Cost Of Goods Sold

Picture of cost of goods pie chart

Relative cost of goods for Kids Double Desk

Pricing

The last couple of evenings, I have been working my numbers in a spreadsheet. I have a good idea what the manufacturing cost of the desk will be within $5 or $10. But there’s also costs that people tend to overlook. How am I going to package this desk? Who is going to package the parts and put them in a box? This is called “kitting, by the way. (Amazon’s FBA, in an attempt to reach the mass market, calls it “Pick and Pack”, but “kitting” in the industry term. Kitting rhymes with hitting.) And how am I going to get it from the manufacturer to the customer?
I’m struggling with a problem that I’ll get to in a minute. And I still have some unanswered questions, or rather, options to choose and the best way to make those decisions it to break down the numbers. As Kevin O’Leary from “The Shark Tank” says, “Numbers don’t lie”.

Cost

Since this is a public post, I am not going to share the actual numbers at the moment for obvious reasons. But I’ll break things down as a percentage and then we can digest it all together. I’ll do this for you with my product, the Kids Double Desk, which is available via pre-order and will soon be available on Kickstarter.

Gross Profit

Before I share my problem with you, let’s first define what cost is so that we are on the same page. Cost is everything that I have to shell out to get the product in your hands. So this is the manufacturing labor, the cost of the wood, the cost of the hardware, packaging, warehousing, shipping, transaction fees (paypal 5%). This is often referred to as COGS (Cost Of Goods Sold). So gross profit is what you make after COGS. The formula for calculating gross profit is (P-C)/P. Price minus cost now take that number and divide it by price. Another way to say it is gross profit divided by gross revenue.

Net Profit

There are other costs of running a company not directly related to the cost of goods/services. In my case I will use kickstarter as a springboard which has a 5% fee. This is not ongoing, but a cost that I must consider in my pricing decision. Other costs I have are domain hosting, email hosting, accounting, phone number, etc. Net profit is also calculated after a company pays its employees. This won’t apply to me any time soon as I will return profits into the company to grow it. Net profit is revenue minus COGS, expenses, depreciation and taxes.

My problem

Let’s discuss my current problem that I mentioned earlier. Most people will tell you that, in order for a business to stay in business, you need to sell a product for more than it costs. If you can sell it for more than it costs, you make a profit and if you continue doing that, you will stay in business, right? No necessarily.

Yes, if the sale of a product covers the cost of goods, and provides a margin, that margin is considered to be good. But, is it good enough? Cost of goods is not all of the expenses incurred by a company; there’s operations costs. Fortunately for me, my operations costs are relatively low.

For now, I have managed to keep my operations costs relatively low. Right now, my operations costs are email, web hosting, telecom, and paypal fees. In the near future, I anticipate bookkeeping fees and taxes to impact my bottom line also. I did spend $30 doing some facebook advertising recently. I plan to do this again, with a different approach and I’ll share the results in a future post.

But these costs are still not the problem that keeps me up right now. My primary concern right now is the success of the Kickstarter campaign. The purpose of the kickstarter campaign is to make it possible for me to bootstrap this business. In other words, I need to make enough on the first batch of sales to allow me to reinvest in the second batch without a bank loan. The value that Kickstarter provides is that the customers, through pre-orders, are covering the up-front cost of goods. After that first batch, I must use the profit to pre-pay the cost of goods.

If you are interested in these details, consider opting in to my email list. I’ll assemble more details around this topic and share it with you.

Here’s an interesting note. Since my margins are 42%, and since my minimum order with my manufacturer is 200, my first order for kickstarter actually needs to be 300 units. The profit made from 300 units is just enough to cover the cost of goods for 200 desks with just a little left over. I will then have enough profit after every batch of 200 units to continue ordering 200 units.

Everything hinges in my ability to sell 300 units on kickstarter, or at least raise the $75K. (Some people will give “in kind” donations, so it is possible to sell 275 units and still raise $75k.) Many people successfully raise this on kickstarter every week, but most goals seem to be lower than this. Do I have a plan B? Yes. But it is my plan B for a reason. Over the last year, I have put so much work into this project.

What will I do if I do not sell 300 units (or reach $75K on Kickstarter)? I will learn from it and move on. But you can be sure that I will do everything in my power to advertise the campaign while it’s going. My other concern is my wife. She has been frustrated with how much time and energy I have put into starting this business so far. If this Kickstarter doesn’t go well, things will not go well for me. She looks at things differently than me. If I don’t hit my goal, I will see it as an opportunity to learn and I will take the time to figure out why. But she will see it as a failure and just tell me to cut my losses and quit.

A good advisor will tell you not to make decisions under stress. Don’t quit your job without at least six months of income. If you lose your job, don’t make rash decisions. If you win the lottery, wait until you come down from that high before making bid decisions. I have to admit as I get closer to the launch of the Kickstarter, I do feel a bit nervous and I am worried about making poor decisions. So I need to be extra cautious about decisions, but also aggressive during the campaign to get as much exposure as possible.

Shipping Costs

If I can not get these desks into the hands of my customers, I will never have a business. As I broke down each of my costs, I realized that shipping is going to kill me, especially while I am a small startup company. And the more that I researched shipping, the more I realized just how complex logistics can be. It was almost daunting.
As I did some online reading, I discovered that there are consulting companies that specialize in reducing the logistics costs for companies. In other words, I was right. Logistics is complex. So much so, that consulting companies make a business out of saving large companies money on their shipping costs, and charging those companies a percentage of the savings. I knew that this was common in telecommunications, but I was a bit surprised to find this in logistics. I saw this as an opportunity. I picked up the phone and called the first one I found based on a blog post from LJM who offer freight auditing and consulting. I was open and honest. I told them that I am simply a guy trying to bring a product to the market and I don’t want to get robbed on my shipping costs. Would they be willing to give me any advice? The person answering the phone said that all the consultants were in Atlanta, but she would help me for a few minutes.

  1. Pre-purchasing shipping upfront can save money. This savings can be negotiated.
  2. Credits When you print your labels, be careful Sometimes employees will “mess up” a stickyback label and throw it in the trash. Usually, the employee doesn’t care or does not know that this is the equivalent of throwing money in the trash. If a label is destroyed, then you should log into the UPS account and void that particular label. Voiding a destroyed label will return a credit back to your company.
  3. Attention to Detail. This was the mantra given to me by my company commander in the Naval Basic Training. Don’t make mistakes on a label. UPS will charge $11 if there is even a small mistake on an address. If they fix the address, say it is suite 10, but I accidentally wrote suite 100. Even if there’s only 10 units in the building and it is OBVIOUS that I meant suite 10, it doesn’t matter, they will charge me $12.50 to fix the typo.
  4. Beware of pickup charges
  5. “Residential delivery charge” of $3.50
  6. “Commercial delivery” fee of $2.15
  7. Saturday delivery fee of $15 for UPS.

I would have loved to have stayed on the phone with her longer, but this was free advice that she was giving to me. Giving me free advice did not fit her business model. After all, finding these types of savings is what produces revenue for her company. After a couple of tips, I asked her “Wow, what else should a guy just getting started need to know on day one?”. She shared a couple of additional tips and her tone changed. I politely thanked her and wished her a good day.

I called UPS directly and I set up a small business account. After answering a few questions, the nice lady told me that the best account to give me is the “occasional account”. Since my volumes are going to reflect that of a business, I do get a couple of discounts which total 39% off of retail residential pricing. I asked what seemed like a dozen additional questions to try to uncover any hidden or recurring fees. So far, it seems there are none.

Before it comes time to ship the desks, I will be certain to call UPS at least one more time to see if I can find any more discounts.

I’m not completely satisfied with my cost of goods right now. I would like to get these costs lower for the consumer. Right now, the price of the desk is $239.99. Keep in mind this is a DIY kit, so it isn’t even finished and ready for use yet! Granted, this is a desk that will last a lifetime, but my typical audience is a young family with young children, not middle-aged families in which the breadwinners have peaked in their careers. My goal is to get the price point closer to $199.99 including shipping. I have spent a lot of time on pricing to be sure that I’m purchasing in bulk to obtain quantity-based discounts and negotiated pricing where possible. I am sure that I will find more opportunities for more savings in the future, but for now, it’s time to get this Kickstarter campaign going.

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Regular family guy working to change his stars for his kids.

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