Risky Business !

Picking up from our last discussion regarding your business model, can you give us examples of the successes and failures you’ve had with your products and suppliers ?

Sure, but before we get into these, I’d like to cover some of the basic risks that are there at the beginning of any relationship.

Fair enough. So I assume that like any other business you must assess the risks of a new venture. How is this risk managed to ensure a positive outcome?

Well, let’s start by covering the product risk and say what most grocery buyers will tell you: the potential sales performance for an untested product are unknowable.

The implication is that those involved in a new product launch will want to minimise their financial exposure. Putting it simply you might not get back what you put in!

So why take the risk?

The basic motivator here is how strongly you and those in your network feel about a product’s potential.

So, how do you deal with this risk then?

First and foremost before placing our first trial order, we try to obtain as much product feedback as possible from our network of retail buyers, shop owners, distributors and consumers. We do this to assess sentiment, the competitive environment, and peoples’ readiness to invest in the product.

What next?

If the outcome is negative, we get back to the producer with the reasons behind the decision not to go with the product and often include some positive suggestions from our findings.

If people’s reaction to the product is favourable, we’re ready for a trial order and always start with a basic calculation that helps us minimise the financial risks associated with it.

Can you share this with us?

Sure, the questions we ask are basically:

A. How much does it cost per unit to ship a certain minimum amount of product from country X?
B. How much per unit profit do we think we can make?
C. How many units do we need to sell to make enough money to cover the cost of goods, the shipment cost, and any other necessary initial marketing expenses that are incurred?
D. Finally and most importantly, how strongly do we feel that we can achieve B & C?

But don’t you have any idea of what you might sell based on how similar products are doing?

Sure, that’s where the initial optimism came from, but don’t forget this is a trial order and there is no need to rush into things: wait and see if the product works!

So what you are trying to do is recuperate your initial investment in a worst case scenario?

Yes

Ok, so you’ve put in your first order and it went well, does your risk assessment now change?

Not significantly at this stage, not unless the product flies! It’s early days yet and we now need to factor in new variables before deciding whether to go for the second order. These include:

A. How long did it take to sell the stock?
B. Did we achieve the price point we wanted or did the products have to be discounted, or go on promotion?
C. How often did the stores who bought the product order it over the period?
D. How many new stores ordered the product every month?
E. What feedback did we get from the stores, form consumers?

So a second order is not guaranteed?

That depends on the above factors, but if the feedback in general was good we would certainly go ahead to the next stage.

Is the second order the most important order?

No that comes later! The order however is important for two reasons:

First because it is confirmation of our commitment to the supplier: more on this later.
Second, because the product needs to now perform against a set of objectives that we outline.

Can you go into more detail regarding the second point?

Sure, bare with me.

Not all products will do well enough to justify a continuing investment in them. This is a reality that people deal with in most industries. As a result people diversify their product portfolios across categories, price points, and so on… focusing on those that yield the most while nurturing and growing those that have potential. To carry a product medium term however it needs to perform at a certain level.

Can you give us an example?

Sure. Let’s say we had a bit of money available to invest in a new product opportunity ( ie the second order), we would need that investment to deliver in the medium term at least what it would be delivering if it were invested in one of our successful products, or any other investment opportunity we had at the time.

You mention medium term twice, how long is that?

Oh I don’t know! That might depend on the existing economic environment I guess, and on the resources we had available: a couple of years maybe.

Ok, so what you are saying is that order two is important because it helps to measure the expected financial returns of a medium term commitment to the product.

Sure, we set the returns we would like to see, and then measure the performance in view of those financial and market objectives. If the product can deliver the performance, it has demonstrated profitability and shown signs of growth.

Can you give us examples of these objectives?

Based on order one’s performance, the second shipment would be placed to cover sales expectations for a given period, say six months. From a commercial perspective, we would be measuring the following against objectives:

A. A certain overall sales volume
B. A certain monthly growth rate in new stores taking up the product
C. Consistent or growing monthly orders by store
D. A certain numbers of distributors listing the product.

And if the product performs, you can expect to carry and nurture it over the next two years?

Precisely, stage one completed!

And what about supplier risks, how do they play out?

For us as you can imagine, supplier risks are in many respects very apparent. How we measure and deal with them is quite particular to our business model and I look forward to covering this with you in the upcoming post.

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