Drafting a Credible Marketing Roadmap
By Jack Lander
We might suppose he meant that things never happen exactly as we visualize them. But let’s take him at his word: planning is essential.
So, should we plunge right into preparing the classical business plan advocated by the MBA schools before we file for a patent or launch our startup? Ugh!
What a dreadful thought for most inventors. We’re creative people. Writing 30 pages of anything as boring as a business plan is not part of our DNA. Then, how about only two or three pages that address marketing? Think of it as recording notes to yourself as you evaluate your invention’s market potential.
If you can’t come up with a marketing plan, the rest is pointless. As one of my professors said to me many years ago, “If you can’t write it, you don’t know it.” So, concentrate on your marketing plan, and skip the rest for now.
Whether you plan to license or produce and market on your own, here’s where you start: You’ve got to satisfy yourself that the product your invention will become can be made and sold at a profit.
Even if you plan to go the licensing route, your prospective licensee will want the assurance that your product will produce a profit. If you leave the calculation up to the licensee, it may get it wrong. And if you plan to produce and market on your own, it’s even more essential that you know, before you start, that you can make a profit.
The rule-of-thumb for a typical product is that it must be made for one-fifth of its retail selling price. Sounds great, doesn’t it? Just multiply your cost, whatever it is, by five, and get rich.
Hold on. Let’s look at three critical aspects of marketing:
- Retail selling prices are set by the market.
- The market will take about 60 percent off the top.
- You’re left with 40 percent of what the market sets as the retail price.
Let’s say that you’re selling to catalogs. The cataloger has a good feel for how much the “traffic will bear.” In other words, the cataloger wants to price the product as high as possible to make the most total profit during the product’s life cycle.
The cataloger knows that at some price point customers will resist buying. So, he’s looking for the price that provides the best compromise between his profit per item and his sales volume. (Profit per item times number sold = total profit.)
The cataloger doesn’t tell you how much he’ll pay for your product. It’s up to you to tell the cataloger. But he’ll multiply your price to him by 2-1/2, and compare it with the retail price that he has set. If the resulting figure is higher than his set price, he’ll either negotiate with you to get your price to him down or he’ll reject your product.
Sounds a bit complicated, but that’s how it works.
So, what you must do is anticipate the price that the cataloger will set and multiply by 40 percent. Then analyze your share of the pie to see if you can make a satisfactory profit.
The 40 percent breaks down this way: 20 percent for the direct cost of your product, 10 percent for all other costs (overhead, tooling depreciation, etc.), and 10 percent for profit. Thus, the market determines your maximum direct product cost.
Note that 20 percent for the direct cost of your product is one-fifth. This is where the misleading rule-of-thumb – multiplying your cost by five – came from. You can’t simply multiply your cost by five and dictate the selling price to the market unless maybe you’re selling from your Web site or at flea markets.
The example above uses rounded and approximate figures. The 2-1/2 multiplier applies to catalog items selling for around $10 to $15. These are not exact figures for all catalogers. And catalogers will use graduated multipliers approaching 2 as the retail price approaches $100.
So your marketing plan begins with determining how much you can spend to produce your product. And if your product’s cost is too high by the aforementioned calculation method, you have six alternatives:
- Redesign your product to lower manufacturing cost.
- Retool your product to lower manufacturing cost.
- Produce in China or India.
- Try a more upscale catalog – one that can sell at a higher price.
- Accept a meager profit and deceive yourself about overhead.
- Abandon your product idea and keep trying with others.
You probably thought that a marketing plan covered how to get your product in retail stores using distributors and wholesalers, etc. It does. But as my old granny used to say, “That colt has got to learn to stand steadily on its feet before it can gallop.” Or something like that.
Editor’s note: This article appears in the December 2010 print edition.
Not a subscriber!? Click here now!