spend no time on them.
The response I get when I introduce this concept is more or less universal: Huh?
People can’t believe that most of the ultrasuccessful companies in the world do not manufacture their own products, answer their own phones, ship their own products, or service their own customers. There are hundreds of companies that exist to pretend to work for someone else and handle these functions, providing rentable infrastructure to anyone who knows where to find them.
Think Microsoft manufactures the Xbox 360 or that Kodak designs and distributes their digital cameras? Guess again. Flextronics, a Singapore-based engineering and manufacturing firm with locations in 30 countries and $15.3 billion in annual revenue, does both. Most popular brands of mountain bikes in the U.S. are all manufactured in the same three or four plants in China. Dozens of call centers press one button to answer calls for the JC Penneys of the world, another to answer calls for the Dell Computers of the world, and yet another to answer calls for the New Rich like me.
It’s all beautifully transparent and cheap.
Before we create this virtual architecture, however, we need a
To narrow the field further, our target product can’t take more than $500 to test, it has to lend itself to automation
Can a business be used to change the world, like The Body Shop or Patagonia? Yes, but that isn’t our goal here.
Can a business be used to cash out through an IPO or sale? Yes, but that isn’t our goal either.
Our goal is simple: to create an automated vehicle for generating cash without consuming time. That’s it.22 I will call this vehicle a “muse” whenever possible to separate it from the ambiguous term “business,” which can refer to a lemonade stand or a Fortune 10 oil conglomerate—our objective is more limited and thus requires a more precise label.
So first things first: cash flow and time. With these two currencies, all other things are possible. Without them, nothing is possible.
Why to Begin with the End in Mind: A Cautionary Tale
Sarah is excited.
It has been two weeks since her line of humorous T-shirts for golfers went online, and she is averaging 5 T- shirt sales per day at $15 each. Her cost per unit is $5, so she is grossing $50 in profit (minus 3% in credit card fees) per 24 hours, as she passes shipping and handling on to customers. She should soon recoup the cost of her initial order of 300 shirts (including plate charges, setup, etc.)—but wants to earn more.
It’s a nice reversal of fortune, considering the fate of her first product. She had spent $12,000 to develop, patent, and manufacture a high-tech stroller for new moms (she has never been a new mom), only to find that no one was interested.
The T-shirts, in contrast, were actually selling, but sales were beginning to slow.
It appears she has reached her online sales ceiling, as well-funded and uneducated competitors are now spending too much for advertising and driving up costs. Then it strikes her—retail!
Sarah approaches the manager of her local golf shop, Bill, who immediately expresses interest in carrying the shirts. She’s thrilled.
Bill asks for the customary 40% minimum discount for wholesale pricing. This means her sell price is now $9 instead of $15 and her profit has dropped from $10 to $4. Sarah decides to give it a shot and does the same with three other stores in surrounding towns. The shirts begin to move off the shelves, but she soon realizes that her small profit is being eaten by extra hours she spends handling invoices and additional administration.
She decides to approach a distributor23 to alleviate this labor, a company that acts as a shipping warehouse and sells products from various manufacturers to golf stores nationwide. The distributor is interested and asks for its usual pricing—70% off of retail or $4.50—which would leave Sarah 50 cents in the hole on each unit. She declines.
To make matters worse, the four local stores have already started discounting her shirts to compete among one another and are killing their own profit margins. Two weeks later, reorders disappear. Sarah abandons retail and returns to her website demoralized. Sales online have dropped to almost nothing with new competition. She has not recouped her initial investment, and she still has 50 shirts in her garage.
Not good.
It all could have been prevented with proper testing and planning.
ED “MR. CREATINE” BYRD is no Sarah. He does not invest and hope for the best.
His San Francisco–based company, MRI, had the top-selling sports supplement in the U.S. from 2002–2005, NO2. It is still a top-seller despite dozens of imitators. He did it through smart testing, smart positioning, and brilliant distribution.
Prior to manufacturing, MRI first offered a low-priced book related to the product through ?-page advertisements in men’s health magazines. Once the need had been confirmed with a mountain of book orders, NO2 was priced at an outrageous $79.95, positioned as the premium product on the market, and sold exclusively through GNC stores nationwide. No one else was permitted to sell it.
How can it make sense to turn away business? There are a few good reasons.
First, the more competing resellers there are, the faster your product goes extinct. This was one of Sarah’s mistakes.
It works like this: Reseller A sells the product for your recommended advertised price of $50, then reseller B sells it for $45 to compete with A, and then C sells it for $40 to compete with A and B. In no time at all, no one is making profit from selling your product and reorders disappear. Customers are now accustomed to the lower pricing and the process is irreversible. The product is dead and you need to create a new product. This is precisely the reason why so many companies need to create new product after new product month after month. It’s a headache.
I had one single supplement, BrainQUICKEN® (also sold as BodyQUICK®) for six years and maintained a consistent profit margin by limiting wholesale distribution, particularly online, to the top one or two largest resellers who could move serious quantities of product and who agreed to maintain a minimum advertised pricing.24 Otherwise, rogue discounters on eBay and mom-and-pop independents will drive you broke.
Second, if you offer someone exclusivity, which most manufacturers try to avoid, it can work in your favor. Since you are offering one company 100% of the distribution, it is possible to negotiate better profit margins (offering less of a discount off of retail price), better marketing support in-store, faster payment, and other preferential treatment.
It is critical that you decide how you will sell and distribute your product before you commit to a product in the first place. The more middlemen are involved, the higher your margins must be to maintain profitability for all the links in the chain.
Ed Byrd realized this and exemplifies how doing the opposite of what most do can reduce risk and increase profit. Choosing distribution before product is just one example.
Ed drives a Lamborghini down the California coast when not traveling or in the office with his small focused staff and his two Australian shepherds. This outcome is not accidental. His product-creation methods—and those of the New Rich in general—can be emulated.
Here’s how you do it in the fewest number of steps.
Step One: Pick an Affordably Reachable Niche Market
When I was younger … I [didn’t] want to be pigeonholed … Basically, now you want to be pigeonholed. It’s your niche.
—JOAN CHEN, actress; appeared in
