Simulacra – cre8ica

Wow another link to a Paul Graham essay in one week. I’m going to have to send him a few pennies for all the thoughts I’m borrowing from him. This post is about “Ramen Profitability”

It’s hard to leave the corporate world and make that leap. I was lucky and never really had a 9-to-5 job other than a few part time jobs to pay for school. When I left university I took that first leap and tried to make a go of it on my own. Actually not 100% alone –  I had a couple of friends as business partners. I figured why get trapped in that false sense of corporate security and besides I sucked at interviews. To me it was easier to create a start-up then make a resume. I was already used to living the poor student life so I had nowhere to go but up. Any modicum of success would be fine and if I failed I would just pad my resume with what I had learnt and looked for a “real” job.

Well that was 1998. Since then I’ve built the start of a few  ”successful” businesses and have crashed and burnt many times in between. I don’t believe any of those were failures because I learnt not only what I shouldn’t do again but they all taught me what I really wanted to do. Most importantly I’ve never needed to write a resume and have managed to survive on my own. This time though I think I’ve got it right and I’ve managed to carve an interesting niche out for myself and have real money in the bank.

Those first few years of survival and growth are the hardest ones. Start-ups have very little money to begin with and even less security then they had in the corporate world. Yet with the recent downturn in the economy and slow up shift I know more friends putting in 60+ hours a week. They are no longer happy with the hours, no longer happy with scheduling “date time” with their significant other. Or the veil of promised security they thought they had.

Many corporations are still downscaling and now we’re seeing many burnt out people take the severance package and make a lifestyle choice of starting their own small business. Sadly that means no more regular pay checks, less fancy dinners and rolling all your profits back into the business with the hope that it all works out in the end. The good news is all of it comes with a real sense of accomplishment, a lot more smiles and hopefully some ramen profitability.

Ramen profitable means a start-up makes just enough to pay the founders’ living expenses. This is a different form of profitability than startups have traditionally aimed for. Traditional profitability means a big bet is finally paying off, whereas the main importance of ramen profitability is that it buys you time.

For a small business actually producing a product being ramen profitable means the business is finally self sustaining. You’re taking a small income to pay the basics and able to continue to grow. Being in this position gives you enough hope that the struggle is worthwhile even if it’s not paying off as you wished it would. The best part about being self employed and self sustaining is the ability to look at the world around you and realize you’re so much happier then you were before.

Being Ramen Profitable makes you realize that your ideas and vision are working. People actually want your products and are willing to pay you for them. Being in a startup is so full of self doubt. You’ve produced your product and done your inital marketing and suddenly the sales aren’t coming in as you hoped. Knowing that not only do people like your products but they want to buy them and continue to buy them gives you a sense of relief. You’re not only on the right track but you are finally self sustainable.

So what’s next? Keep going but do it carefully. Enjoy a celebratory dinner, buy yourself a small gift but don’t go overboard. Remember you’ve just proven your concept enough to survive but the point here is to have enough sales to grow and to build not only a business but a sense of security that you once had. And remember to smile and enjoy life the success you’ve started to have.

Note: this post was written at Crema Coffee Co. – Big thanks to the staff for great coffee, a break from my studio space and an amazing environment for my ideas to flow.

I was reading an essay titled “Startups in 13 Sentences” from Paul Graham one of the founders of Y Combinator. I normally don’t place too much credence to articles about tech startups. Why…

1. I’m not a tech startup (been there done that – didnt make me happy)
2. Most tech startups focus on a build to sell model. I decided when i started this business that if it makes me happy i’d keep it and not sell it.

But Paul’s essay intrigued me becasue it’s relevant to anyone starting their own business. He says many of the same things I’ve said to friends who want to start their own business. I’ll let you read the entire thing yourself because there’s a lot of useful information in his essay.

What really struck a chord was his second point.

“Launch fast. The reason to launch fast is not so much that it’s critical to get your product to market early, but that you haven’t really started working on it till you’ve launched. Launching teaches you what you should have been building. Till you know that you’re wasting your time. So the main value of whatever you launch with is as a pretext for engaging users.”

Of course you should launch fast with a basic plan. But most people are too scared to start. You need to take that leap and once you do the market will define the oppotunities for you.

What I started off doing and what it has evolved into seem miles away but if i hadnt started i wouldnt have found the correct niche to focus on.

You’ll never see the market opportunities by just analyzing spreadsheets and developing business plans. Jump in and get your feet wet and suddenly the opportunities will present themselves.

I find that many small manufacturers and crafters always find it difficult to price their products. For the long term sustainability of a business it’s important to make profit. You need to understand your manufacturing costs, and most importantly ensure that you have enough of a margin built in for distributors and vendors.

Determining your production cost.
Remember both direct material costs and direct labour costs must be included in the price calculations.

Material Costs are your ingredients, packaging, labels etc.
Labour costs include the time it takes to make the product, package and label it.

Let’s say it takes 10 minutes to make, fill and label a bottle of lotion.
Your hourly rate for labour is $10.00/hour
The cost of the ingredients and packaging is an additional $1.00

Labour costs are $10/hour divided by 60 minutes = 17 cents per minute
$0.17/ minute * 10 minutes = 1.70 Direct Labour
+ 1.00 Direct Material
Total Cost to make a bottle of lotion is $2.70

Most small business will then double or triple the cost and make that their retail price.
$2.70 x 3 = $8.10 Retail

This is where the problems begin.
At $8.10 you haven’t factored in any future growth costs such as distributor or retailer margins. The more sales you make at  $8.10 the less money you will actually be making. In essence your own success will kill your company.

As sales increase you will need more time to focus on manufacturing and less on direct retail sales to your end customer. You decide you need more retailers to help grow your business. You now have to factor in their margins.
Another year down the road you realize you are spending more time shipping products to retailers and cant keep up demand  so you look for a distributor to manage those retailers.  You now have to factor in their margins.

From the beginning you should always plan your Distributor/Manufacturer price : Wholesale price : Retail price.

So lets go back to the lotion and figure out the correct price so you can ensure your success wont make you bankrupt.

Cost of the product is $2.70
Manufacturers Prices is $2.70 x 1.43 = $3.86
Distributor Price is $3.86 x 1.11 = $4.29
Wholesale Price is $4.29 x 1.43 = $6.13
Retail Price is $6.13 x 2.00 =  $12.26

Setting the retail price at $8.10 will make it very difficult to include retailers and distributors into the mix when the true retail price should be $12.26. If you had initially set the price at $8.10 you are effectively making your manufacturer cost $1.70 hence losing $1.00 for every product you make.

Be very careful when developing new products and factor in all your costs including future growth.
Your success  should not cost you your business.

As everyone has read or watched in the news the current issues in the world have raised commodity prices.

This has affected small manufacturers and many will not be able to survive without some radical changes in how they do business.

Many small business and crafters dont price products appropriately (a post waiting to be written there) so this could effectively shut many independent  businesses down very quickly.

Perfect example. Holey Butt’r one of our most popular aftercare products consists of  25% Jojoba oil. In the last month i’ve seen the price of Jojoba increase 225%.  A huge spike that needs to be accounted for.

At this point i refuse to alter my formula to reduce the % of Jojoba and i cant adjust the size of the product because of the packaging commitments we’ve made.

The easy option is raise my price or reduce my margins. I decided to look at other alternatives…

I was lucky and spent the last quarter of 2010 looking at ways to improve production and find efficiencies in manufacturing.  With new equipment and new production methods we can now produce 400% more product in the same amount of time. This helps reduce labour costs and the bottom line.

I also looked at efficiencies in raw material purchasing and realized if i bulk order my stock of ingredients that haven’t shown price increases i could save even more.

Result, even with a 200% increase in Jojoba oil i managed to only incur an increase of a few cents per tin.

For now I can absorb that cost increase and not pass it onto my customers.

Look at your costs and ask yourself where you can find efficiencies and most importantly make sure you have priced your products properly in the first place.

Surprise I’m back! After a year long hiatus I had to decide if I wanted to keep this blog alive or kill it for good…

I’ve decided to try and resurrect this space but with some changes. I realized the reason i stopped writing was because the site started to feel fake. It started to fell like a marketing tool and a page to just promote my products.

It was never meant to be about marketing my products  but the online world talks about social marketing and product promotion and suddenly you feel like you’re missing an opportunity and should follow the masses.

Being away for a year has not affected my business at all. In fact 2010 was our best year to date and 2011 has already surpassed our expectation.

It seems I got lost in the need to push my products and lost my vision about just talking about what i do and what comes to mind.

What i’m hoping to do here is talk more about my thoughts on life. Because one of my passions is my business you will of course see work related posts but i promise to keep the marketing down to a minimum.

So here’s to a new chapter and hopefully those that still have me on their rss feeds will be in for a pleasant suprise when they read this.