A few weeks after receiving my second shipment of tea, I designed new packaging and placed my third order. I wanted to make sure the new shipment arrived before I sold out of my existing stock. This time, Sophie was front-and-centre. She was the focal point on the front of the pouch and on each teabag wrapper. I wanted to remind customers about Sophie every time they had a touch-point with the brand. My brand strategy, for the first time, felt cohesive.
It was around this time that I made the decision to expand my product range. It was simply too hard relying on a single product when my only marketing channels were on social media. You can survive as a business if you have a single product and you get that product stocked at hundreds of retailers, but it’s a much more difficult proposition when you are selling a single product through a single source. The process of coming up with new products proved to be incredibly difficult. There were a lot of factors that had to be taken into account. I couldn’t just pick any tea product, I had to pick products that were complimentary to my existing product offering. Other companies in the industry had decided that the best strategy was to release other types of tea alongside the detox tea that were marketed with different effects, like a fertility tea or a sleep tea or a complexion tea. Since I had entered the teatox industry by copying other companies, it was tempting to mindlessly follow their lead once again. The only thing that stopped me was money. Since I still didn’t have a lot of money at that point, I really had to think about what I was releasing. If I was going to spend $30,000 on each new product, I needed them to sell well as stand-alone products. I became obsessed with this idea that all of my products needed to develop a cult-like following.
I came to the conclusion that my competitors clearly hadn’t thought through their collective strategy. It is much easier to make more money from existing customers than it is to acquire new customers. With that in mind, it doesn’t take a lot of brain power to realise that there is only so much tea someone can consume in a day. On average, a person isn’t going to consume more than a few cups of tea each day. Some will consume more, some will consume less. A typical consumer isn’t going to spend hundreds of dollars each month buying six different types of teas that are being sold at inflated prices if they can only consume a few cups each day. The best-case scenario is that an existing consumer will purchase a few different types to try in the first month and then go back to purchasing one blend each month in the future. This does nothing to increase the average sale price in the long run and is more likely to cannibalise sales in the short run. It is a strategy that relies on the acquisition of new customers. By offering different types of tea, you can, in theory, access new markets, which will bring in new customers. For instance, you can send fertility tea to influencers promoting fertility health who will have access to completely a different set of consumers.
Customers are prepared to pay a premium for any product they feel is prescriptive in nature. While a person may pay $35 for a tea that feels prescriptive and could help them lose weight, they are unlikely to put the same value on another type of tea that claims to improve their mood or sex drive. Since production costs would be the same for the new types of teas, the per-unit profit would fall if customers weren’t prepared to pay the same amount for each blend. The bottom line is that other types of teas don’t work. A detox or weight loss tea relies on effects-based marketing. While a customer may experience decreased bloating after consuming a detox tea for a few days, they certainly aren’t going to experience an improved sex drive or a boost in fertility as a result of consuming a tea.
Other teatox companies were selling products that could only be consumed 30 days at a time. If a customer can only consume a product a few times a year, it made sense to have other products that could be consumed in the intervening months. Since I had positioned my tea as something that could be consumed every day, I was in a slightly different headspace. If I had released a new blend of tea that wasn’t complementary, it would have almost certainly cannibalised sales. Because of this, and the fact that I didn’t have the best track record when it came to acquiring new customers, I decided to focus instead on releasing complementary products that targeted existing customers. I knew that while it would have been difficult to extract hundreds of dollars each month from customers by selling supplementary products, it was at least possible if the products were complementary in nature. I didn’t want a new customer coming to the website and purchasing a new blend of tea at the expense of an existing blend. I wanted an existing customer to come to the website and purchase five different products that could all be consumed daily. That was how I was going to make money.
People are creatures of habit. Based on what most people consume in a day, there are very few opportunities to introduce someone new into the average person’s diet. I didn’t want to sell something that customers could buy from other companies, but at the same time, I didn’t want to create something that would force customers to change their daily consumption habits. When it came down to it, there were very few complementary products that I could release. I narrowed my search to pills, powders, and basic food items.
I began to develop a basic investment criteria and went through each product category with a fine-tooth comb. There were two major benefits of selling complementary products over supplementary products. The first, is that you can bundle products together, which boosts the average sale price of each order. At the time, my average sale price was around $45. Most of my orders came from customers who purchased two bags of tea at $60, while the remaining purchases came from customers who purchase a single bag of tea for $35. My goal was to have an average sale price of around $80. If I could get to that point, I felt that it would be much easier to consistently generate over $1,000 in sales each day. It would also give the company enough money to pay for marketing and future product releases.
My thinking was simple. When I walk into a traditional retail store, the best-case scenario is that I want to buy every single item in the store. When there is a good range and the items complement each other or at least don’t compete for the same dollar, I will spend significantly more than the base price for a single good. A lot of stores get into trouble because they don’t understand this. A store selling winter jackets can only make a certain amount of money from each person who walks through the door — that amount is capped at the price of a single jacket. I might walk into the store and purchase a jacket for $300. The store cannot make any more money from me, unless I purchase additional jackets for friends and family. If that same store were to release other complementary products that I could also buy, like t-shirts, long pants, and thermals, I might pick up a few other items with my order. This would immediately boost the average sales price. Now imagine that the products were seasonal, so the store could rely on customers coming back on a more regular basis to purchase. One of the reasons Toys“R”Us went out of business is because the stores did a poor job at selling complementary products. Parents would find a toy, purchase it, and then leave the store. There was nothing else for them to purchase alongside their toy purchase. All the toys in the store were competing with each other to get purchased at any one moment. If Toys“R”Us had sold items that were complementary, alongside the toys, the company would no doubt still be in business today. This is a big draw-back of having a theme-based store. Toys“R”Us had to sell toys because of their name and the brand recognition they had. That didn’t stop a general retailer like Walmart or Amazon from selling toys alongside a huge range of other products.
The second benefit of selling complementary products is that it becomes possible to utilise a bulk-unit pricing strategy. I only had an interest in selling products that could be consumed on a regular basis. Since my revenue stream was patchy at best, I couldn’t afford to stock products that would lead to one-off purchases, like accessories. Bulk-unit pricing can be used when multiple units of an individual product are offered at ever-increasing discounts, depending on the number of units purchased. For instance, if a customer purchased a single unit of tea, the price was $35. If the customer purchased two units, the price was $60 ($30 each) — a saving of 14% or $10. The price of three units was $75 ($25 each) — a saving of 26% or $20. The idea is that the pricing discounts should be so compelling that customers would feel foolish to pass up the opportunity to buy in bulk. Why would a customer buy just one bag when they can get three and save $20? This is perfect if you have customers who do not have discount codes because they always feel like they are getting a great deal. If they do have a discount code, they get an even better deal so it’s a win-win situation.
The bulk-unit pricing strategy is also great, because it gives the illusion of choice. If there was an online store with three individual products, a bundling strategy could give an additional three options, while the bulk-unit pricing could give an additional 12 options to purchase. That would mean that when most stores only have three products to sell to customers, this store would instead have 15 product options. Many companies don’t adopt bulk-unit pricing because it can have a big impact on sales forecasting. If I receive a shipment of 10,000 t-shirts for $30,000, I know that I have just spent $3 on each t-shirt. If I am able to charge $20 for each blank t-shirt, I know that the entire shipment will generate $200,000 in revenue. If I started using bulk-unit pricing, I would, at best, be able to come up with a revenue range. If the best discount (from a customer’s perspective) was $10 per t-shirt, I could make anywhere between $100,000 and $200,000 in revenue depending on the number of discounts used. Since I won’t know how many t-shirts will be purchased in bulk, I would have to be happy making $100,000. While it isn’t perfect, this strategy allows retailers to move through stock faster. At the end of the day, having a strong cash flow is more important than profit margins.
The more time I spent thinking about the types of products I wanted to release, the easier it became to cross unsuitable products off the list. I needed a product that satisfied most of the investment criteria below:
- Can be consumed daily
- Fits bundle strategy
- Fits bulk-unit pricing strategy
- Good margins
- Prices can increase year on year
- Not trend-based
- Easy to ship
- Can be shipped internationally
- Small and light in size to keep shipping and storage costs down
- Easy to store
- Lasts at least two years before expiring
- Easy to market
- Can be consumed by men, women, and children
Having a list helps in framing decisions, but it certainly doesn’t simplify the decision-making process. There were some items that were obviously unsuitable and were easy to strike off. Most food items, for instance, were completely inappropriate. Take something like a breakfast cereal. It would have been easy to mix a little bit of matcha with a breakfast cereal and market it as a slimming breakfast. While it satisfies most of the above criteria, in that it could be consumed daily and would be easy to ship and could, in theory, be sold in bulk, it would never have the right pricing or margins. I was purchasing tea for a few dollars and selling it for $35. If I sold a cereal, I would be purchasing it for a few dollars and selling it for a few dollars more. The price ceiling would be very low. Almost no-one would be willing to pay more than $10 for a breakfast cereal. Companies with more money don’t need to worry about margins as much and can focus on creating fast-moving products. For companies that don’t have a lot of capital backing, it is important to sell products with good margins in order to generate much needed cash for reinvestment. Margins become slightly less important when cash flow and sales are strong, but I wasn’t there yet. While I was moving through stock quickly, I knew that my sales would fluctuate over time. I needed stock that could be sold over a period of years.
I came to learn that most ingestible products have poor margins. Customers have a limit. Unless there is some sort of experience connected with consumption, there is only so much money people are willing to pay for something that is eaten or drank or otherwise ingested. Someone might be willing to pay $180 for a bikini that costs $5 to make, but they only want to pay $60 for a protein powder that costs $20 to manufacture. There’s an inequity there that is hard to stomach. Not only can a bikini-maker charge more, but they didn’t have to worry about spending $20,000-$30,000 on branding or stock expiring or customers getting sick. They only have to worry about the design of the bikini itself and the marketing costs that go along with it. I suspect that most product businesses come undone at this point by not understanding the true cost of releasing an ingestible product. If you had stock that cost $30,000, depending on your product, you may also need another $20,000 for branding and packaging, and an additional $30,000 for marketing. There will also be other costs associated with product development and distribution which affect the final price. So, the true cost of a $30,000 product release may actually be a figure in excess of $80,000 if executed correctly.