This is a 4-part series on what building a scalable hardware business looks like:
Part 3: Logistics + Marketing
In the later stages of a hardware startup, consumer companies spend the vast majority of their time figuring out how to market their product to drive sales. Enterprise/B2B companies turn their attention to optimizing costs, namely of logistics and supply chain management. This is not to say that consumer companies don’t care about logistics or B2B businesses can slouch on marketing, but the focus of the organization typically polarizes towards one.
Moving cargo around the world is an endlessly fascinating industry. It’s also something founders of hardware companies tend to forget about until the last minute. Setting your expectations about costs and time can save a ton of unnecessary headache during the planning process.
If you’ve never seen a container ship in real life, do yourself a favor and drive down to your nearest port to take a look. They will blow your mind in sheer scale (each one of those boxes is the back of an 18 wheeler). The vast majority of the world’s freight moves around the globe on these ships. Most Chinese goods bound for the US leave from Hong Kong or Shenzhen and arrive in Long Beach or Los Angeles. The journey takes 4 to 5 weeks. Make sure to buy insurance as containers (or “cans” as they’re commonly referred) sometimes fall overboard in a strong storm.
Moving a single can across the pacific typically costs around $2,100 but can vary depending on contents, weight, time of year, and value of goods. Be sure to spend time thinking about how the can is packed to maximize space utilization. The vast majority of the cost of ocean freight is moving the can regardless of how full it is. Companies that ship lots of product actually design their gift boxes, master cartons and pallets to fit perfectly inside of a 40′ HQ container.
Many startups are frustrated by the 4 or 5 weeks it takes to move a container across the Pacific ocean so they explore shipping their product by air freight instead. While it does shave off a lot of transit time, the cost is typically so much higher than ocean freight that it rarely makes sense. Exceptions to this rule include customized products that are drop-shipped (things like configured laptops) and high-value per cubic inch products like smartphones. Otherwise, expect to spend 10x more than sea freight.
Another oft-forgotten expense: duty and customs fees (depending on where it’s from and where it’s going). It varies but you’ll often pay somewhere between 3% and 5% duties of your BOM to the customs office. Not a huge fee but something you should keep in mind.
You’ll always want someone to help with 3rd party logistics (3PL) and freight forwarding. I can say from experience, managing it yourself is a massive nightmare and isn’t worth the few bucks you wind up saving. 3PL providers manage all steps and paperwork involved in moving cargo from CM to cargo ship to warehouse to land freight to warehouse until the distributor/retailer/end customer receive the product.
Different firms specialize in different parts of the process but the two biggest things to have managed are inter-continental transit (moving between countries, with a company like Flexport) and order fulfillment (including pick and pack, with a company like Shipwire). These two parts of the process tend to be exceptionally painful when more than 1k units are in transit. Be prepared to spend 2% to 5% of BOM cost on logistics providers.
Once your product is processed by customs, it’s now your job to move it by land freight (trucks) to wherever it needs to be stored. Moving a single pallet of your product will usually cost around $1k and take 4 or 5 days to move from California to New York (although most warehouses are in the west and midwest). Keep in mind: moving smaller and smaller parcels costs more and more per unit. As you break cans into pallets and pallets into master cartons and master cartons into gift boxes, each unit becomes more expensive to move.
Many distributors and big-box retailers will require that you agree to hold your product in something called backstock. This means a retailer may sign a PO for 10k units, but will require another 5k units be sitting in a warehouse they control ready to ship at a moments notice. This is to ensure their stores don’t run out of stock too quickly if your product turns out to be a big hit. Some startup-friendly retailers don’t care too much about this (Brookstone) while others will require you double your stock (Walmart). If managed poorly, this can have disastrous effects on a small company’s cash.
Once your product arrives in a store and is purchased, there’s a chance that the customer brings it back. If this happens, you are responsible for taking the product back, moving it somewhere out of the retailer’s control, and figuring out what went wrong. This entire process is called reverse logistics and can be quite costly because of how variable it can be. There’s an old adage: “it’s better to not have a customer than to have one that buys your product and returns it.” You’ll spend far more money and time taking a product back than selling it, so be careful of high returns. In the early days of your product, expect return rates to be high (10% max). 2% is reasonable after you’ve worked out the kinks of the product.
Figuring out how much it costs to acquire a new customer is the single most important thing you’ll do as a young consumer products company. Here are a few tactical guidelines to help you through the process of spinning up the marketing flywheel:
Lot’s of companies believe the difference between a good brand and a not so good brand is PR. This couldn’t be further from the truth (but it doesn’t stop many small startups from spending tens of thousands of dollars on high-end outsourced PR firms). Even a small firm will charge $10k+ per month for helping amplify your presence. I’ve always found it to be far more efficient for companies to do it themselves, at least in the early days. This has the added benefit of exposing you to how early adopters react to your story.
Giving your product away to a few hand-selected target customers can be an exceptional way to market your product/company. It’s usually best to wait until your product is quite polished (DVT at a minimum). I’ve found ~10 units per week is a pretty reasonable marketing expense. If your product is $50 COGS, you’re spending ~$25k/yr to acquire a bunch of great early adopters.
Many young startups attempt to compete with large, established brands by going to conferences and building extravagant booths. Nearly every startup should have some sort of footprint at certain events, but in the beginning it almost never makes sense to pay for fancy displays. You can very cost-effectively meet people by walking around the show floor with your product in-hand (if it’s small enough).
High-quality photos are one the cheapest way to increase the perceived value of your brand. A good photographer will do a full-day session for $3k-5k. The difference between photographs with good composition, models, and color balance is astounding. Using your iPhone to take prodcut pictures for the website is not a good idea.
Mostly due to crowdfunding, product launch videos have become extremely good over the past few years. There’s an entire cottage industry booming around production of these videos, being spearheaded by the now infamous Sandwich Video. Most “standard” product launch videos are $7k or so to write, shoot, and edit but some companies charge significantly more than that to deliver a (usually much) better product. A good video by Sandwich, for example, can cost upwards of $100k.
Just like with investors, the conversion rate for online sales is lower than you’d expect. A strong brand will get about 2 out of 100 website visitors to purchase their product online. This is why brick and mortar retail is so critical for consumer hardware companies to scale. Most companies wind up selling only a small percentage (<10%) of their volume direct on their website. Exceptionally strong brands, like GoPro, can sometime drive direct sales higher than 50%, but this is exceedingly rare.
The secret to success with marketing is understanding your customer acquisition cost (CAC). You can think of this as the total amount of money you spend to get a single customer to buy your product. Good marketing may cost a lot but it will likely convert a large number customers.
There are many books, blogs, talks, etc on the subject but just like manufacturing, the best way to figure out how to acquire customers is talking to a ton of people (especially people that have done similar things themselves), synthesize the best plan you can, and quickly fix your mistakes as you find them. Oh, and praying to the marketing gods probably won’t hurt.
For part 4 on Retail and Exits click here.
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