Going into a retail store can be one of the biggest decisions that you can make as a small business owner. As a big decision, it must be considered carefully.
Since the beginning of this year, we have been asked by a few retail establishments if they could carry our products. Of course we said “yes” because we delighted that someone would want our products! And any exposure can only help our business, right?
A while back I wrote an entry titled “To Retail or Not To Retail“. We totally ignored our own advice in that blog post and jumped on the opportunity. The opportunities presented to us were for consignment. One was at a major hotel in downtown Houston while the other was for a local retail store with great exposure that focuses on local Houston makers. Seems like an easy decision, right?
Neither one of these opportunities required a huge amount of effort. We just delivered what we had on hand and replaced our inventory with new products we made.
Here is where we ran into problems:
The opportunities were consignment. This means that we don’t collect any payment until after the accounting cycle of when the retailer actually sells the product. At a minimum, this is at least 30 days after delivery.
Some of our products are perishable. While the products don’t necessarily “go bad” our lotions in particular will lose its scent if left exposed to sunlight for long periods. This resulted in product that had to be thrown out.
Delivery costs and time are also a concern. While both locations are relatively close, with Houston traffic, it takes at least two hours round trip to make a delivery or check on inventory and status. I know that there are ways that we could improve this, it is still a concern.
Pricing also caused issues. One of the things that I make is custom razors. You can see these on www.MCShaveGear.com (gratuitous promotion). Each of these basic razor sets (razor and stand) cost me about $30 including my time. This means that I would need to set the retail price of $120 per basic razor set in order to get $60 in payment from the retailer. See “How To Price Your Products” for my pricing explanation.
To make things worse, one of my deluxe razor sets was sold as a basic razor set because the tags got switched. I was paid less than half for the razor set that I had delivered to them.
Remember too that there is nobody there actually selling our product. They are selling a wide variety of products and ours is one of many. It is easy for an individual product to get lost in the mix if not represented well.
All of these issues together don’t seem that bad until we calculated the total rate of return. Rate of return refers to how much you earn based on some investment over time.
The total cost of us getting into these locations consisted of the cost (our cost) of the products being delivered. For both locations, we delivered (our cost) about $300 of products. If we were a big manufacturer, that is not a huge deal. However, being a small business, it is worth note for us.
For the first nine months of the year, we have received about $225 in revenue from these two retail opportunities. This means that have not had full turnover of the products in the stores. We are not experiencing positive cash flow.
I’ve also let these retail opportunities guide my pricing. I set my pricing based on the retail opportunity and this was a mistake. One of the big reasons that retail is struggling is because people realize that they can get the same product or even a better product directly from the maker if they shop online. Online is one of the sales channels that I want to grow over time. If I have to price things online based on retail costs, I lose a lot of my competitive advantage. Having my products in a retail store also reduces its “exclusivity” and “hand made” competitive advantage.
Whether or not you choose to enter into a retail relationship is entirely up to you, but it is fraught with pitfalls. Be aware of these and make these decisions based on logic, not on emotion. Yes, we have bragging rights that we are in a high-end store, bragging rights don’t pay much.
We haven’t entirely closed the door on retail opportunities. However, we will be evaluating new opportunities to make sure that they are the right fit with the right target demographic. We also won’t be putting all of our products in every store, but maybe just the ones that are that perfect match.
I hope this helps you avoid some of the pitfalls that we have fallen into.
See you at market!