In my last message I wrote about SCALE and explained that the profit is greatest when production and sales closely match. Unsold inventory is a drain on profit. But it's also a fact that large orders can give each of your components a lower per-item cost. Moreover, with a larger order you have access to a greater range of bottles, pumps, boxes, and even fragrances. The question is, are there purchasing strategies that will give you the best of both worlds?
The answer depends (this may sound corny!) on your business plan, your long range goals. Is your first venture into perfume being planned as a one-shot venture -- if you make money perhaps you'll go deeper; if you don't make money, that's the end of it -- or does your plan reach out beyond your first promotion?
If your planning calls for a moon shot -- one "make it or break it" promotion -- then the smart plan is to follow the strategy outlined in my last message which is to match, as far as possible, your production with your likely sales so that, when you've finished, there will be "no paid for but unsold" inventory dragging down your profit.
On the other hand...
If you are planning "perfume" long range, your first venture is simply a test, and you do want to keep it small, working for orders from just the very best prospects. But now there are some ways you can reduce your cost per bottle.
Say for your test you are hoping for 1,000 orders. Does that seem too small? OK, we'll bump it up to 3,000 orders, increasing our risk just a bit. So, while we will need to produce 3,000 bottles of perfume, we aren’t limited to ordering 3,000 units of each component.
But before ordering any components in larger quantities we have to estimate how far our program might go. Ultimately will we sell 20,000 bottles, 40,000, or more? What do we have available in funds?
Look at an example. For our first promotion our expectation is that we will sell 3,000 bottles. But within a short time, when our first results come in, we expect we'll be able to sell at least another 7,000 bottles, and we have the money available to produce 10,000 bottles without straining our budget. So what do we do?
We buy 10,000 pieces of each component we need but we assemble only 3,000 bottles. Our only exception could be the perfume itself of which we may be able to buy in a minimal amount, just in case our market really hates the scent.
By assembling only 3,000 bottles and keeping the rest of our inventory in reserve we gain flexibility. Should our first promotion bomb because of the name, we can change the name because we haven't yet printed those 7,000 other labels. Should we need more perfume immediately, we will be ready with the necessary bottles, pumps and boxes.
By ordering components in quantities of 10,00 each instead of 3,000 each there is a chance that we will significantly reduce our cost per bottle. And, because the bottles we do not fill are not "leftovers" but, rather, inventory for the next stage of our project, they do not become a drag on profits.
Settle your strategy before you get started
Are you going for a one-shot promotion or do you have business building plans? If you are planning a one-shot, limit your buying to what you expect to need now. The cost per bottle will be more than if you bought in a larger quantity but unsold bottles won't be sucking the profit out of your sales.
On the other hand, if this is to be the beginning of , and you can consider your first promotion to be a test, it makes sense to buy your components in larger quantities. Only don't get too carried away and buy so much inventory that you won't be able to use in this lifetime!
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