IncQuery: Turning Ideas Into Products
Could you use some advice from an experienced entrepreneur who's been where you are and figured out what works and what doesn't? Use the Sound Off! feature at the end of the article to send your questions. We'll find the best people around to answer them.
Nothing happens without a sale, as the saying goes, but first you need something to sell. This month we hear expert advice on conserving your capital while you manufacture your first products and research the market for them. We also get tips on dealing with a sale so big that you can't finance it and developing a positive image for a service with negative connotations.
Getting Stuff Made
Inspired by the birth of my son eight months ago, I've decided to go out on my own and start a company specializing in clothing and toys for babies. I've done some research on manufacturing and concluded that I can't compete unless I manufacture overseas.
But that poses problems. For openers, the factories insist on a minimum order that is too large for me starting out. They want to ship in 20-foot containers, which translates into a few thousand pieces. I don't want to commit to purchasing that much inventory before I've even tested the market.
Second, one of the baby toys I have in mind requires injection molding. It will cost me 5 to 10 times as much to make the molds in the United States as it would cost to make them overseas, but the overseas manufacturer will expect us to place a sizable order as soon as the molds are complete. Do you have any advice? --John
"Those minimum-order requirements are actually good for you because they force you to look before you leap," says Chuck Sussman, who worked with manufacturers both in the United States and abroad while building Pretty Neat Industries into the world's leading maker of cosmetic organizers. "Too many entrepreneurs fall in love with their idea for a new product and spend all their money on it, only to discover too late that no one else shares their enthusiasm.
"So the first step is to see if there's a market for your product. You can start by showing some samples to potential buyers and soliciting orders from them. If you get a positive response, I'd suggest you go initially with a domestic manufacturer. You'll be able to buy smaller quantities than you would have to purchase if you were manufacturing abroad, and you won't have to wait as long for reorders. Granted, your production costs will be higher, so you'll probably earn less profit, and you may have to charge more than you'd like to. But you'll limit your risk while you're figuring out how viable your idea is. Once you're reasonably sure the market is big enough to handle the minimum-order requirements, you can move to manufacturing abroad.
"So how do you find those domestic manufacturers? For the clothing, you'll probably want an independent local contractor -- or maybe two local contractors, since the cutting and sewing are often done in different shops. I'd look in the yellow pages of a nearby major city. You can also get recommendations from local suppliers and repairers of industrial sewing equipment.
"With the molded items, I'd have a sample maker produce an exact prototype of the final product. If prospective buyers like it enough to place orders, you can go ahead and mold your first production samples. I'd start with an inexpensive aluminum or resin mold, which has a limited life expectancy but will get you going. Look for a small local molder who is hungry for business and will charge you hourly for setup time and then so much per piece. You'll pay more per piece than you would if you ordered in bulk from a large molding company, but you can keep your production at a manageable level, and you'll be able to oversee the making of the mold and the products."
Adventures in Cash Flow
About two years ago, I took over an almost bankrupt jewelry business and was able to turn it around using my own financial resources. (We do the design and marketing; the manufacturing is contracted out.) The company is now growing very quickly, and I've begun getting orders of $1 million to $2 million. The problem is, I need outside capital to cover my costs until I get paid for the orders -- about six to eight months -- but the banks I deal with won't lend me the money if I don't have a history of profits going back two to four years. So where can I find the financing I need? --Stuart
"Before you look for financing, you might want to rethink the business you're in," says Sam Kaplan, president of Central Chase Associates, in New York City, who has helped raise money for dozens of young companies, including several of his own. "Right now you design, market, and sell jewelry that is manufactured by someone else. The question is, Do you also want to be in the business of financing receivables on behalf of yourself and the manufacturer?
"You don't have to be in that business if you'd rather not be. I'm sure you could find a manufacturer who'd handle the financing and give you a percentage of the total sales for your contributions. In effect, you'd be functioning as a manufacturer's rep with a design capability. Your 'commission' would be somewhat smaller than the profit you'd earn if you handled everything, but at least you could get the deal done without the expense, hassle, and risk of financing the receivables.
"Alternatively, you could go to your customers and see if they'd be willing to finance the sale or at least give you better terms. Six to eight months is an awfully long time to wait to be paid. If your customers really want your jewelry, they may be willing to help you get it made -- for example, by giving you a partial payment up front and the balance on delivery.
"If, on the other hand, you want to handle the financing yourself, your best bet is to go to an asset-based lender. It's true that no ordinary bank will loan you the money you need without a history of profitability, especially if your collection time is six to eight months. Asset-based lenders look at other factors -- your customers' credit, for example. They also charge much higher interest rates than commercial banks and impose a lot of conditions on the loan, but you can probably find one that will do the deal if that's the way you want to go. For more information and a long list of asset-based lenders, check out the Web site of the Commercial Finance Association ( www.cfa.com)."
Long-Term Care for Fun and Profit
I am an insurance broker with two employees working out of a small office. It's a good business, but it needs to change and start growing in a different direction. Our primary product right now is health insurance, which I believe will eventually be taken over by the government. Accordingly, I'm planning to switch in the next year or so to long-term-care insurance as my primary product.
Selling long-term-care insurance will be a challenge. Most people don't like to think about the circumstances under which they may need such insurance or the kind of life they may have when they're using it, but I'm convinced that it's our best bet for the future. So how can I motivate customers to buy such a product? --Dick
"You're not the first person to face this dilemma," says marketing maven Max Carey, founder of Atlanta-based Corporate Resource Development Inc. and CEO of EmCrit, in Morristown, N.J., a developer of communications platforms for fast-growth companies. "I ran into the same issue years ago, when I was working with a company that did retirement planning. The problem was that everyone thought about retirement as the end of life. So we came up with a campaign built around positioning retirement as the beginning of a new phase of life, and we did well.
"You need to do something similar with long-term-care insurance. For example, you might want to package it with other products and services that you could market together as, say, 'The Lifecycle of Peace of Mind.' You might even think about reaching beyond your industry and teaming up with a retirement community, a physical-therapy provider, a fitness center, or whatever. The idea would be to get potential customers thinking in terms of maximizing their quality of life as they grow older rather than focusing on what could go wrong.
"Long-term-care insurance would fit in with that, although I'd definitely try to come up with another name for it. You want to accentuate the positive, as the song says, and that means looking at the upside -- peace of mind, quality of life, and so on. The phrase long-term care has all the wrong connotations."
Having Trouble Sleeping Lately?
Could you use some advice from an experienced entrepreneur who's been where you are and figured out what works and what doesn't? Send your questions to IncQuery@inc.com. We'll find the best people around to answer them. And if you don't like their answers -- well, you can tell us that, too.
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