The Cost Is Clear
The Entrepreneur: Ross Youngs, 46, founder of UniKeep LLC in Columbus, Ohio
The Product: Youngs' latest product is the UniKeep, a stackable, archival-safe three-ring binder made from polypropylene and introduced in 2001. Its fully enclosed design allows users to store pens and other small items as well as papers. Youngs is also known for inventing the Safety-sleeve, the first sleeve using a combination of nonwoven, clear plastic for storing CDs in three-ring, fabric and clear-plastic binders. Youngs' company sells more than 1.5 billion Safety-sleeves and other licensed products annually.
Start-Up: $2.5 million in 2001, which Youngs used to pay for the molds the UniKeep required, multiple worldwide patents, branding, packaging and the initial marketing push
Sales: $2.5 million in 2003
The Challenge: Manufacturing a product with perceived value by keeping costs low so you can compete with large, established corporations
The price you choose for your product ultimately depends on how much it costs to produce it. When Ross Youngs decided to sell his UniKeep three-ring binder, he knew he'd have to limit manufacturing costs to compete with larger companies that sell traditional binders. Luckily, Youngs was able to do just that-and today, the UniKeep sells for a good value against the competition. The UniKeep is found nationwide at select Office Depot and Staples stores, as well as through commercial office suppliers such as Boise Cascade and Corporate Express. Here are the steps Youngs took to ensure costs didn't spin out of control:
Steps to Success
1.Set the right price. "Our original target retail price was $3 [per binder]. "Manufacturing costs can only be about 20 percent of your list price to account for costs in the distribution channel, so our cost target for manufacturing was 60 cents [per unit]," says Youngs. However, you won't always meet your target. To account for all the costs in his distribution channel, Youngs ended up selling his product for an average price of $5.50 per binder.
2.Streamline the manufacturing process. Youngs used his background in industrial engineering to simplify the manufacturing process. "I was sure I could make a binder in just one step, with polypropylene rings included in the mold," he says. Simpler manufacturing is one way to keep costs down against the economies of scale of bigger manufacturers.
3.Obtain firm price quotes from manufacturers. To get a price quote, Youngs put together specifications for the product that were eight pages long. "Include a clause that states that manufacturers should review the idea to see if there's a more cost-effective way to produce the product under a nondisclosure/confidentiality agreement," he says. This agreement ensures that the company you're working with can't steal the idea and make the product on its own.
4.Limit packaging and shipping costs. Youngs aimed for packaging and shipping costs that were 7 to 10 percent of the manufacturing costs. "Packaging is crucial," Youngs says. "It has to tell the product's story, but you have to keep the costs down." Regarding shipping, "when you sell to big retailers, you are going to have to pay the freight, so you have to be careful with all your shipping sizes," Youngs says. "You need to be small enough to ship six to 12 units to a small store, but placing more units in a carton will help avoid excessive shipping charges."
5.Set aside enough money for allowances. Allowances are costs you have to deduct from your invoice for items like co-op advertising, shelf space and returns. "We tried to keep our allowance budget at 10 to 15 percent, but that allowance level may only work for a hot new product for a smaller manufacturer," Youngs says. "It takes an allowance budget of 20 to 25 percent to get your end-cap placement every day. Paying more for allowances to get better shelf space is one of the most effective ways for a small manufacturer to increase sales."
6.Have some financial backup. Despite all of Youngs' planning, some of his "firm" price quotes turned out to be not so firm. According to Youngs, "We are working now to resolve those cost issues, but we've had to draw some resources from Univenture Inc. [Youngs' company that makes the Safety-sleeve]. We expect to get our costs back down, but we would have been sunk without some financial protection."
1.Know your target costs. Costs come at an inventor from all directions. Manufacturing, shipping, packaging, marketing, retail allowances and product liability insurance are just a few of the costs inventors have to pay. Five percent more for packaging doesn't sound bad, but it grows fast if you forget to include taxes and shipping. The next thing you know, your product is too expensive. So set a target, and stick with it. If you go over on one item, find another area to cut from.
2.Learn to balance your costs. A major reason why many inventors fail is because their costs are too high. Even inventors with plenty of experience have cost overruns. It's not always the manufacturing costs that get out of control, but rather items such as product liability insurance, shipping costs, retail allowances or commissions to sales reps or distributors. The best way to be prepared is to connect with an expert at an event such as an association meeting. He or she will have enough experience to evaluate your projected costs and see if you've missed anything important. You can find associations for almost every type of business in the Encyclopedia of Associations (Gale Group), which is available in most libraries. If you can't connect with a similar business or expert there, try your local inventors' association (visit www.uiausa.com, or see a nationwide listing of organizations at www.inventorsdigest.com by choosing the "Inventor Organizations" link) or Small Business Development Center (www.sba.gov/sbdc).
3.Have a financial reserve for when things go wrong. Inventors rarely experience smooth sailing from start to finish. There are always problems, and if you don't have money in reserve, you might not be able to adjust for a relatively small problem. Try to avoid completely running out of money, or you'll have trouble negotiating a good deal from a bank or investor. The best time to set up a line of credit is when you still have plenty of your own resources.