Situation: A small company sells consumables as its primary source of revenue and profit, and produces equipment associated with these consumables. Their challenge is that designing and producing equipment is beyond their financial capacity. They have a small, loyal staff engaged in equipment production. This is a critical trade-off that must be resolved. Where should the company focus – people or cash?
Advice from the CEOs:
- This product/profit combination is common. HP sells printers and ink, as well as other products, but ink cartridges have long been their primary source of corporate profit. The question is how to produce the associated equipment at the lowest cost?
- Given the shortage of financial resources, why not asks a company with expertise in equipment to build the equipment on a contract basis?
- Offer the outsource company the designs and expertise to support the project. That company may even hire your employees who have developed expertise in this area.
- In return for providing design and guidance, ask the contract company for a percentage of the revenue or profit on equipment that they sell. This relieves you of the payroll and cash obligations for the equipment, and provides you with a modest income stream from equipment sales.
- There is an obvious question of how the small company retains its intellectual property position. Is it possible to look at critical sub-assemblies and retain the expertise within the smaller company to complete and install some of these?
- If so, this will boost annual revenue. The contract partner completes all but the most critical pieces, and the small company finishes the product with its technology.
- The small company, through its sales and marketing efforts, should maintain control of leads and sales of both equipment and consumables.