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Rule #3: Buy smart.

If we look at rule #3 we see:

The real difference between a hobby and a business is that businesses don’t buy retail. Just as you’ll be selling wholesale to other stores, you’ll need to buy your components wholesale to keep your products affordable. That means buying in volume, and the discounts typically get a lot better in units of thousands than in hundreds.

Well, right now I’m much closer to “hobby” than to “business” as far as purchasing. I certainly don’t have the capital to buy parts in the thousands, or even the hundreds. Let’s be honest, not even the dozens. As I mentioned previously, I’m not going to have much stock to begin with, which I think is fine. It keeps the risk low, and since demand is sort of an unknown factor at this point, I’m all for keeping risk (and expenses) fairly low.

That’s not to say I haven’t investigated things like bulk discounts, and with at least one component, I’m already saving (a little bit) by ordering larger quantities. The most expensive component has a discount starting at 25 units, which is more than twice as much as I’ve ordered so far. If I sell out the first run immediately, I’d consider 25 for the next order. The discount isn’t huge until you get into 100 units, which is a lot of cash right now.

At some point looking at alternate suppliers might make sense, but that also means checking that new/replacement components are of a high quality. I’m a bit picky about quality, so I really want to avoid cheap/unreliable components, or things that are aesthetically unappealing. Over the years one thing I’ve come to realize in business is that if you compete on price, it’s just a race to the bottom, and who wants to be on the bottom? Some folks do, but not me.

So yeah, it’s smart to buy smart, but it also costs quite a bit of cash to buy smart… So for now, I’ll just do my best to not buy dumb.

(See all the posts in this series: Begin, Stock, Buy Smart, Basic Rules, No Leeway, Be Open, Community, Manufacturability, Marketing, Shipping, Lessons Learned, The Real Costs.)

Rule #2: It takes lots of cash to stay in stock.

After I built the button, I got an email from a guy asking if I could build one for him, and I did. At the time I didn’t follow the pricing rule of 2.3x and didn’t account for shipping (but I also didn’t do the programming, as he wanted to do that.) In the end, after I charged too little, and didn’t account for shipping, I ended up making so little money that I was getting paid minimum wage (or less) for the work I did. As a one-off thing, this isn’t too bad, as it was an interesting experience, but as a business it would be a complete failure.

So I’ve already established a price, and now I need to actually have items to sell. I’m starting with just 10 units. I’ve ordered the parts (from 4 different companies) and when everything gets here, I’ll do the soldering, programming, painting, and assembly, and then have 10 units to sell. (And yes, I did factor in the shipping costs I paid into the price I need to charge.) If I can sell 4 units, that will cover the costs of the materials, though not the cost of my time. I’m assuming right now that if I sell all 10 units, I will have covered my costs, and actually be able to cover my time at a reasonable rate. (That’s the theory anyway.)

I really don’t anticipate needing a huge amount of stock. I mean, demand isn’t overwhelming (yet) for what I am selling, and if I run out, well, I can choose to make more (or not) and it shouldn’t affect my overall business too much. It might annoy people if I’m out of stock, but hey, that’s all a part of selling physical goods, right?

(See all the posts in this series: Begin, Stock, Buy Smart, Basic Rules, No Leeway, Be Open, Community, Manufacturability, Marketing, Shipping, Lessons Learned, The Real Costs.)