When it comes to launching a new branded product, we caution, “Every ship that sinks was first launched!” The launch is not the magic. Surviving the first few months is not the magic. Even achieving positive cash flow is not the magic. The real magic is the navigational skills that get your “entrepreneur-ship” to port safely!
Between solvency and acquisition are the dangerous waters known as “The Growth Phase.” This is when most brands fail. It’s when you must have enough money and know-how to expand your operations, hire more salespeople, and achieve efficiencies of scale. And it’s when you must pay extra to service your branded products. It’s when your brand can be discontinued or get the reputation of a “slow mover.”
Expansion is difficult to properly navigate and can be the undoing of your business – unless you have prepared for growth in advance. Here’s our short list on how to prepare for the growth phase:
- Hire a Cost Accountant – not just any accountant, but a cost accountant. They specialize in true costs of production and more importantly, true costs of sales. They can tell you the cost of each component that goes into your product as well as the costs to sell it, per item, per case and per lot. They can tell you how much you have to sell to break even or to make a profit. They can tell you how fast you can expand. These are the key metrics you need to understand before you move into a new market.
- Set Prices Based on Expansion – Many brand builders find out that expansion requires a higher cost of sales than they anticipated. The reason is simple. Now there are more entities to pay and more unforeseen costs such as travel or one-time expenses. Many businesses fail because their price point blows up during expansion in an effort to cover these costs. On the other hand, they may fold because they have to honor the rock bottom prices they came out with originally.
- Get Your Vendors to “Invest” – in your expansion! Remember, when you grow, they grow. They are natural strategic allies. Find a vendor whom you can work with who has the capacity to perform under sales volume pressure. Before they will take a chance on you, they have to see how you behave in a variety of challenging situations, so this may take a year or more. Do you notify them in advance of a missed payment with a plan – or do you go dark? Are you willing to sign a long-term contract – or will you leave them as soon as you get big enough to attract other vendors? In your early stages, it is especially important to give them reasons to trust you and see you as an ally. You will need extended credit, warehousing, and other special favors they can give you worth big bucks as you grow.
- Develop Incentive Plans based on Growth and Profitability. Knowing how to pay your salespeople is always a giant challenge. They will produce what you pay them to produce. So take a good look at how you are paying them. When you expand, every mistake in compensation is multiplied by the number of salespeople you hire. Are they getting paid for sales, but not for growth or profitability? Or worse, are they paid by the hour – for attendance? Find out how to balance these critical elements by experimenting in your early phase so you will have it down before you expand. Limit your compensation contracts to one year so you can tighten them up the next year.
Just because your ship can float, doesn’t mean it can take the waves! Take a shakedown cruise before you take to the open seas!