Stock – uncovering the hidden costs

Startups selling a product often have to consider a number of factors when bringing their items to retail. We've explored a couple of these potential issues here.

This is the fourth of five articles written by Springwise and brought to you by UPS. The word “stock” can cause alarm bells to ring for any entrepreneur who is just starting out and looking at keeping their costs down. As a result, many new business founders prefer to start operations that offer an online-only service, avoiding the issues that stock can create altogether. Stock availability is a major issue for any startup that is selling a product, particularly if there is a complex production process in the making of the product. The two students behind Jerry the Bear – a toy that helps children manage their diabetes – are now accepting pre-orders for the teddy bear and will have 500 made available for retail. Because their product is a teddy bear that can make sounds and emit light, the technology that goes into the making of the toy is quite specific. As a result, it would currently be an expensive and lengthy process if the founders were to make a large batch of bears, and there is no guarantee they will make their money back, leaving them to pick up the production costs. Providing a limited number of bears helps the founders to minimize risk, but it also helps to create a sense of exclusivity, and pre-orders generate a buzz as customers look forward to the day when they can receive the product. Sometimes the amount of man hours required to make a product can limit its availability, but this can be used as a sales advantage. Dustin McBride, founder of bamboo bicycle startup – Zambikes, supports this idea. ‘Currently, we can only hand-craft up to 25-30 bikes per month so the price reflects the uniqueness and exclusivity of the specialty bike frame.’ However, it is wise to ensure that the product on offer is suitably unique to justify this delay otherwise customers will go elsewhere to receive the same product in a shorter space of time. Another potentially thorny issue is production costs. Vertical plant pot creators, Jared Aller and Beau Oyler, who founded Urbio, quickly learnt that costs can mount up when manufacturing a product. ‘One of the challenges was trying to put a price to the product. You can get initial quotes for things, but that only gives you a rough idea. It wasn’t until much later that we found out the most expensive part of our project (the magnets) were going to cost us A LOT more than the original quotes we had received.’ Despite conducting research into production pricing, there can still be a nasty shock when a product hits the factory lines. However, if these costs are factored into the retail price then it is possible to minimize the financial blow. Zambikes founder Dustin McBride has done just this. ‘We’ve priced the bamboo bikes with extra margin for our dealers and retailers, not to mention shipping from Zambia is a massive expense.’ The two Urbio founders also touch upon another issue when sourcing the necessary equipment to make a product – the issue of inflation. ‘If there was one thing we’d do differently, it would have been to order our magnets earlier. The prices of magnets have quadrupled in the past 8 months – ouch!’ With the recent economic troubles, costs are rising, and it can be wise to bear this in mind and buy sooner rather than later to try to keep costs to a minimum. Isabel Rutland runs a startup – Discover & Deliver – that sources high-end items from around the world. As a result she can sometimes struggle to keep costs down when mailing the items. ‘Packaging can be tricky — and expensive — for high value items. There are some pretty amazing solutions out there now though including foam injection packaging for vases/fragile items. Packing is important to us from an aesthetics perspective as well as we want to make the occasion of receipt very special. We wrap things up nicely.’ This is an important point – most products will eventually end up on a customer’s doormat, so it is important to consider the presentation of the item, as well as how safely it is packaged to avoid damage in transit. When bringing a product to market there are many factors to consider, and we have tried to cover some of the most important ones here. Exclusivity of the product can create an appealing buzz around a startup, as well as keeping costs to a minimum by manufacturing to meet demand – in this instance, less is more. Also, production costs can mount up, and accounting for this in the product’s retail pricing is necessary in order to keep a company afloat. Forward planning and up-to-date research into production costs cannot be underestimated, and avoids any nasty shocks further down the line.