How I Make Money, Part II: 5 Steps to Creating a Product

In my first post of this series, I wrote about some common myths that stop would-be entrepreneurs. This post outlines how to make a list of potential product ideas, determine which one is best, and get the ball rolling on finding a supplier.

Since you’re reading a blog post about starting your own business, we’ve already established that you aren’t satisfied with hate your job because:

  • your boss is an idiot
  • you don’t get paid enough
  • you work too many hours
  • you’re underappreciated
  • you’re bored
  • all of the above

Low risk, high profit. A good place to be.

I’m going to give you a crash course in idea generation and product development. It’s not the risky, dark art that “they” want you to think it is – once you know the key steps and some good tools, it’s as easy as…dealing with China.

We’re going to hold off on forming a corporation until after we’re 100% ready to go, so we’ll be covering that in a future post. For now it’s just information gathering – this is the fun part. Remember, the goal here isn’t to come up with a blockbuster new product idea – it’s to find an existing product that you can do a better job of selling.

Without further ado – it’s time to take a look at the roadmap to starting a side business. It’s the exact formula I used to start my kettlebell company.

—-

1. Let your competitors do the work for you.

Did you know that you can access the US Customs database and see exactly what any company is importing? I personally use ImportGenius.com and it costs about $200 per month, but the data it gives you is priceless. You input a company name or address, and you get a list of everything they’ve imported in the past 12 months (for $399, you can access everything back to 2006). Sign up for this immediately – even if you’re not ready to start a business. It’ll help get the juices flowing, and you can pay for it by skipping a session with the therapist you visit to complain about your job.

When I first found this service, I couldn’t sleep at night – half because I was so terrified that this data was out there, and half because I stayed up searching every company that I could think of. Within seconds, you can find out the name of all their suppliers, how much the shipments weigh, the types of product being imported, and a wealth of other information. I find it most useful for finding new sources, but it also gives you an idea of the total size of the market.

A lot of people suggest finding sources by using Alibaba.com (a directory of factories, more or less), but I find it to be a crapshoot. You have no idea how large the companies are, how good the quality is, how reliable their production schedules are, etc. You can eliminate a lot of headache and quality control requirements by using ImportGenius to choose a factory that works with large, well-respected US companies – companies with the resources to do their homework on the overseas factories.

Sign up for the service for a month and start searching. Don’t know where to start? Well, my hobbies are cars and fitness – I already owned an auto parts company, so I chose to research kettlebells. If you can’t think of anywhere to start, get a hobby.

Note: I eliminate anything made of stamped metal (cast and forged are OK), injection molded plastic, and anything with many moving parts. The first two have extremely high up-front tooling costs, and the third is a pain in the ass.

2. Assess the sales-side viability of your options.

Now that you have a list of product ideas, it’s time to determine what products are viable to sell.

I break sales-side viability down into 3 aspects:

a. Demand. If a company is importing a million pounds a year of kettlebells, there’s a market for it. Check.

b. Room for another competitor. I saw that kettlebell retailers were charging outrageous shipping rates, they were shipping the product out slowly, and their websites were awful. I knew I could compete by offering free, same-day shipping and by having a user-friendly website. Check.

c. Ease of market penetration. Apple sells a billion iPads a minute – but that doesn’t mean you should try to come out with your own version. It’s an impossible market to penetrate. If you have an idea that makes everyone – or very large market segments – a potential customer, throw it in the trash (that means your great ergonomic dog bowl idea, or anything else pet-related, for that matter). Niche markets are easy to reach because they operate in small, tight-knit communities. If you can make a cheaper, faster, stronger, or better-looking speed bag platform, you can advertise it on a speed bag forum (yes, that exists).

Note: If you build it, they won’t (necessarily) come.

The biggest mistake you can make is thinking that your cheap/new/better product will sell itself. The internet is a huge place, and people will not just stumble upon your site simply because you put it up. Building traffic is the hardest part. Hey, speaking of building traffic…can you please help me by sharing this post on Facebook?

4. Shop it around.

OK, so now you have your product idea and you’ve checked off the three points above.

Here were mine:

  • There are plenty of kettlebells imported into the US. There’s definitely a demand for them.
  • The kettlebell companies out there had hard-to-use websites and slow/expensive shipping. I knew I could do a better job.
  • Kettlebell users are reasonably easy to reach, since it is such a niche market.

It’s time to see if you can have them made at a reasonable cost and without a massive up-front investment. Get back over to ImportGenius and come up with a more comprehensive lists of suppliers for your product. Try doing a product-based search to generate more leads – instead of entering the name of kettlebell competitors, I entered the word “kettlebell” into the search engine. This gave me a list of all of the known kettlebell suppliers overseas.

As a general rule of thumb, I prefer to work with China or Taiwan. Stay away from India unless you want to deal with never-ending production delays. Taiwan has excellent quality – rivaling that of US factories – but is significantly more expensive than China. Taiwanese factories are more trustworthy and you will have fewer problems with quality control. A kettlebell is relatively hard to screw up (it’s a piece of iron), so I didn’t have any reservations about working with China (I did have my fulfillment warehouse do a 100% inspection of the product when it arrived, and there were only two units with imperfections out of the whole production run).

Come up with a template email (called an RFQ, or Request for Quotation). Here’s the actual email that I used (I sent it from my personal Gmail account, but it’s better if you make a new account so you look more official – like “acmekettlebells@gmail.com”):

Hello,

We are interested in purchasing some kettlebells in various sizes. What is your minimum order quantity?



I have attached a spreadsheet with the details on the product. Please fill out this Request for Quote at your earliest convenience.


Thank you!

Best regards,



Zack

Note: you can view the spreadsheet here. You’ll note that I asked them to quote the tooling costs and unit costs separately – this is important, because you need to know what your up-front vs. recurring costs will be. “MOQ” stands for “Minimum Order Quantity.”

5. Negotiating the quotation.

The factories can be a bit difficult to deal with. Here are a few common questions you’ll get and how to respond to them:

  • What is your target cost? If you give them a target cost, they’ll just quote you at your target. Let them give you a blind quote first. Tell them that your company policy is that you cannot provide target costs.
  • What is your proposed initial order? Respond by asking them what their minimum order is. Then, ask for a quote on minimum, 2x minimum, and 5x minimum. Even though you can’t afford 5x minimum, it’s good to know how much you’ll be making when you reorder!
  • How many do you sell per year now? Tell them that it’s a new item for you and you don’t have an estimate yet. Don’t tell them that you’re a startup.
  • Can you tell us more about your company? Website link, etc? Either tell them that you are a trading company and you have various customers in the USA, or tell them that your company policy is to not reveal the end customer. Or just ignore the question. All three have worked for me.

Once you start to get quotations, pit the companies against each other. Take your lowest quote and cut it by 10-20% – then tell the other factories that you have a quote from a Chinese factory for that number. Ask if they can beat it.

If you can’t hit a 65% margin, it’s not worth pursuing the project. Your margin will get eaten up by advertising, fulfillment, and other costs. Calculate your margin as follows:

(Selling pricecost) / (Selling price) x 100 = Gross margin %

Example: you think you can sell something for $100. Chinese factory quotes you $20 per unit.

[($100-20) / $100] x 100 = 80%

In this case, you’re good to go.

Note: I tend to ignore the up-front tooling costs when calculating margin. Add it into your startup costs and figure out what the payback is. Don’t worry, we’ll go over this later.

—-

The hardest part is over, so we’re going to take a pause here. Before you pull the trigger on production, we need to calculate your total required investment (we’re going to bootstrap to get it as low as possible). You’re going to need to have some money to start with – in order to save some cash, I VERY HIGHLY recommend reading I Will Teach You To Be Rich. It’s a quick read that will teach you how to start putting away a little bit of money – no matter how little you’re earning now.

Stay tuned for the next installment where we’ll set up your fulfillment warehouse (they’re also going to help you coordinate shipment into the US so you don’t have to deal with logistics, which are a complete mystery to me). I’ll tell you how to design and build your website, and start on marketing – getting you prepared to sit back and collect money.

Until next time – un abrazo fuerte.

Zack

7 thoughts on “How I Make Money, Part II: 5 Steps to Creating a Product

  1. When can we expect your next installment? This is something I have always wanted to learn more about…I’ve been checking back daily hoping on part 3.

  2. Authorship isn’t far off for you, as far as I can tell. These installments alone would make a book worth buying (for those who weren’t lucky enough to read them here for free).

    Thanks for the guidance, I wish you luck in becoming published.

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