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My Lesson Learned on Pivoting, Profitability, and Margin

The Importance of Margin

Y’all!! Today was such an exciting day for us. It was a day of victory after a struggle of drowning with not enough margin. Here’s my story on the importance of margin, the importance of knowing your numbers when you start. The importance of pivoting when you have to and not being afraid to go back to the design phase and conquer your issues.

Here goes… When I launched my product I made a critical mistake in calculating FBA Fees and average shipping costs into my margins. When I created the listing (something I had done so many times before) I saw the FBA fees were $25 (Over half of my product’s price!!) I had already paid for molds and production, it was too late to turn back now.

When I calculated them myself during the design phase, I didn’t account for volume in the box size. 2 sides of the box were over 15″ and that meant I had to pay for shipping volume. I don’t know, perhaps I was distracted by all of the other decisions I was making in creating a unique product and the fact that I hadn’t even sourced the bottom half of my product yet.

I contacted Amazon and said, this can’t be right, this product only weighs 3 lbs and it’s considered small oversized. They assured me when I sent the product in, they would remeasure it and adjust my fees accordingly. Well, I should have known better. We sent in our first shipment and the fees went up instead of down. Our profits without advertising would be less than $2 per unit.

How did this happen? How did we make it this far and how could we survive after this?

 

TIME TO PIVOT: We made the critical decision at that time to save what little margin we had left by the merchant fulfilling the product ourselves. We went from the factory assembling the product and shipping it directly to Amazon, to shipping it to our own warehouse in bulk, assembling it ourselves, and shipping it directly to the customer.

This brought our profit per product to an average of $10 instead of $2 we were getting through FBA. Still, in low quantities, it costs us $12 to make. The golden rule I teach all my clients is that when you sell your product, the money you have leftover in net profit should allow you to buy a few more units. If you don’t have enough money left over to even buy one more unit, you are in trouble. You are digging a hole you can’t get out of. I’ve seen it time and time again.

I was in this hole with this unique product I created from nothing, all the while the rest of my private label products were at 10-20x margins and supporting the business. YIKES! So I set out on a mission to redesign the product. To think throughout I could make it smaller. Could I break it down into pieces and have the customer assemble it? Could I fit the top part into the bottom part? Could I make the lower part collapsible?

I went to Canton Fair and saw a fully collapsible laundry bin. That was it! Could I somehow replace the huge plastic bin I had with a new fully collapsible one and add handles as customers were requesting in their feedback? I started researching different materials and getting samples with the sizes and dimensions needed to replace the plastic bin. I went to China and met with the best factory and we worked through solutions together to ensure I could source it for under the price I was currently paying sourcing in the US. I just ordered a 20 FT container and we are about to have the mid-production inspection.

Next, I visited my factory in Dallas Texas to discuss design modifications of the upper part of my product. I needed a way to reduce the size. We looked at my molds and discussed various options. Ultimately we tested the product without handles and found it worked just as well without them. We paid $5k to adjust the molds and we removed 4″ off the width of the product with this option.

At the same time, we met with our packaging supplier with the new design and asked them about packaging options. We just received the box you see in the photo. It has no design yet, we are working on that. But today we measured and weighed everything. In this box is the fully collapsed bin (which used to be 14″ tall and 10″ wide and is now 10″ wide but 1″ tall) and our sifter without the handles (which went from 14″ wide to 10″. We also reduced the weight from 4 lbs to under 3 lbs.

Here’s where the victory comes in: Today we looked at the options in seller central to buy shipping to send to a customer in Virginia. With our current box and weight, the cheapest option was UPS ground at $25. Under the new dimensions and weight, we not only save over $12 on UPS ground, but we also open up new shipping options with USPS that weren’t even an option before!! We can now also send priority mail for a savings of over $13!!

Not to mention FBA opens right back up for us at a reasonable healthy profit. We can now send from our factory to Amazon and UPS E-fulfillment and sell in all channels. We can finally expand globally as well. Something we had no margin for before. Imagine the savings in man-hours!

Do you have enough net profit per unit to buy another unit? If not, how are you able to continue to afford new inventory and scale? Are you borrowing money to do this hoping you’ll come out ahead eventually? I’m excited to address this and some other important aspects of profitability in tomorrow night’s class. What are your biggest struggles in this area? Would love to hear from you…