Platt Perspective on Business and Technology

Building a startup for what you want it to become 3: products and product portfolios, price points and building for repeat business 2

Posted in startups by Timothy Platt on May 26, 2015

This is my third installment to a series on building a business that can become an effective and even a leading participant in its industry and its business sector, and for its targeted marketplaces (see Part 1 and Part 2.)

I began to explicitly discuss products and services that would be offered in Part 2, and the cost/benefits dynamics of offering them, so as to capture market share and create both profits and overall business strength. And I focused in that on building a startup that would compete in more established markets, leaving disruptively new and innovative product and service offerings, and the development of blue ocean marketing and sales opportunity to a later discussion in this series – which I will return to and in detail in another series installment.

I continue my Part 2 discussion here, examining costs and price point issues in greater detail, and product and service portfolios of them, and with a continued focus here on offerings that would compete in more established markets. In that regard and as noted at the end of Part 2 I will at least begin discussing in this posting:

• The issues of loss leaders and the profit generating offerings that they would serve to help drive sales for, where that can mean physical products or supporting and other services, or combinations of them for either.
• Profitability and profit potential for a given offering can and often does fall along a continuum when you look at individual elements of a well-crafted offerings portfolio, and can do so even at a seemingly fixed step in its lifecycle (see my series: Building for an Effective Portfolio of Marketable Offerings at Startups and Early Stage Businesses, postings 173 and loosely following for a more detailed discussion of product lifecycles.) I will discuss how product portfolios do and do not fit together so as to create overall competitive value and strength for the offering business, in a startup context with its special constraints.
• And along with discussing loss leaders as noted in Part 2, I will also discuss tiered product and service packages, and basic, standard, and premium package offerings as a part of that.

But I begin this with the fundamentals: costs and price points faced when producing and offering anything to a marketplace. Ultimately, what a new business plans on offering constitutes the single most important defining factor in determining its overall potential for success.

As I noted above, I will begin this overall discussion with the fundamentals, and in that regard I cite two specific installments from my above-cited reference series, in which I discuss a dynamic approach to understanding product portfolios per se and how they fit together:

Part 5: meshing product portfolio offered and business model pursued 1 and
Part 6: meshing product portfolio offered and business model pursued 2.

I discussed product portfolios in general there, and with a more broadly contextual focus on:

• The fiscal dynamics of maintaining a positive overall cash flow with the positive returns from current revenue generating products included in a portfolio,
• Covering the more cost-center stages of developing other new and next-generation products and product lines that are also entering into that portfolio,
• And with the portfolio as a whole kept in overall cash flow-positive balance over time from that.

I start addressing portfolios of offerings in a more specifically startup context here by considering two types of businesses as working examples:

• A new retail store that seeks offer a range of products to a market that is locally under-served for the types of products they would offer, and with support service in the form of sales expertise on the floor for helping customers find the best products and product models to meet their needs, and
• A new manufacturing business that would seek to offer products that could compete in an already established market that is more geographically diffused, but where there is unmet consumer need. Targeted markets are not saturated or even close to that by comparable products already available, and consumers there do actively look for new and different and even just cosmetically new and different.
• So as in my first, new store example above, there is room for successful entry into this business’ targeted market space too. And in both of these case in point examples, I assume there is room for these businesses to excel and to capture significant market share with loyal customer bases, if they can offer products and consumer supportive services that their potential customers and end users would see as offering them particular value.

Now let’s consider their early stage product portfolios and for both scenarios. And I begin with the storefront startup:

• New storefronts have to offer a wide enough selection of offerings to meet the needs of a wide enough range of potential customers’ if they are to draw them in to do business, and particularly if they are to bring them back in that crucial second time for repeat business. This of necessity means value held as inventory in non-liquid forms, or at least in forms that might not be quickly converted to cash and certainly if inventory turnover proves to be slow – which it probably will for at least some percentage of item types on the shelves – and even if the business is successful from day one.
• With lower overall cash reserves, as is usual for a new business, it is crucially important that this slower moving fraction of the entire inventory be kept to a minimum, and that anything that does not sell quickly be cleared out and replaced on the shelves with more consumer-wanted, more profitable offerings.
Shelf keeping unit (SKU) selection is important for any retail business, but it is the make or break point for any new storefront business, and certainly if location is at least acceptable for customer availability, and if customer facing staffing and management are at least reasonably friendly and efficient in doing their jobs. Keeping inventory lean and efficient and market oriented: keeping that product portfolio competitively effective in creating sales is crucial.

Now let’s consider the manufacturer startup:

• When a business like this is just getting started, financial constraints, limitations of employee headcount that can be brought in and retained, and particularly pre-revenue will be very severe, and even if outside funding is made available, from the founder and their friends, family and others. These constraints generally limit this type of startup to focus on producing and offering one initial basic product: the core product that they see as holding greatest potential for turning their startup into an ongoing success. (See my series: Understanding and Navigating Burn Rate at Startups and Early Stage Businesses, postings 67-78 for its Parts 1-12 for a discussion of the financial side to this from business day one through to when a new business begins to generate its first profits.)
• Startup product portfolios for this type of business are generally at least initially single product portfolios with perhaps a few cosmetic variations to that one product type if they can be produced, packaged and distributed without creating significant additional up-front costs and if there would appear to be sufficient consumer demand for that type of product diversity to merit this increased risk – with the consumer-based data that enters into that analysis coming from more general outside market research and not from direct findings from this business itself and its production and sales results – yet. And note my use of the word risk there, as this is all about potential risk and benefits.

When I made note above, of loss leaders, this is a type of strategy that essentially any retail business can offer and from day one of its initial opening for business. By way of example, there is a sushi restaurant not all that far from where I live that offered select items from its menu at half price from its initial launch as a going concern, just to draw in early customers and to build some buzz that could bring in more. They succeeded at that, and in becoming a going concern too and are still very much in business as I write this.

• Loss leaders only become truly viable options when a business can offer a more multiple-product, diverse product portfolio with a range of full priced consumer purchase options that could be marketed and sold in conjunction with them.
• This same requirement holds for offering tiered product and service packages such as basic, standard, and premium package offerings. They require portfolio diversity and complexity that product packages can be developed, marketed and sold from.

And this brings me to a core point that I would raise from these two examples. They start with different underlying business models. Their underlying business models are constructed around very different images of what would be offered and sold as revenue generating products. And ultimately, going beyond the specifics of the above two examples, it is the basic parameters of the business plan that determines what a startup’s initial product portfolio can be for its offerings diversity and for its overall complexity, and how fast it can expand its portfolio from that and even under best growth conditions. I have been writing my series: Building for an Effective Portfolio of Marketable Offerings as cited above, in terms of established businesses that have already reached a point in their growth and development and in building a sound financial reserve so that they can afford to expand and diversify their product portfolios into new opportunities. Startups do not start holding that possibility in hand – yet, and for most businesses one of their growth and development goals should be to reach a point in their development where they can. And this applies to businesses that have to start out with more complex initial product portfolios, that can expand from there as they learn their market’s and their customers’ specific preferences, just as much as it applies to businesses that start out with single product portfolios that they could expand out from as their resource base and their customer base make that both possible and effective for them.

I am going to continue discussing startups that seek to build into and compete in more established markets in my next series installment, where I will consider the role of track records and reputations, and where the bulk of both can only be found in the histories and reputations of a startup’s founders and any other individuals who they can bring into their enterprise. And I will at least selectively discuss exit strategies and outside funding in this context. And after that, I will switch directions to explicitly discuss innovation driven startups, as I have said I would several times in this series now. Meanwhile, you can find this and related material at my Startups and Early Stage Businesses directory.

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