it seems like the only options are getting acquired by Kraft or withering to dust.
Going the MLM route puts you at one speed: fast. If you’re at all successful you’ll be paying lots and lots of people downstream, and their commissions need to come out of the purchase price. So you have to go the high-end route and put as many “new” ingredients as possible and portray the product in such a way so that you can charge more than what people would typically pay for something on Amazon or VitaCost.
You also have to know about the logistics of starting an MLM network, and on this subject I’m of little help. I have no clue how to do it. None. If I went the MLM route I can’t imagine I’d have been the least bit successful. I imagine it helps to know people….but that’s about all I got. I suppose the good news about MLM marketing is that you’ll meet your fate pretty quickly if you’re not successful. Most of them seem to close up shop within 6-9 months if they can’t get traction.
So that leaves direct. In most ways its wonderful, except for one: you’re insourcing the task of customer acquisition. In most business endeavors people’s attention is more scarce than money, and if you sell direct then you’ve given yourself the sole responsibility of mastering the most critical aspect of the business process. It’s not impossible, but you should expect it to be slow going at first. It’s hard to scale in the beginning, and you’ll have to resign yourself to the fact that about 85% of your efforts are going to result in failure. It’s just the motion of the ocean, baby.
But selling direct allows you to be like water. You have the flexibility to mold yourself into the cracks of what’s given to you, and allows the most incubation time to perfect your product/market niche. That’s a really big deal. It’s also more fun because you get to interact with your customers more directly. One of the most enjoyable aspects of Health Kismet are the thoughtful and honest e-mails I get from customers that allow me to see what makes them tick. It’s a very gratifying process.
How To Plan, and How NOT to Plan!
To be a business owner is to be an uncertainty broker. You buy it wholesale and sell it retail. Dealing with grey areas is something most people are not accustomed to, and being comfortable transacting with limited information is the sui generis of successful entrepreneurs.
Key word: limited. All of your important decisions will be made with incomplete information. By the time all the relevant information has presented itself in consumable bits and pieces the horses will have already left the barn and you’ll be left chasing thin air. Only then will you have a guarantee. You’ll have guaranteed failure. You have to place your bets.
Key to dealing with limited information is understanding how to plan. In general you want to be suspicious of anything that requires continuous assumptions over long periods of time. Beware of pie charts and line graphs that project more than a year or so into the future.
The most relevant planning centers around how to increase the chances of successfully making your next step.
The analogy I use in my head is rock climbing. You have a clear idea of where you need to end up, and a reasonably good idea of what you have to do to get there, but success is all about focusing your time and energy on finding that next little crevice that gives you solid footing to keep on going. You need to obsess over your local conditions. It’s the same thing in business.
Model the Transaction, Not Gross Sales
When trying to model profitability, I strongly recommend modeling the customer, and not what your business is going to do as a whole.
Start with a single customer, and think about how you’re going to reach them, how much that’ll cost, how much you think you can charge them, and what you’ll have leftover. The more specific you can get about this specific tranaction, the better off you’ll be.
This is going to much less error proof than thinking about aggregate figures, which are always going to be guesswork.
If you do this, your business model will be reduced to four simple questions:
- How much will it cost to make my product?
- How much will it cost to reach my customer?
- How much can I charge them?
- What will I have left over?
You should be able to answer these questions with at least a little accuracy.
Once you can answer those questions, then ask yourself this:
What’s the easiest way I can get started?
If you can answer this question, coupled with your comparative advantage, you’ll have the right frame of mind to get started.
A Simple Spreadsheet
Here’s a sample spreadsheet you can use to model some of the assumptions discussed in this post. This is merely to get your brain thinking in the right direction about product/cost scenarios and not meant to be definitive. I’m also not an accountant so I make no promises about my terminology being technically correct.
You should be able to edit it within this post, so please let me know if you can’t.
[gview file=”https://healsupplements.files.wordpress.com/2013/01/66ca5-supplement-business-model.xlsx” save=”1″ cache=”0″]
Please keep in mind this doesn’t include a lot of costs. You still have taxes, legal fees, miscellaneous expenses that aren’t recurring….and you’ll still need enough to pay yourself and employees after that.
But hopefully this’ll allow you to construct a simple model around the basic process and experiment with different scenarios.