Dave, over at Grav.com, is one of the leading manufactures of glass pipes in the marijuana industry. We first met in Austin, but serendipity brought us together, for morning biscuits, in Denver the other week.
At breakfast, Dave told us a story of when he was first starting out. At the end of his first three years in business, although he had decent sales, he was in deep in debt. He would rotate credit cards with suppliers and juggle the company’s finances every month to scrape by.
One day, sometime during year three of the business, he met with a distributor about a new product they had developed. It was a simple glass pipe, different from the larger pieces he had been making. During their meeting the distributor asked Dave the obvious question, ‘How much is this product going to cost me?’. Dave, not wanting to upset his distributor who was currently selling his other products, gave him a price that was the bare minimum it would take for Dave to remake these simple glass pipes. The distributor, from Dave’s account, seeing that he was new to doing business said, ‘Dave, you can sell me the pipe for $1.50 or $3.50, either way I’m selling it for $9.50’.
Dave recalled this moment as the time something fundamental clicked for him — low pricing was holding back his company from being successful. Not only was he hurting his own margins, he wasn’t actually making his customer happy by charging a lower price.
As we flipped through Dave’s catalog at breakfast he reflected, ‘One of our company’s most valuable assets is the people who distribute our products.’ Although I remarked that the glass was very nicely designed, Dave said that there were other companies arguably making cooler looking products.
Dave now runs a multi-million dollar operation. To think that he was in crippling credit card debt when the company first started seems unbelievable, given where he is today. And here’s the crucial point: they are selling the same products, albeit more of them. But one simple change, implemented after a conversation with a distributor, led to them charging a price that made the business profitable, and this made all the difference in terms of his success early on.
Companies can live or die during pivotal periods like Dave went through, simple pricing changes can make the difference.
So many times entrepreneurs with good products, and good intentions, shut themselves out of markets because they do the same thing Dave did: price their products unfairly low. It’s a martyr’s mentality and, especially for bootstrappers, can mean the death of your company in the long term.
The obvious question is: how do you price a product? Here are my thoughts:
1. Bake as much margin into your product as the market will allow, especially in product businesses. There is a good chance your cost structure will go up. Staff, marketing, insurance, etc. are all negligible when you are first starting out. But, over time, it’s likely you will be selling the same product at your initial price but you will have the cost structure of a full-blown organization.
2. It’s harder to raise the price than it is to lower it, or keep it the same. People and companies do not like to buy the same product at a higher price. Blah Blah Blah inflation….it sucks to pay more as a consumer. Sell at a premium price point to start with. If you do need to raise your prices, experiment with adding on services, or features, that are cheap and easy to produce with a negligible increase to your costs.
Lately, I haven’t seen too many successful internet-based, bootstrapped companies that weren’t profitable in the first few months of business. As in Dave’s case, debt can be a sign that you aren’t creating enough margin. But it can also mean you haven’t gotten to market quick enough, you haven’t taken time to track your financial progress, or maybe you are a small player competing in a large, efficient market.
When we first started our product business, we took out a loan for around $50k. Within the first year it was paid back and we had more than three times our initial inventory investment in the bank. Plus, we had allowed ourselves to re-order the stock initially sold and also invest in new product development. This was made possible by calculating the price of our products before we entered the market.
Bootstrapped business aren’t supposed to be inherently risky or run on debt. In the case of many TMBA readers, they are built with the specific purpose of wealth generation to fulfill life goals.
Corporate debt, bonds, and startups with burn rates are not the same business model. Sustainability is key to the bootstrapper, and profitability is paramount to this.
Set your pricing accordingly.