Before you do anything else, ask yourself this one simple question:
How much money do I want to spend in creating this business?
This number represents the total amount that you will be able to spend on product stock, branding, web development, marketing and all of the other expenses associated with getting your business off the ground.
It doesn’t matter if you are putting in $100,000, $1,000, $100 or you are trying to start your business with no money whatsoever. The only thing that matters is that you know exactly where you stand. The amount of money that you invest should be an amount that you can comfortably afford to lose. If that number is zero dollars and you can’t afford to lose any money, so be it. In this instance, the answer isn’t to overextend yourself by taking out a loan or by putting everything on a credit card. The best thing you can do is embrace your financial reality. If the money is allocated correctly, someone who spends $5,000 in starting a business can get the same or better results as someone who spends $100,000. When you don’t have a lot of money or otherwise aren’t prepared to take on a lot of financial risk, you can still succeed in business; you just have to be a lot more creative.
The great thing about the internet is that it acts as the ultimate social leveller. You don’t need hundreds of thousands of dollars to succeed. You don’t need a college degree or family connections. You don’t need to live in London or New York or Sydney. All you need is a growth mindset and a willingness to get your hands dirty.
The advantage of having a lot of money when starting a direct-to-consumer business is that you can afford to outsource most of the work. If you are able to invest hundreds of thousands of dollars, you will, depending on the product(s), have enough money to hire a creative agency and web designer who will be able to complete much of the work on your behalf. Depending on how much you want to spend, you can outsource every single part of the creative process from product design and sourcing, right down to naming and fulfilment.
In theory, the good thing about outsourcing this work is that you will be left with a polished, finished product that you can then start marketing to consumers. The downside is that outsourcing is expensive. Rightly or wrongly, creatives will demand a premium for their services. The majority of creatives are simply taking advantage of gaps in a client’s knowledge. If you know nothing about typography, they can choose a font and space out the lettering and present you with a logo… and a bill for $2,000. If you know nothing about web design, they can use a standard template and stock images and present you with a website… and a bill for $5,000. If you know nothing about photography, they can take a couple of photos and edit them in Adobe Lightroom using pre-sets and present you with a few jpeg photos… and a bill for $2,500.
If you are able to find and hire the right creatives, they will certainly be worth the money. The problem is that even if you are able to find a great creative agency, they may not have the capacity to take on your project and even if they did, they could charge a fortune for their services. So, where does that leave us? Rather than getting despondent and worrying about money, it’s important to lean into your limitations and get a minimum viable product off the ground. It’s important to start somewhere. Starting is the only way you will learn —even if it means that you aren’t entirely happy with what you are able to produce. If that means you need to design a logo and packaging yourself, or take photos yourself or do the website yourself, that’s just what you will have to do. If you have to make the products by hand and learn how to keep the company’s accounts, that’s just what you will have to do. If that means that you have to do every single thing yourself, that’s just what you will have to do.
Building a business is a lot like building a house. If you have to hire an architect and builders and have a project manager supervising the build, costs can quickly spiral out of control. If you are able to take control and complete a lot of the work yourself, you can save a huge amount of money. The good thing is that if you are reading this guide, you will have access to all of the tools you need to be completely self-sufficient when starting your business.
While it’s important to be optimistic, if there is no urgency in getting your products to market, the best thing you can do is invest the smallest amount possible to make sure that the idea will float. You don’t want to spend $20,000 on bed sheet stock only to find out that no-one wants them. It would be sensible to test out the waters by ordering a small quantity and making an assessment about long-term viability from there. If there isn’t a market, you have the option of stopping and going in a different direction. If you can’t order a small quantity, you can cheat and start marketing your products without actually having them. This is done by setting up a landing page and collecting email addresses to gauge interest. You can find more information about setting up landing pages here.
The good thing about spending the minimum amount of money in the beginning is that you have the flexibility to change over time. If you spend your entire $80,000 budget on packaging and then forget about marketing, it won’t matter how revolutionary your products are —no-one will know about them and they won’t sell. No matter how much you spend on the creation of a business, if you don’t know how to market your products or don’t allocate enough money to marketing, your products won’t sell.
If you have a limited budget, start small and do as much as you can yourself and push all of your funds towards marketing. Customers need to know that your products exist. At least half of the capital you have to invest in a business should be allocated to marketing. With a direct-to-consumer business, all you are trying to do is extract as much money as you can, from as many people as you can, as often as you can. The easiest way to do that is by moving products as quickly as possible. Determining how much money to allocate towards product design and marketing is a balancing act. Spend too much on products and you won’t have enough to spend on marketing. Spend too much on marketing and you may not have enough for your products. If you don’t spend enough on your products, it could turn customers off, even if they are exposed to them as a result of marketing. If the goal is to hold the smallest amount of inventory possible and turn over stock as fast as possible, you need to be thinking about a lot of things at once to ensure that you make the right decisions.
It is important that you understand how you are going to make money in business. When selling a tangible product, there is a finite amount of money that can be made by selling product stock. With no new injection of capital, the best thing a business can hope for is that capital will grow and snowball over time. If you purchase stock for $500, the idea is that you sell that stock for a profit, say $1000. You then take out taxes and other expenses and you may be left with $600. So, you have turned $500 into $600, for a $100 profit. You now have to reinvest. You take that $600 and you try to turn it into $1200. Once you sell that stock, you are left with $720; a further $120 in profit after taxes and expenses are deducted. This process continues ad infinitum.
The snowballing of capital is why product selection is so important. Let’s say you want to start a business selling specialty bars of chocolate that you make yourself. Each bar costs $5 to make and you are able to sell them for $15 each. In total, you have invested $5,000 into the business. Assume there are no costs associated with selling your products and all of the money is able to be spent on product stock. Now, if you sell all of your stock, you will make $15,000 — a pre-tax return of $10,000 on top of your initial investment. Now assume that your friend, Zoe, has decided to start a company selling bikinis. Zoe is also going to invest $5,000. Shortly after deciding to start her company, Zoe finds a supplier willing to supply for with bikinis for $20 each. While Zoe is paying significantly more for her products on a per-unit basis, she is able to sell each bikini for $150. If she spends her entire $5,000 budget acquiring 250 bikinis, she will be able to make $37,500 if she sells all of her stock. That means that Zoe will make a pre-tax profit of $32,500, which is $22,500 more than you made even though you both spent $5,000. Obviously, this is an oversimplified example and there are a lot of other factors that would need to be taken into consideration, but this is how you need to be thinking when you are making decisions. If you choose the right products, you can overcome all of the limitations of having a smaller budget.
You may choose to put additional capital into the business over time, which is perfectly fine. However, at a certain point, a business should be able to stand on its own without additional capital injections. That doesn’t have to be in year one or year five, but it should be possible at some point in the future. The best thing you can do when starting your business is to have an external source of income. Do not quit your day job to start a consumer product business. At least in the beginning, it would be a terrible idea. You can quit your job when your business is generating enough money to pay for your living expenses and you are able to invest in additional product stock and withdraw money for savings. Until then, make sure that you have an external source of income. If you rely solely on a business to generate income, you will develop an unhealthy emotional attachment towards money and it will put a strain on all of your relationships outside of business. One of the main reason people start businesses, aside from money, is the freedom that it affords you. If you are constantly worrying about money, you will crave the constraints of regular employment.