The Challenges of Retail for Startup Hardware Companies
In a recent column, I covered some of the challenges entrepreneurs have in getting their products into retail. This column explores the issue in more detail. It’s based on an interview I had with James Berberian, an experienced sales executive who has sold consumer electronics products for his entire career, including nineteen years with Targus, where he grew their worldwide sales to over half a billion dollars in 2011, the year that he left as VP sales.
P: What are some of the misunderstandings an entrepreneur in a new product company has about retail?
J: Companies introducing their first new product are usually unprepared and don’t realize how difficult selling a product can be. Even after they make their first sale to a retail account, they’re about to discover the job of selling has just begun. Retailers expect the company to generate demand for their products. And getting the product to sell at the retailer is the only measure of success.
Most companies underestimate the cost it takes to sell a product. They’re excited the store’s buyer likes their product and has put it on the shelf but that means little. They need to be prepared to spend anywhere from many tens of thousands to a few hundred thousand dollars.
P: What is the state of the retail environment with regard to selling consumer electronics and what has changed?
J: Consumer Electronics at retail has consolidated tremendously. Circuit City, CompUSA, Good Guys, Lechmere Sales, The Wiz, and many more big box stores (large chains) have gone out of business. While some of this has been caused by online sales, particularly Amazon, it’s also the result of a new, younger generation of consumers more tech savvy who don’t need a salesperson to explain the product.
Online resources such as YouTube, product reviews, and gadget blogs help with the purchasing decision and explain how to set up and use the products. Customers are much more comfortable buying without seeing the product first. Online has become more convenient and has eliminated all the risks of buying sight unseen. Amazon refunds your money back the day a return is shipped. And many buyers know more than the salesperson and prefer not to interact with others for assistance.
P: Who are the five most important retailers today?
J: Best Buy, Wal-Mart, Target, Costco, and Amazon
P: What are some of the costs a product company faces in going retail?
J: Packaging costs, point of purchase displays, and distribution costs. Retailers often want the package to be designed just for their store. A product selling for $100 or more often requires a display. They’re expensive to build, set up, and maintain. Distribution costs are higher.
If a company wants to get their product into retailers and has only one or two items, they’ll be directed to a distributor, who already has a relationship with the retailer. The distributor’s role is to inventory, take orders, ship, process returns, and invoice the retailer. For this, the distributor charges 5% to 12% of the selling price. Lastly, a company will need a rep firm or sales staff. Rep firms, consisting of an independent sales force, are usually the most effective at gaining sales without the overhead costs of a large sales staff. They will take a 3% to 6% commission.
P: Should a product company try to sell to as many retailers as possible?
J: No, to be successful at retail and protect your selling price, don’t have a goal to sell to everyone. Focus on selling to several strategic retailers. If you sell to everyone, your price point is degraded, your major retail partners will want to differentiate, and will often replace you with one of your competitors. Retailers don’t want to sell the same product as their competitors. While it’s counterintuitive, you can end up selling less when you have too many retailers.
P: What sort of profit margins are needed by the retailers? In other words, what does my product need to cost me to sell for $10 at retail?
J: Accessories require a 65 to 50-point margin (retailers pay $3.50 to $5 for a $10 retail product), hardware requires 35-45 pts., and a powerhouse brand such as Sony or Apple, require an 8-15 points margin. When you add distribution and rep commissions, a hardware product that sells for $10 needs to be made for as little as $2.50 or $3.
P: What are some of the biggest surprises in working with retailers?
J: A retailer may ask product companies to take back a competitor’s inventory as a condition for selling their product. They may force a company to take back the first order if the product doesn’t sell.
If a product has no intellectual property or patents and it’s successful, the retailer may copy the product and sell it under their own store brand. Designing and building products used to be a specialized skill, requiring a relationship between a brand and factory in China. Now, virtually anyone can get products built. Retailers are very aware of what products cost and, of course, they know what sells, as they are closest to the consumer. (Start-ups worry about the Chinese, but they should worry more about the retailers.)
P: Is selling a product in the Apple Store a big benefit?
J: Yes. It adds credibility. Buyers from the large retailers notice and it can help you gain distribution. But there is a downside. If a product is sold in an Apple store and then is removed within 60 days, buyers assume it has failed.
P: With all these challenges should a company ignore retail and focus on just online sales?
J: Yes. Margins are a lot less using retailers than selling direct online. Retail adds many extra costs and lots of frustrations. But most consumer product companies cannot afford to ignore retail. Retail today is still the 800-pound gorilla and moves a huge amount of product, much more than online does for most categories. There are many customers that still want to visit a store and touch the product, as well as a surprisingly large number that don’t have a credit card and cannot buy online.
P: Finally, what advice do you have to an entrepreneur who has had a successful Kickstarter campaign, has developed the product, and now is faced with selling the product to consumers? What are his priorities?
J: The very next thing I would do is to find a way to reliably source the product and hire independent rep firms to cover the country. A company can have 20-25 sales reps on location selling their product for no out of pocket cost until sales are made. Instead of spending on costly ads and rarely impact sales significantly, spend on a retailer’s program to make them successful in selling through the product.