Determine key aspects of your product, and the competition’s: Positioning can satisfy a niche market that is willing to pay the price the start-up must charge in order to make a profit.
Positioning is the process of deciding your eventual product’s features, benefits, quality, price and channels of distribution, in the context of knowing those same things about its competition.
Positioning starts with describing your typical customer. What is his or her income level? In what kind of a home does this person live? Is this person a conspicuous consumer, or a modest consumer who is a bit embarrassed by his or her luxuries? Is this the average person who mows the lawn, fixes the bathroom faucet when it leaks, and prefers to flip the light switch manually? Or is this a person who loves the latest wireless conveniences that respond to the spoken word, or even to his bodily presence, and is willing to pay the price of their purchase and maintenance?
Positioning is an option in forming a start-up because it can satisfy a niche market that is willing to pay the price the start-up must charge in order to make a profit. Most start-ups struggle with insufficient profit and cash in-flow in the beginning. Early sales volume is often low, and is mismatched with the production methods that will pay for themselves when sales volume reaches the eventual forecast volume.
Production cost decisions
A common example is a plastic injection mold needed for a molded part. Such a mold can cost between $20,000 to $150,000, depending on the size and complexity of the part it produces. The start-up faces three basic choices:
- Forgo investing in the volume-production mold until sales volume and income justify it.
- Pay for the volume-production mold by taking in an investor.
- Position its product for a niche market willing to pay the price that earns a profit early, when sales volume is low.
Forgoing investing in the volume-production mold means that your unit cost to produce will be high relative to your target selling price. The option is to use low-volume methods and tooling, and sacrifice profit. For example, most plastic parts that are injection molded can be machined by the material-removal method. The cost is higher because the removed plastic is scrap compared with the near net use of plastic that results from molding. Also, the machining time is usually high compared with molding time. Even a simple part, made by machining, may cost two to 10 times its molded cost.
It’s attractive to take in an investor, but most of them want to see a history of sales from which they can calculate return on investment. It’s rare to find an angel investor who will share your dream of producing and marketing a new product. Dreams don’t get financed, except perhaps by your rich Uncle Oscar.
Positioning your product is not always possible. It may be that your product has a very specific market and an upscale version is not opportune.
But I recall laughing at the idea of a robotic vacuum cleaner. Who would buy such an item? No robot is going to clean the edges and corners of my floors like I can with my handy Oreck. (Boy, was I wrong—about anyone wanting it, I mean!) True, the robot lacks a bit of finesse when it comes to edges and corners, but it does an adequate job on 90 percent of the area. I can catch up on the rest of it later.
The seven positioning steps
I hope you aren’t planning to launch another vacuum cleaner. But whatever your tentative product, you must consider all of the features, benefits and price of a product that competes directly with your own, and you must decide how you can shape your product to fit advantageously into the market in order to maximize your profit.
Start-ups often fail because the inventor/entrepreneur omits the conscious, painstaking positioning process and plunges in with only an intuitive approach to features, benefits, price, etc. Intuition is valuable but should be double-checked, not just taken as a wild guess.
The positioning steps, assuming you have a rough idea of the product you have invented:
- Decide your marketing channel(s). This will determine discounts to the sellers.
- Set the retail price for your product. Set it on the high side at this point.
- Decide what fraction of your retail price you can devote to manufacturing cost. It may be as low as 20 percent for wholesale/retail distribution, or 50 percent if you do most of the distribution functions yourself.
- Determine which features and benefits you can include in the manufacturing cost.
- Evaluate your competition and compare positions.
- Repeat the above until an acceptable balance is achieved—until you have defined a potential or actual niche in the market.
- Perform the market research to verify that the niche has enough potential customers to support your start-up.
Variation options abound
There are several ways to morph an ordinary product into a niche variation. Upgrade its materials; use stainless steel when regular steel is the usual; make the product smaller or larger; adapt it for use by people with handicaps; guarantee it for 25 years; simplify it by omitting features; add features; include a free video for setup, use and maintenance. Etc.
A good example of a simple variation is the cell phone. You may have seen an ad in a magazine for a cell phone with large numerals for ease of dialing. The phone is basic, without all of the goodies that most of us want. It appeals to older people who may have trouble seeing or punching the numerals due to arthritis.
Another variation of a common item is the hearing aid for $200. It looks a lot like the one for which I paid $1,400. No doubt mine is tuned to the defects in my natural auditory spectrum. But I’ll bet the one for $200 would be adequate for most conversational deficiencies, and for watching TV. It also serves to confirm the benefit of a hearing aid for the deniers who still insist that their wife or husband mumbles a lot.
Selling a niche item may have the advantage that it fits in with other niche items that are sold to a certain kind of consumer, such as products for temporarily handicapped persons. A person who has had a hip joint replaced will find a store not too far away that sells a device to aid in putting on socks during the early days of recovery. An entrepreneur without a good idea for a product could call on such a store and ask whether there are any devices that its customers ask for that are not on the market.
We can set our product’s selling price based on our best guess. But in the end, the market determines it. Positioning may be the way you can succeed with a selling price that yields a profit when you need it most—in the early days of your venture.