December 6, 2013
This column is a bit of a change of pace, but like all the previous ones it is targeted to the real issues I see with contract manufacturers and fabricators. This column focuses on products, specifically, the products you may want to build and market under your company’s auspices versus someone else’s.
In virtually every engagement I have had with custom fabricators, there comes an occasion when the owner or senior managers talk with me about designing, building, and marketing their own product. This is natural, I think. The custom business is highly demanding and, in any case, there are sound reasons to want to diversify the business by adding products that you can control. Fair enough.
I have a lot of experience running companies that produced both standard and custom products. I can tell you that there is no magic formula that can guide you in choosing the more profitable one. It depends on the markets, competition, what advantages your company may have, and where those advantages will lead the business.
I also can tell you that sometimes when I probe the reasons for wanting to produce proprietary products, companies often have the “grass is greener” notion. It’s not greener—not even close—but it is different.
Let’s start with the products. Many of the ideas seem solid enough, and the company seems to have the ability to produce the product. That’s a good start, obviously, but it’s really only the first steps, and small ones at that, in what is essentially a marathon.
So what are the hurdles? One is the product itself. Who would buy it and why would they buy it? Is it for a broad market or a specialized niche? Is it unique, or is it a less expensive or more functional version of something that already exists? What is the target sales trajectory? Can the product be protected, if necessary, from competitors that try to copy it?
It seems that when we come up with a product idea, mull it over and refine it a million times, that idea becomes our baby—the most beautiful thing in the world. Be very careful. That’s the first sign that blinders are being put on, very expensive blinders. I’ve been there, done that, unfortunately.
Very few product ideas succeed in the marketplace. I strongly suggest that before you put any money into a new product beyond a functional prototype (if that), you work with people not involved in the product’s success to do one thing: Try to rip the idea and its presumed acceptability to shreds. If there are fatal flaws, you’ll find them at the least costly point. If it survives, you have a shot. This is what the big guys do, and it’s good practice. It doesn’t prevent market bombs, but it normally exposes fatal flaws that are hard to see with the inherent blinders.
If you think that the product is a unique solution to a perceived market need, you need to protect it from being copied. This is usually done with patents. The first step is a search of prior art. This further tests the product’s inherent viability and whether or not you have something special. Patenting is long and expensive; it can take 18 to 24 months and cost $8,000 to $20,000. The lesser of these costs is for a design patent that is far less protective than a normal patent.
I call these preliminary tests the “What the hell was I thinking” process. If it fails, it’s best to just drop it and go on to something else despite the natural inclination to fight and prove everyone else wrong. Believe it or not, when it comes to products, “everyone else” is actually right most of the time.
A parallel part is, of course, financial. Along the way you must build up a model that details a schedule for all the costs (“cash out”) involved in product development, verification, process documentation, production prototyping, and marketing. This is mapped alongside a schedule projecting sales (“cash in”) for two to five years after launch. From this you can model a return on investment given your cost of money and alternative uses of the cash. This is really the easy part. But, as always, there are pitfalls.
The blinder effect really comes into play here. Pros in the art of new-product development and marketing will tell you that it’s best to assume that to fully develop a product will take twice as long as your initial estimate. The actual cost schedule is about 1.5 to 2 times what you initially estimated. And to achieve some planned level of sales will take twice as long as you thought it would.
I’ve been involved in the design and marketing of dozens of new products and can assure you that this is pretty accurate, especially when you are entering markets new to you. There are exceptions, but these are usually found with companies whose core businesses are innovative product development and marketing, companies like Apple and P&G.
It’s good to model along these worst-case lines to get a feel for how robust the product is financially. If it holds water in this test, your product is probably going to be financially successful, if enough people buy it.
As imposing as the product development and financial hurdles are in the proprietary product journey, they are actually not as big as the final hurdle: marketing. You must find somebody to buy what you’re selling (or have them easily find you), and you have to present an easy way to buy.
Classical sales and marketing prowess is a structural weakness in custom fabrication. The vast majority of companies are organized to provide cost-effective solutions based on production and technical skills. They simply don’t have the knowledge and experience to put together a marketing and sales program that can attract a broader market. This is not a criticism at all; it’s a statement of reality. The companies in this industry simply haven’t needed to have expertise in this area. There have always been a finite number of available customers in a finite geographical area.
With your new standard product, that changes. You almost certainly have to market outside of your comfort zone. The preferred solution has been, and is, to use the worldwide nature of the Internet, perhaps backed up by some human support.
That sounds pretty easy, right? We already have a website. Hell, everyone on the planet has a website. And that is exactly the problem. You must find a way to get people to be aware of your product and into your site. Further, your site has to provide a means for people to easily buy your product, either through an e-commerce feature or some other means. You probably need a new site, one with an ultra-professional look and feel. This is certainly doable, but it probably doesn’t come cheap.
The trick is getting people to be aware of your product. This involves professional marketing, meaning a combination of print advertising, tradeshows, e-mail marketing, and sophisticated means of drawing people to your site through search engine optimization. The emphasis can be varied, but there must be a solid way to get to your target markets (and they to you) in an environment of millions of voices competing for attention.
This is not trivial. In fact, it’s the biggest single challenge a company has when entering a new market with a new product. Despite the old adage about building a better mousetrap, in today’s environment, it is possible to have a wonderful product with almost no sales.
Despite all of these obstacles, every year some new products from companies that are unknown outside of their home markets are successful. But it’s rare. The gauntlet described above is real. But, if you’re determined to have your own product and have the cash to fund it, then why not? It’s everyone’s dream—and it’s fun. But so is the lottery.
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