Tag Archives: Consumable

How Do You Expand Your Customer Base? Six Solutions

Situation: A company produces a consumable product which provides its primary revenue stream. They have developed a new delivery system for the consumable that potentially competes with products sold by its largest distributor. As a defensive move, the CEO wants to expand its customer base. How do you expand your customer base?

Advice from the CEOs:

  • Take a lesson from Hewlett-Packard. HP’s primary revenue stream comes from ink, not the printers. They assume that their cartridges will be copied but design a new cartridge for each generation of equipment, with rapid equipment upgrades. By focusing on upgrades to the latest equipment, HP understands that if customers keep equipment for 3 years, they will likely use cloned cartridges.
  • If the company is going to alienate a key customer by selling the new technology, then they are going to be alienated. Don’t let them know in advance until the new technology is ready for launch.
  • There is no reason to alienate the large customer. Once the new technology is ready for the market, ask if they want to carry it. If the equipment is good, they may well say yes!
  • Given the concern about alienating this one large customer, start to develop other customers NOW, not later.
  • Currently the company does not serve the “mom and pop” market. Could money be made here? If they require technical support, charge for this. Use the software market model and sell single hours or bundles of hours of support.
    • Most questions will likely be elementary, as smaller customers will not be sophisticated users. Use current staff to handle service needs at one price. If higher levels are support are required, warn customers that this is more expensive.
  • The work that has been put into the new technology should qualify for the R&D Tax Credit.
    • This credit can be used against taxes payable. This may defer tax liability until the company starts to make money on the new technology.

[like]

How Do You Position the Company for Growth? Four Key Points

Situation: A company is completing the design of a new line of equipment which is expected to drive future growth. An important distributor for a company’s principal product – a consumable – also distributes equipment. The CEO is concerned that this distributor may perceive his new line of equipment as competing with their existing line. How should the CEO handle this? How do you position the company for growth?

Advice from the CEOs:

  • Meet with the CEO of the distributor and ask two questions:
    • Can they sell the company’s new line of equipment, as well?
    • Do they have any other source for the company’s consumable product?
    • If the distributor must rely on the company for the consumable, whether they decide to distribute the new equipment line or not, there should not be any risk.
  • The company has a wonderful opportunity to start doing business in a new way.
    • The company has a proprietary consumable and chemistry/formulation knowledge that will be difficult for others to copy.
    • The company now has knowledge of how to design equipment that utilizes the consumable.
    • Proprietary trade secrets may be more valuable than patents, presuming that the company can keep a lid on these secrets. Coca Cola and 3M have never sought patents on their key products. In a well-managed environment, trade secrets have a much longer life than patents.
  • Think about the sales mix in a new way, one that would address concerns about the annuity vs. capital equipment mix as well as improve overall profitability.
    • Focus on turn-key solutions. Use Hewlett Packard as a model. HP makes the most money selling paper and ink cartridges – annuity products; not from selling printers which sell less frequently than the cartridges. A busy office will spend far more on ink cartridges and paper per year than they spend on printers – and at a better margin for HP.
  • Combine the two prior points to leverage the new model.
    • Lease or provide the equipment at just above cost, in exchange for a contract commitment to purchase the consumable for a defined period.
    • Triple the cost of the consumable over time!
    • This should provide a more profitable and sustainable model. Adjust the cost of the ink upwards so that it pays. On a per-piece basis, the consumable at 3x or 4x current cost will still be a miniscule part of overall product cost. Further, the buyer won’t have to amortize the cost of the equipment over their production, making this an attractive option.
    • Concentrate on equipment design and outsource the manufacturing on a modular basis while keeping control of the one or two most critical components.

[like]

How Do You Set Goals in a Volatile Economy? Five Thoughts

Situation: A component company is struggling to set financial goals. Its sales are dependent upon purchases by large customers whose orders are influenced by the economy and demand for their products. How do you set goals in a volatile economy?

Advice from the CEOs:

  • What are the principal drivers that define the market? Have they changed? If so, how? Focusing on principal drivers creates more clarity in a volatile economy.
  • Rather than looking at the company as a producer of components, focus on the critical value add that the company’s products provide to customers. By focusing beyond the product, strive to become a key partner to customers. This can allow you to develop retainer contracts with key customers rather than working solely on a project basis.
  • The Holy Grail is predictable recurring revenue, for example on a service contract basis. The establishment of retainer contracts can help the company move in this direction.
  • The company’s customers have increasingly placed rush orders because they have been hesitant to commit to steady production. This, in turn, increases the costs to the company because they are being asked to alter their production schedule to accommodate rush orders. It’s fair to publicize and charge expedite fees for rush orders, just as delivery companies increase their charges for expedited delivery. Expedite fees will cover the cost of altering production schedules and can also add cushion to company profits.
  • A portion of the company’s business is supplying consumable parts that the OEM marks up and distributes to end users for their equipment.
    • As an alternative look at parts manufacturing/sourcing, storage and distribution direct to the customer as a separate business opportunity and take this over from the OEM – it may be a nit to the OEM that they would be willing to give up for a reliable service alternative.

[like]