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While most established business have more than one stream of revenue, it is often sales of products that contribute most to this cash flow.
The product(s) a company sells will be a huge factor in whether they succeed. The right product can propel any company to fortune and the wrong product can make even the most exhaustive efforts unprofitable.
So what are the attributes of good products? One of the most important requirements of a product is that it must fulfill a need or want.
Does the product ease a pain, fulfill a dream, make life easier, or make life better? If not, you better start searching for a product that does. The first part of the Executive Summary in any business plan is the need. What is the need, and how does your business/product fulfill this need? Are you targeting a mass-market or a niche Market?
The second part of the executive summary is an overview of the market. What is the market for the product? Is it a business to business product or business to consumer? How big is the market? In some cases, having a product with mass market appeal is a good thing. For example, if you wanted to have your product featured on Home Shopping Network or market it using infomercials, then you want your potential customers to be everyone or at least a large part of the population. Products with a mass-market appeal that have been successfully marketed through infomercials include George Foreman Grills, Ginsu Knives, and Oxyclean cleaner. You would be unlikely to be successful marketing a book analyzing the cerebral cortex of llamas via a mass-market infomercial.
Other times, however, it is beneficial to have a product that is geared to a niche market. It is much easier to become a real player with niche products than with products that appeal to everyone. There is generally less competition, plus you are able to focus your marketing and advertising on a pre-determined demographic group. In most cases, there will already be trade journals, websites, and magazines which the market segment you are targeting pays attention to, making it much easier to develop brand recognition and a product-following. Word of mouth, also known as viral marketing, also tends to spread faster with these niche products, and it is quite likely that someone with a specific need knows a few other people with the same need.
The Importance of an Ample Margin
Sufficient profit margin is another crucial attribute that a good product must have. Generally, it must be at least 2:1, however, the best products have margins of 5:1. Yes, that’s right, a 500% or more markup. You might say, if I raised my prices that high no one would ever buy. This may be true, depending on your product and the competition in your industry, however, there are a number of things you can do to raise your profit margin.
Margin is simply the sale price of the product divided by the cost of the goods sold. This equation has two components and can be worked on from two angles. The first angle is to lower your cost of goods sold. How? Do everything you can to get the lowest possible price with your supplier(s). Renegotiate terms, offer incentives, tell them you’ll be sending some business their way; whatever you need to do to get their lowest price. Second, increase your sale price. How can this be done without hurting sales? Simple. Increase the perceived value of your product.
What is perceived value? Well, simply, what customers think your product should cost, or more specifically, what value they think it has to them and what they would be willing to pay for it. So how can you increase the perceived value of your product?
Improving perceived value
Here are eight ways to improve the perceived value of your product.
1. Emphasize quality
2. Display success stories
3. Tell of your top quality customer service
4. Stress convenience
5. Improve the design of your product’s packaging and labeling
6. Distinguish your product from competitor’s product and tell why yours is best
7. Develop your unique selling proposition.
8. And if you are selling this product from your website, make sure your website is nicely designed, easy to use, and typo-free.
After you’ve improved the perceived value of your product, you should be able to increase your price without causing a decrease in net profits.
Elasticity & Maximizing Profits
If your sales increase when you increase your price incrementally, you are in the inelastic segment of your price curve. If you’re sales decrease when you increase your price incrementally, you are in the elastic segment of your price curve. If your sales do not increase or decrease substantially when you increase your price incrementally, you have found unit elasticity. At unit elasticity you will maximize your profits.
If this concept in fuzzy to you, you may wish to go back and review your intro to economics textbook or take a look at the 2002 edition of Economics by McConnell and Brue published by McGraw Hill.
One-Time-Sale or Continued Sales?
J. Paul Getty, a former billionaire oil baron and once the richest man in the world, is known for emphasizing the importance of selling products that give continued sales. Most products are single-sale items (vacuums, beds, ladders, videos, etc.), and it is more difficult to build a business selling these as you are always spending money and time trying to attract new customers. If you have your choice of products, look for those which can be sold multiple times to the same customer.
The pharmaceutical industry can afford to spend the billions it does on R & D. Why? Because most often they produce treatments and not cures for diseases and ailments. Treatments must be taken continuously. Other health products like nutraceuticals and vitamins are also repeat-sale products. Anything that needs to be refilled or reordered within a relatively short time frame can be considered a repear-sale product. The majority of services (phone, water, electricity, hosting, etc) are on this auto-bill and auto-deliver system. See if you can find a way to put your product on an auto-bill and auto-ship system. And if you can’t, find a product to sell that you can.
Up-Sell & Cross-Sell Ability
A good marketer knows the value of upselling and cross-selling. There are three ways to increase your revenue. One, increase the number of customers you have, two, increase the frequency from which they buy from you, and three, increase the amount they spend on each purchase. Upselling and cross-selling work on increasing this third pillar. Essentially, upselling is encouraging (usually though an incentive like a discount or free gift) a customer to purchase more of your product than they had originally intended. Cross-selling is selling the same customer a related product of to the one they are buying that they either were not intending to buy in the first place or didn’t know you offered.
Here’s an example of an upsell and a cross-sell. One day, I wanted to buy a small turtle for my girlfriend. So I drove to the pet store and walked in with the intention of buying a turtle, some turtle food, and a fish bowl to put her in. Well, eighty-seven dollars later I walked out with a lovely new turtle, a glass aquarium, an automatic filter, an aquarium heater, two bags of stones, turtle pellets, and some dead crickets. It is obvious to see that I had been both up-sold and cross-sold by an experienced salesperson.
Also, often related to upselling and cross-selling is the back-end product. The back-end product is a related and often more expensive product offered to customers after they’ve purchased their first product. Using back-ends, cross-selling, and upselling is a great way to strengthen your bottom line. Therefore, before deciding to sell a product it is necessary to determine how easily a product can be upsold and cross-sold and if there are any suitably-related products to offer your customers after they’ve purchased the product.
The Perfect Product in Review
The perfect product has the following attributes&ldots;
1. Fulfills a need or want
2. Has either niche market appeal or mass-market appeal
3. Has at least a 2:1 margin; 5:1 or higher is optimal
4. Has a high perceived value
5. Must be replenished or repurchased by the customer often
6. Is easily upsold and cross-sold
7. Has a related back-end product