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Business Booby Traps

Are you just starting to sell your new product? Don't get caught making these new-business blunders.
August 14, 2006
URL: http://www.entrepreneur.com/article/164824

You've invented a product or started a business. You've done all your homework--written a business plan, conducted market research, compared manufacturers, even developed a plan for publicity. You've dotted all your I's, crossed all your T's. It's all under control.

Right?

Right. Well, mostly right. Because there will inevitably be some little things you never thought of that will be coming your way--niggling details that can surprise and sometimes sidetrack even the most prepared new entrepreneur. In fact, I think the true definition of entrepreneur is "a business-minded person who's willing to constantly solve unforeseen problems."

So what are these details? They fall into no particular category, really--we just call them business booby traps. Because if you don't know about them--or how to handle them--they can delay or sometimes completely halt your forward growth. Although there are many that have tripped me up as I was building my new business, a few booby traps in particular come to mind that I'd like to share here.

Booby Trap #1: Universal Product Codes
Getting a Universal Product Code is probably not the first thing you think about when going into business. (A UPC is, of course, that familiar pattern of black bars and numbers you find on just about every consumer product that's scanned at a store check-out.) But if you aspire to a certain level of consumer product sales, a UPC will be critical because most good-sized retailers will expect you to have a bar code on your product to adapt to their in-store computer system.

While UPCs aren't essential if you plan to limit your sales to small boutiques, independent retailers or the internet, it's to your advantage to purchase a bar code and incorporate it into your packaging design from the start. Then, once a major retailer comes calling, you'll be prepared, and you won't miss out on a great opportunity.

To get the ball rolling, go to the GS1 US website ( www.gs1us.org ) formerly known as the Uniform Code Council Inc. There you can apply for your own UPC. Once they've accepted your application, your bar code can be used on up to 100 products, which means there's no need to apply for additional bar codes if your first product spins off into multiple offerings. The fee you'll pay is determined by the number of unique products you need to identify and your company's gross sales revenue. That means if your company is small and you begin with a single product, you won't be charged the same as, say, Pepsi when it registers a new drink offering. Still, the very lowest fee is $800, so it's good to be prepared for this cost.

Booby Trap #2: Product Liability Insurance
Another potentially surprising cost is liability insurance coverage. While it certainly serves to protect you if you're someday sued for problems or injuries that (allegedly) arise from your product, liability insurance is sometimes hard to obtain because of the skyrocketing increase in liability lawsuits. And when you do find a carrier who's willing to take you on, expect to pay for the privilege. While premiums may be less than $100 per month for some products, others with higher perceived risk exposure--infant bedding, for example--can cost more than $10,000 per year. In fact, some items, such as car seats or trampolines, may be virtually uninsurable.

Some things to keep in mind when seeking product and general liability insurance: There are two components you'll deal with: the carrier, which is the actual insurance company, and the broker, who sells you the policy. Some brokers work with multiple carriers--and offer the potential advantage of rate comparisons and options--while other brokers work with just a single carrier. The potential advantage of a single-carrier broker is that he or she may have a close relationship with the insurance carrier and may be better able to persuade the company to take you on.

Also note that industry associations often have insurance programs for their members; you can also ask for leads from your home or car insurance broker. Ultimately, know that an affordable carrier can be hard to find, especially for a new single-product company.

Booby Trap #3: Electronic Data Interchange
Another factor I never anticipated is the need for Electronic Data Interchange. EDI is the computer-to-computer exchange of structured information, by agreed message standards, from one computer application to another. Like bar codes, some large retailers will demand you communicate with them via their own EDI standards. We use a third-party EDI company that provides the communication format that our big retail customers demand.

For instance, most big box stores require you to send data that would normally be found in a paper document--like a ship-from-warehouse order--via EDI. This system allows for efficient inventory management, warehousing and tracking for the big retailers, even if it's not the most convenient system for you. But if you plan on doing business with these larger entities, know in advance that you'll have to get on board with EDI to make it work. Also know that the cost of hiring third-party companies can vary; we paid a $350 setup fee and pay a monthly fee of $50, which includes up to 66 transactions.

Booby Trap #4: Chargebacks
This is a nasty little booby trap I didn't know about until it happened to me. In a further effort for efficient inventory management and minimal handling, most large retailers will penalize you with chargebacks if the product they ordered from you arrives incorrectly or you haven't provided proper advance shipping notifications. For example, if they send you a purchase order for 144 units in 12 cases of 12 units and your order arrives with 13 cases of 12 units, you'll be penalized with a chargeback of either a flat fee or a percentage cost, based on their own labor costs in figuring out the discrepancy.

These fees can be hefty--a hundred or more dollars per error. That means it's extremely important to effectively manage your shipping and fulfillment. If you're still small enough to do it yourself, take care that orders are accurate and in synch with purchase orders and shipping orders. Or if you're shopping for a warehouse/fulfillment center, proceed with caution. Remember, the cheapest option now may cost you more in the long run, especially when errors start costing you chargeback fees. So be sure to base your warehousing decision as much on service and track record as you do on upfront price.

Booby Trap #5: Slotting Fees
Another surprise that often faces growing manufacturers is the cost of optimum shelf space (eye level or end-cap displays). These charges are called "slotting fees." To get premium shelf space, you'll commonly have to pay marketing or slotting fees of some kind when selling direct to a retailer. How do you get around this fee? Well, you don't--it's the cost of doing business with larger retailers. Ideally you'll learn about them in advance and then build them into your product costs. Or by partnering with another company that already has shelf space, you may be able to get into the store at a cut rate--for the short term, anyway. Of course, they'll expect compensation: a percentage of your sales revenue that can typically range from 25 to 45 percent. Or you may decide to partner with a distributor who has access to the store space and will handle fees and all other business aspects with the retailer.

Booby Trap #6: Timing
If you're selling to large consumer retailers, you'll soon learn they work far ahead of schedule when deciding on inventory. Most mass-market retailers have what are called "planograms" that outline exactly what the store will carry and where--they're an evolving map of store inventory that usually changes every six or twelve months. That means it's vital to correctly time your product pitch to improve your chances of success for being included in the next planogram.

While some chains and industries may vary, my experience is that these floor changes take place in February and July for most retailers, with presentation of product to management in September (for February placement) and February (for July placement). Although new products are reviewed continuously, the process intensifies in July and August and early December and January. Buyers often scout trade shows at these times for new and innovative products to pitch to their own management.

These booby traps are just a few of the surprises specific to consumer products you may encounter along your entrepreneurial journey. And although I call them traps, with enough advance planning, they're simply another aspect task you'll need to complete to keep your business running smoothly. As with anything, preparation and knowledge are key.