S7 E13. What you must know about your Production Costs to have a profitable business with Jeremy Gray

Episode 14 Production costs too high? Find the best way to reduce your costs. ​ Cost is usually a balance between good, fast and cheap. You can have two of the three but not all of them. If you find that your variable costs are more than your customer is willing to pay but you still believe in your idea what options are open to you? Continue regardless in the belief that at some point sales volume will reduce your variable cost below the price point and profitability will follow. This is a viable option if you have the funding. Amazon is a prime example. But if you cannot afford to wait for profitability, consider these options: Find someone who can manufacture your product for you. A toll manufacturer. A toll manufacturer is a company who takes raw materials supplied by you and converts them into finished goods. Could be an option if your products do not require specialized manufacturing processes. Quality control needs to be maintained. You will not be the toll manufacturer’s only customer. Accounting for materials can be a challenge. Your marginal costs are likely to be higher than making it yourself, but your fixed costs will be much lower. This may bring your variable costs below the expected selling price. White labeling is another option to explore. This is similar to toll manufacturing but the producers purchases and uses the materials required to make the product. This is likely to be more expensive than toll manufacturing but is more friendly to your cash flow. Supplier may ask for take or pay contract. These are not second-class strategies, they are used by huge MNCs such as IKEA and Skype Use a modified form of sustaining engineering. Used by existing companies to reduce the cost of the products to improve profitability, match competitors pricings or drive volume. Do further research to identify lower cost sources or alternative materials which are less expensive. Look at all costs – an alternative form of packaging could deliver savings. Negotiate with potential suppliers. Guarantee 100% of your needs will be bought from them. May not get you much but at this stage every percent counts. Give them a reason to reduce their prices to you Value engineer your product. In your enthusiasm for your product you may have over designed it. Look at your features incorporated in your design? Do some add only marginal benefit? Will some only be used by a niche customer? Scope creep is a common failing. Turn this into a positive. Your stripped-down version can be your initial offering, the original design maybe your 2.0.