Consider a Few Decisions

What kind of people do you want to meet and be around.  What are your interests, or what is important for the people you are trying to serve.  you have probably already answered these questions and know what kind of business to start.  Before you start buying inventory you should know of a few concepts and strategies surrounding products before you start operations.

Value Proposition

How do you bring value to the customer?  Do you make something, have something, or do something which someone will pay for?  This is your Value Proposition and depending on it, you will employ different strategies towards choosing which products to sell.  Mainly, the way you take the factors of production and bring a solution to your markets; will determine some universal and special problems for your consideration.

Manufacture

Great!  You want to make something.  Manufacturers tend to manufacture products within a specified category, and create separate companies for manufacturing in different categories.  So if you have a company making cellphones, you have the means to produce smartwatches, tablets and computers as they are electronics with similar production equipment and materials, but you would not produce clothes.

If you wanted to produce other goods, you would need new technology and diversified manufacturing facilities and accounting books.  Producing products from two different categories in the same company might force one under-performing category to eventually consume the profits from a profitable category.  Having a separate company to produce from a different category will keep the integrity of profitable categories, and allow each category to experience competition differently.

Retail

You hold items in inventory to sell to customers, saving the trip to the maker.  Retail is different in that the confines of manufacturing equipment does not necessarily apply to retailers.  Retailers tend to buy in large quantities and plan product procurement based on shopping habits.  Additionally, Retailers try to not be confined by a product type or category, instead compete in departments.  The retailers will try to keep supply in stock that they know will sell.  Additionally they will employ discounts and marketing to build brand equity and satisfy customers to continue shopping with them.

Service

You do something which others will pay to have done, you offer services.  You should only have products that are relevant to your services.  If you own a dentist practice; you could sell oral hygiene solutions (toothbrushes, gum, toothpaste, braces, whitening strips, oral correction devices and support products, etc)  If a school has a student store, it makes sense to sell stationary, and office department products like pens paper, scantrons, snacks and food, but selling cars makes no sense.

Four Considerations and Examples

Categorizing and Categories 

A category is a collection of like products.  for example an Apparel retail operation will sell clothes (category / Product Type) but inside the store may have different departments or specialties (athletic, casual, dress, men’s and women’s, etc)

Product Development

This is the ground up approach.  You identify a goal, you conduct research and you develop a product with continue research and development till you have something to introduce to the market.  This is the an expensive option because you may not come up with something that can be protected or profitable.  Additionally, this product even though produced now needs to receive help from marketing and customers will need to be educated how to use it.  You get an idea for a solution that a market needs, you design it, you start a patent for it, you develop it, you finalize it, bring it to market, and continuously defend it for the duration of your protection term.

Economies of Scale

This is the bulk discount but on another level.  All value proposition types can benefit from this strategy.  The more you buy, and the more of a discount you receive; the more you can make per item.  Some manufacturers have a set price that is determined by length with company or may be flat for all buyers.  The first retailers were caravans that traveled routes to small towns, they popularized this strategy when they bought from stores in big cities and brought these wares in a caravan through rural areas and made profits from marking up items they bought elsewhere, saving the traveling costs for residents in other towns.  Manufacturers make products in large amounts, retailers buy items in bulk and distribute to stores in different areas.

Product Analysis

Manufacturers and retailers rank products around measures to obtain efficiency, quality and profitability.  Efficient companies buy products that are selling and in amounts that are reasonable.  Retailers like Target and Walmart keep track of shopping habits for each product to make smarter inventory choices.  Think about it!  Shoppers in areas that are mostly overcast like Northwest United States, might buy less sunscreen.  Where as you see the back to school sections appear at the end of summer in all locations.  Large retailers procure products according to past sales trends and upcoming seasons.

Quality is important so if a new product sees too many complaints or returns, the retailer can save themselves from further risks by pulling products and replacing them based on sales, returns, and exchange records.

Profitability is important.  Some items may sell faster and in larger quantities than others.  Typically smaller priced and items will sell faster than larger ones, and certain categories sell more than others.  This concept is the only way you could say that a bar of soap moves faster than a lawnmower.

Case Studies

Scrub Daddy

Category – scrub daddy debuted on Shark Tank around season 4 and was an instant success with it’s high quality, durable, cleaning sponge.  The company manufactured the sponges and increased their product lines to include the accessories like a hand to clean hard to reach places, and different types of sponges and cleaning solutions.

Target and Walmart

Economies of scale – These retailers buy large amounts of a product, say 20,000,000 units of laundry detergent and they have 5,000 locations.  They send out an average of 4,000 units per store.  If you only make 35% as a margin, it makes a bigger difference in large amounts.

Product Analysis – Target and Walmart are market leaders in massive departmentalized inventory retail operations.  They supply stores with the products that the customers are buying in different amounts, regions, and product selections.

Apple

Product Development – Apple’s first popular product to the consumer market (computers for business and enterprise market) was the iPod.  They took the iPod and added more technology like telecommunication and an operating system and started making cellphones for the consumer market.  They then took the device, made it bigger (generally speaking) with memory capabilities, and made it again as a cell phone, tablet, and smart watches.