Burning Cash and Slashing Profits for Growth


One Startup. No Secrets. Start at the beginning.

I finally ran the numbers and called Casey, as promised, to report the actual cost of a bottle of our Bees Knees Spicy Honey. Sometimes the truth sucks – and this is one of those times. Despite having made our biggest batch yet, each bottle of finished product cost a whopping $9.01. Since we are selling at $14 a bottle the profit margin isn’t terrible, but our dreams of testing wholesale pricing for retail sales, free shipping and a scalable business seemed crushed.

But within days, and after a discussion over a few cans of Rolling Rock, we began to offer free shipping and selling wholesale. And now, a few weeks later, our business is growing substantially.

This counter-intuitive approach began with a hunch. Maybe we could ignore our margin and burn a little cash in exchange for higher volume, which in turn could drop our costs and then BOOM! - improve our profit margin and ability to grow. (I'd like to note that my wife mentioned how this strategy is at least partly discussed in lengthy detail in Marks' Financing Growth, but I cannot confirm as I have not read it, mostly due to its size).

The Handbook of Financing Growth

Free Shipping
Everyone loves free shipping. I am an Amazon Prime member and my Amazon purchases are almost exclusively items with Prime shipping. In e-commerce, the free shipping offer is almost a necessity, but it can also kill margins. We needed to test the potential.

We received 48 orders prior to offering free shipping. 10 of those, or 21%, were orders for 2 or more bottles with an average of order size of 1.3 bottles per order. Our average shipping cost per order is $5.80, so it might seem foolish that we would test an offer for free shipping on orders of 2 or more bottles. Essentially, we would loose money on that second bottle which would eat into the first bottle’s already thin profit.

$14 Price - $9.01 Cost = $4.99 Profit 
$4.99 Profit - $5.75 Shipping = -$0.76 Loss

However, if the majority of customers could be persuaded by free shipping to order 2 or more bottles our volume would increase significantly.

So, we made a few changes to our shipping settings and changed a few pieces of copy on the site.

And it worked! Of the 50+ orders we have received since offering free shipping, 77% of those customers have ordered at least 2 bottles with an average of 2.1 bottles per order. The result is that our volume has increased proportionally more than 60% from our web orders alone.

Wholesale
Around the same time we decided to test free shipping Casey and I had a number of serendipitous encounters with strangers who seemed to desire our product, despite knowing little about it. This made us think a bit harder about getting into a few retailers sooner. So, we paid a few visits to a representation of different retailers:

We guessed that these retailers would want at least a 30% profit margin. If they were going to sell Bees Knees for no less than $14 a bottle, we would need to offer a wholesale price of no more than $10 per bottle to provide that 30% profit (not to mention that the retailer has every right to charge a higher price).

Bees Knees Spicy Honey Marlow & Daughters

You don’t have to be a math genius to see that we make almost zero profit on our wholesale sales at this time, less than $1 per bottle to be exact. But again, we are testing ways to boost our volume. And guess what happened? In just two weeks of selling to these three retailers we have:

  • Sold over 50 bottles wholesale
  • Exposed our brand, product and category to hundreds of prospective customers we otherwise never would reach
  • Yes, boosted our sales volume

Cash
Of course, our strategy to boost volume has a downside, or two. For one, we have less profit per sale to reinvest, which means our cash burns quicker.  Second, the cash we do have is being invested into larger batches of inventory in order to drive a lower finished product cost.  Ideally, we will soon produce at a low enough cost to begin earning back strong profits and replenish our cash.

A big factor in our ability to scale and produce large batches is having the right equipment and space. After considering a few options, learning about NY State regulations and deciding Casey needed his kitchen back, we landed at the Organic Food Incubator in Long Island City.

On the positive side, we’ve gained access to large-scale space and equipment that makes large batches way easier to produce in less time. We also have access to a lot of other food entrepreneurs and veterans through the OFI.  On the negative side, we’ve had to spend cash.  OFI requires that we put on our big boy pants and:

  • File a Food Processing License with the state = $400
  • Get an official scheduled process from a Process Authority (we used Cornell) = $100
  • Obtain liability insurance = $253 initially, $950 annually
  • Provide a security deposit = $1500

While the benefits outweigh the cash, and we do get $1500 back when / if we leave OFI, this still represents a huge cash outlay for us. Especially considering we would have otherwise waited a while before buying insurance and filing a food processor license.

Additionally, as we gear up for another batch we have bought hundreds of pounds of honey, crates of chilies and rent kitchen time. We’ve come to refer to our raw small-batch honey as liquid gold, which is to say our cash is running thin at the moment.

But here’s the great part: our volume increase has lead to better purchasing power and more cost efficient production time, so we are going to produce our biggest batch to date next week. And we estimate our cost per bottle will drop to around $7.00, which will boost profits on retail sales and wholesale sales. And, even that pesky 2nd bottle in orders with free shipping will now be profitable!

Despite seeing our profit margins looking bleak and our bank account scraping dangerously close to the bottom, we feel really good about our chosen strategy and progress.

The reason we felt so willing to test free shipping, wholesale sales to retailers and turn our cash into honey is that every part of this is just a test. If any part doesn’t work we can stop doing it. We could stop selling to retailers, stop offering free shipping, and move back into Casey’s kitchen.  But, I have a pretty good feeling that won’t be happening anytime soon :)

Think we’re wrong in sacrificing our margin and cash? Would you have taken a different path? We’d love to hear!

 

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Haven't tried our Bees Knees Spicy Honey Yet? Go ahead, order a bottle or two. We're so confident you'll love it that we'll give your money back if you're unhappy for any reason.


1 comment


  • WilliamfuP

    Say, you got a nice forum post.Thanks Again. Birdinground


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