Last week, the blog took a look at the important operational and financial considerations that small businesses need to make when they go from small-batch to big distribution. Today, the focus shifts to the other side of the coin: generating the energy and buzz necessary to make the leap to a wider market, without seeing your profit margin shrunk by distribution costs. How can a business balance the desire to go big with the need to keep control over their pricing strategy? For one entrepreneur recently featured on Reddit, the answer was to cut out the middleman by leveraging the power of social distribution and word of mouth marketing.
The Hot Squeeze, a condiment company based in Georgia, started out with an investment of owner capital – $23,000 used to start a small batch bottling process for homemade sauces. Owner Sue Sullivan encapsulated the very definition of a bootstrapped small business. Six months ago, her Reddit story made site headlines, attracting thousands of comments and views. In it, she wrote:
“as that first bottle came down the ramp, I thought, “yes, this is my product, my baby.” But then the next 5,999 bottles began queuing up and a more panicked, contemplative voice began nagging: “what the hell am I going to do with all this product?”
For Sue, the first answer was a lot of hard work spent to build up relationships with distributors. Unfortunately, these distributors put a major dent in her margins:
“I would sell $12,000 worth of product and get back something like $500 — and yes, that’s from an actual distributor invoice. Soon, I was bleeding so much financially that I had to scale back almost to where I started.”
Determining the cost of goods for your product is a complex process, but it is fundamentally built on what you need to spend to produce, process, package, and ship one unit of sale. Some of these costs are fixed, and some are variable, but in the end you should be able to model – to a relatively high degree of precision – what your per unit cost of goods adds up to at any given moment.
Expanding beyond direct sales to a wider distribution network will affect the margins around your business significantly. Remember, a distributor will be reselling to a retailer who will then have to sell it to consumers. So there must be margin available for all, throughout the process, or it won’t work (or sell). In light of this, some businesses must be prepared to take 60% to 70% (and maybe more) off their suggested retail price when selling to distributors. The question for a small business therefore boils down to knowing whether or not the increased sales volume through a larger distribution channel will be valuable enough to offset the significantly increased cost associated with getting their product into more stores.
For Sue and her Hot Squeeze products, this was simply an untenable prospect. In lieu of seeking out more distributor contracts, she launched a Reddit-based giveaway that attracted incredible amounts of word-of-mouth buzz. As her distribution contracts came to a close, she found her online direct sales steadily increasing and retaining profitability. Investing in word-of-mouth marketing is a low-cost, but relatively higher-risk, way of making the leap to a bigger market: not every business lands the hook they need to make a viral story go the distance. The key to success in this field is knowing your audience and understanding how to delight them! Just as Sue and her condiments business used word of mouth to alleviate the squeeze on her margins, small businesses should remain aware of the power behind social distribution channels.