The Cost Matters

The Cost Matters

So you found your winning product idea. Next up is figuring out how to produce it as quickly as possible, at a level of quality your customers will enjoy, while meeting your production cost KPIs you have set during product research. Sounds easy? Right 🤔…

One question you may be wondering is ‘where should I manufacture my product’. 50 years ago, this would have been less of a question, but in today’s modern age of global trade, producing goods overseas is not only viable, but also pretty simple to set up and manage by yourself.

Of course, there is always something to be said for manufacturing locally. You are creating jobs in your local economy for one thing, which is always a good thing to give back to your community. And it can also serve as a marketing value proposition; manufacturing in the same communities where you sell your products. So this may help increase your conversion rate on your website. Although, speaking pragmatically from my experience, don’t expect having a badge saying ‘MADE IN THE USA’ to increase your sales drastically. I feel like it’s a nice to have, but not something to build your business around.

In my opinion the most important thing when selecting a manufacturer is getting your landed cost as low as possible, while maintaining a quality product. Your landed cost is the total cost per unit it takes to manufacture, sea/air freight, warehouse, and then ship your product to your customer. It is the sum total of all the costs you incur on the supply chain side to deliver 1 order to 1 customer.

I cannot over-emphasize how important landed cost is when you are pursuing a paid marketing approach to selling your products. Every dollar you can cut from your landed product cost will make your advertising life so much easier when the time comes. I want to give a quick example to illustrate this because I believe it's incredibly important.

Let’s say you are selling air purifiers for $60. You determined your landed cost should therefore be $20, so your retail price is 3X your landed cost. These are healthy margins with enough room for you to pursue direct response paid advertising to sell your product.

When it comes to advertising we will analyze the performance of our ads by measuring something called our ROAS (return on ad spend). In reality, this measure tells us how many dollars in revenue we make back for every 1 dollar we invest in advertising. Without diving too much into the math, for a $60 product with $20 landed cost we know our breakeven ROAS is 1.57. This means that we need to make back at least $1.57 in revenue for every $1 we spend in ads, just to break even and not lose money on each sale.

Now, let’s say we were able to bring our landed cost down to $18 instead of $20. This would change our breakeven ROAS metric from 1.57 to 1.49. That means we now only have to produce $1.49 in revenue for every $1 we invest in ads to breakeven on each sale. This may seem like a small thing, but when you are scaling an ad account having a lower breakeven ROAS will make your life so much easier and less stressful as a marketer.

To put it another way, if you want the business to have a healthy profit margin of 20% with a $20 landed cost, you would need to achieve a ROAS of 2.29 inside your ad account. If you brought your landed cost down to $18, you would only have to achieve a ROAS of 2.13 to hit your goal of a 20% profit margin. Achieving high ROAS numbers consistently is difficult in practice, so having lower ROAS goals/KPIs will drastically increase your businesses chances of success.

The above may sound a little confusing (depending on your familiarly with marketing metrics). And if it did, don’t worry, we will dive much deeper into marketing in a later section. I just wanted to bring this up here to illustrate the effect of choosing the right supplier on your ability to effectively market and scale a product with paid ads. If you choose wrong and are over-paying for your manufacturing, or manufacture in the wrong place and spend too much on sea or air freight then you are making your life as a marketer so much harder, and perhaps even impossible in some cases to make your business profitable.

That’s also why it’s important to know your metrics in terms of how much you can afford to pay for your manufacturing and freight to your warehouse before you start searching for your suppliers. Having this number in the back of your mind will help pre-qualify suppliers so you don’t waste too much time working with a supplier that is simply not a viable option.
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