Our CFO team mentors a wonderful group of women-led brands as part of the Ladies Who Launch program, an opportunity that has given us a front-row seat to the unique challenges consumer product companies face while taking their products to market.
Here’s the deal: Regardless of your scaling aspirations, your focus on margins and profits should commence right from the conceptual stage of your product. A strategic financial plan will take you from concept development to product maturity.
To position your consumer product brand for long-term success—whether you’re a retailer or direct-to-consumer (DTC) brand in industries such as apparel, CPG (consumer packaged goods), home goods, accessories, beauty, and nutraceuticals—you must invest time and effort in devising pricing strategies, inventory planning and capital allocation, and optimizing supply chain logistics.
Let’s delve deeper into these three critical components essential for the growth of a consumer product brand.
1. Pricing Strategies
You’ve got an exceptional product, but how should you price it? Begin by reviewing your Cost of Goods Sold (COGs). It’s a vital factor in setting the perfect price tag, encompassing all the expenses in crafting, packaging, and shipping your product. But that’s not all—you should also incorporate a healthy gross profit margin. This margin isn’t just about covering daily expenses; it’s your ticket to sustain future growth.
Picture this: You start as a Direct-to-Consumer brand (as most companies do) and with a little success, big-name retailers like Nordstrom, Target, Walmart, and Costco come knocking, eager to place a purchase order for your product. But there’s a catch. These giants will demand their share of the pie, and without proper planning, you’ll lack the profit margin to cover their cuts and the additional overhead costs incurred in retail sales.
For example, if your product costs $10 and you feel like a 50% margin is sufficient, you will sell it for $20. Let’s now assume that Nordstrom calls and wants to test your product in their stores. They want to match your retail price and sell it for $20 and they want a minimum of a 50% margin. This means you have to sell it to them at your cost of $10 while incurring additional operational costs to comply with the Nordstrom Vendor Guidelines. The result? You are now selling your product at cost and most likely incurring additional costs you hadn’t accounted for, ultimately losing money.
It’s important to plan ahead when establishing your pricing. If you ever want to take on selling your product through a national retailer, you will need to consider the margin they will take and the additional costs of doing business with them.
2. Inventory Planning and Capital Outlay
For consumer product companies, a well-thought-out approach to inventory planning and capital allocation is crucial. These companies must maintain a sufficient inventory to fulfill orders promptly and meet retailer demands, necessitating a capital investment made months or even a year in advance of realizing sales benefits. Therefore, meticulous planning becomes paramount.
Overstocking inventory can lead to a surplus that eventually requires markdowns, potentially resulting in financial losses. Conversely, understocking results in missed sales opportunities. In times of instant gratification, we know that consumers want it now—if they have to be put on a waitlist for your product, they may forgo the purchase altogether.
Plus, if you’ve secured funding to cover production costs, you now have the added responsibility of repaying debt. Striking the right balance between inventory production, fulfillment, and capital requirements is the key to success.
Establishing a robust forecasting model based on sound assumptions is critical in achieving this balance. It guides decisions on when to invest in inventory production. Additionally, coordinating delivery timing expectations with buyers, including retailers, can streamline production scheduling and align it with the necessary capital resources.
Within the purview of inventory planning, brands must also consider factors such as returns, replacement goods, and the logistics required to manage them. Returns, breakages, and shipping issues often entail substantial costs that must be factored into the planning process.
3. Supply Chain and Logistics as You Scale
Navigating the complexities of supply chain and logistics as your business scales is a pivotal juncture in your growth journey. It prompts the critical decision of whether to outsource production and logistics to a third-party entity or maintain in-house management. To make this decision wisely, several key factors should be evaluated including the impacts to gross profit margins.
First and foremost, consider the implications of transitioning to third-party logistics (3PL). Assess how this shift impacts your cost structure relative to the time saved by not handling these aspects internally. Explore the potential for operational efficiencies and expedited delivery timelines that a 3PL partner, with established scalable processes and substantial purchasing power, can bring to the table.
Moreover, it’s essential to gauge whether the chosen 3PL provider has the capacity to scale in tandem with your business. This ensures that you won’t be burdened with the continuous need to secure additional warehousing space, a concern that can significantly impact your operational agility and cost-effectiveness. Making an informed decision regarding outsourcing versus in-house management will play a big role in optimizing your supply chain and logistics as you progress along the growth trajectory.
When it comes to achieving strategic financial solutions that steer your company’s journey toward success, our team of experts is here to provide guidance. We understand that the early stages of growth require meticulous financial planning, and we’re well-equipped to assist you in making informed decisions. Connect with us today to learn how our fractional CFO services can serve your unique needs.