Episode 012
On today’s episode, David and Ken take a deep dive into the world of understanding your numbers as it relates to sales price, costs, and profit margin. This is a critical step to complete before sourcing a new product and provides confidence in knowing that what you sell will be profitable.
Firing The Man Profitability Calculator is available for download at: www.firingtheman.com/calculator
The YouTube video with helpful tips and tricks CLICK–> https://youtu.be/TT7_B-NQK7s
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David (00:00):
By sticking to that $30 market, not factoring in a worst case scenario, I’m doing myself disservice. All of these steps occur before you write the check to the supplier, and I think that’s really important.
David (00:12):
There needs to be enough meat on the bone after you account for all of your per unit costs for you to pay yourself and all of your other operating expenses.
Intro (00:21):
Welcome everyone to the firingtheman.com podcast, a show for anyone who wants to be their own boss. If you sit in a cubicle every day and to know you were capable of more than join us, this show will help you build a business and grow your passive income streams in just a few short hours per day. And now your host serial entrepreneurs, David Schomer and Ken Wilson.
David (00:46):
All right, welcome everyone to the firing the man podcast. Ken, do you know who Bo Jackson is? Absolutely. Yeah. You know the, uh, the Nike, the Nike shirts that say, bo, knows insert, you know, whatever. Absolutely. All right, well, the title of today’s podcast is bo knows his numbers and bo knows profitability. That’s what we’re going to be talking about today is, is knowing all of your costs and knowing how profitable a product is before you source it. So, you know, one thing that I’ve run into quite a bit is someone will say, Oh, you buy that for five bucks and you sell it on Amazon for 15 you make 10 bucks a unit. And that’s not the case. There’s a lot of hidden costs in their fulfillment fees, packaging fees, labeling fees, and I’ll go into all of these today, but there’s a lot of fees that add up. And I think knowing these costs on the front end makes sourcing a product. You have a lot more confidence when you know all your numbers.
Ken (01:56):
okay David. So today’s show is about know your numbers, right? So what is the first step?
David (02:01):
All right. So when you are sourcing a product, knowing what you could potentially sell it for is really important. And one thing that I think is particularly important is looking at different scenarios. So, for instance, a best case scenario, so say a, say you’re going to add a feature to a product on Amazon, something selling for around 20 bucks and you’re going to add a feature and you think that that feature is going to make it worth 30 bucks. Well that’s a best case scenario. And on paper you can make anything look very profitable, but you haven’t yet tested that assumption that the market will bear a $30 price. And so that’s your best case scenario, you know? But I do think you owe it to yourself to look at the worst case scenario.
David (02:49):
You know, what if this $30 price point that we’re talking about, no one buys it and I need to decrease my prices. Well you already have invested money in inventory. And so I think looking at these things on the front end, you know, perhaps sticking with this example, looking at a $15 $20 and $25 price point is really good when determining your margin. And so, you know, as you work your way through an income statement, you start with revenue, right? This is your sales price. And then you go into costs. And so I think starting off with your sales price is good, but the next step is wrapping your head around the costs.
Ken (03:30):
Okay. So David, you just explained best case and worst case scenarios for the sales price of the product. How did you come up with those numbers? Can you go dive a little bit deeper in and explain, you know, how you come up with those numbers and then where you would get the number that you could source for?
David (03:47):
Yeah, absolutely. So, uh, I think the best way to answer that question is through an example of a product that I recently sourced. So when I, and I think most people probably fall into this category when I find a product that I’m excited about, my optimism is sky high. Mine too. Yeah. I mean it’s a good feeling, right? Riding that entrepreneurial high. Now what I need to do and in what I did was I took that optimism hat off and I, and I said, all right, in this particular product, the average price point of people selling something similar was $20 so that’s my base case, right? That’s, that’s what I am making an improvement here. I value that improvement at about $10 so my base case sales price is just what’s everyone else selling this for? Now my best case scenario is what do I think this is worth?
David (04:39):
Now I value this improvement at $10 it’s not tested. I haven’t tried to sell this at a $30 price point. So who knows if this is going to work? But by sticking to that $30 Mark and not factoring in a worst case scenario, I’m doing myself a disservice. So my best case scenario, I’ll put my optimism hat back on and think about, okay, here’s what I think I could sell it for. And then worst case scenario, and when I think about my business, I always go into things very optimistic. But if I look at performance, typically my performance lands between base case and worst case. Would you agree? Yeah, for sure. Things always cost more. Uh, there’s always some expense that you don’t think of anyway. But going back to your question, how do you come up with worst case scenario? I like to find the lowest cost provider, you know typic.
David (05:30):
So on this particular product that the general price points $20 uh, there is one person that’s selling for 13. The pictures are bad. That listing’s bad. And so that’s my worst case scenario. And I think that if you have a worst case scenario and you next, and we’ll talk about this factor in all your costs, if that’s still profitable, a, you might as well go forward with this. But if your worst case and base case aren’t profitable but you’re only showing profitability in your best case scenario, then you really need to check yourself before you place that big order. And so, you know, we talked about it on the last episode of failing on paper. This is what I’m talking about. All of these steps occur before you write the check to the supplier. And I think that’s really important is, is doing your due diligence. And this is a critical piece of due diligence,
Ken (06:20):
You know now going back to the numbers, if you have a product that you’re going to sell for $20 you know your competitor is selling for 20 right now, you’re going to make an improvement to the product, make it better, and hopefully sell for 30 right? So how do you know how much you can afford to pay for that art? Or do you, do you have a ratio or percentage, a target price that you’re, that you can source it for to leave a certain margin for other fees and then also obviously profit?
David (06:53):
Yeah, so one rule of thumb that I use in my business and when I look back at previous product launches, this has held true. If I can sell something for four to five times landed cost and we’ll get into what landed cost is if I can sell something for four to five times landed costs, I’m going to be profitable. And typically in the products that I sell, I’ll come in at about a 20% profit margin. And again, we’ll get into that a little more but, but I think that that’s kind of the rule of thumb. But in order to talk about profitability and profit margins, let’s dive into costs. So step one, you send your supplier a message and you say, how much do you charge for this? What’s your minimum order quantity? Uh, for all of these questions, listen to our episode about how to find a supplier on that Firing The Man podcast, but they may come back with all right, per unit cost is $4.
David (07:50):
Well that’s not the only cost you need to know. You need to go back to them and say, all right, are there any additional costs? And I’m just going to go through a list here of some extra costs that I’ve incurred. One is packaging and that can be significant, especially if you like to separate yourself from the pack by having really nice packaging. So packaging is is another one that’s typically not going to be included in that product cost. The second one is barcodes and labeling. If Amazon does this for you, it’s 20 cents per unit currently. But again, if you are selling a lower priced product that adds up and that’s going to cut into your margin. Another cost that comes up is tariffs. And you know we’ve talked about these Trump tariffs. You had mentioned 30% on a couple of products that you sell.
David (08:38):
That’s huge. That’s a huge haircut. And so if you have a $4 product and you were charged, you know an additional 30% import fee, you definitely need to factor that in. And so what I’m doing and, if you go to www.firingtheman.com/calculator I’ve got a downloadable spreadsheet here and this is what I use in my business and this, it’s a free download, but I just list out every cost I’ve ever incurred and it’s kind of a nice checklist when I’m communicating with the supplier. You know, I ask are there any tariffs, are there any packaging costs? What are my inspection fees going to be? And I’m trying to get to a, a fully loaded unit cost. And that’s not it. There are still additional costs, right? So you need to ship the items from the manufacturer, typically to a United States port or wherever you’re selling from.
David (09:34):
And then from there you need to ship it to an Amazon fulfillment center or to your own warehouse if you’re doing fulfillment by merchant.
Ken (09:42):
So David, I’m not very smart, you know that. And so you mentioned that there’s a resource on www.firingtheman.com/Calculator. And so this, this, uh, this calculator that you’ve built, does it cause you, you’ve rattled off a lots of fees and lots of different costs. Can someone just go in there, download that, and then enter and then it just kind of walks them through all of these costs?
David (10:07):
There’s an accompanying YouTube video. If you just go to a firing command YouTube page https://youtu.be/TT7_B-NQK7s Uh, I walked through a complete example of, it’s a real world example of a product that I recently tried to source. And, uh, it ended up not being as profitable as I thought on the front end.
David (10:23):
And so I ended up passing on it. But it’s a, it’s an in depth video and it walks you through everything in terms of figuring out what your total fully loaded cost. And so, you know, I, I’m a CPA, I geek out on this kind of stuff, but I understand that, you know, most normal people don’t. And it’s a weird thing to geek out on. You know, I, uh, there’s a a quote here, I’ve got all my notes. It’s, uh, the global economy is built on two things. The internal combustion engine and Microsoft Excel. Never forget this. And it’s so true. It’s so true. There are so many business that run off that powerful tool we call Excel. And, uh, I really enjoy it. And so I’ve built a model, it’s a free download. This is a resource for you, the listeners to use.
David (11:21):
Kind of circling back to two costs. What I’m trying to get to is on a per unit basis, what are all of my costs? So you know, if I, if I’m ordering a leprechaun loincloth I want to know how much that leprechaun loincloth costs. But I also want to know on a per unit basis how much is shipping. So for example, if shipping was 1000 bucks and you ordered a thousand units, you need to add a dollar onto your per unit cost. And at the end of this you have your sales price and you have your fully loaded costs. And the difference between those is your gross margin. And this is something, you know, one criteria I use, and this is in the category that I sell and I will not move forward with the product unless it has a gross margin of 30% because that doesn’t account for all the costs of my business, right? I still need to pay myself, I need to pay for, you know, my computer for subscriptions, for, you know, my VA a lot of these other things. And there needs to be enough meat on the bone after you account for all of your per unit costs for you to pay yourself and all of your other operating expenses.
Ken (12:42):
It was really tough when I first started out to say, okay, Hey, there’s, you know, product a sells for $20 and I want to sell this product. Now you had mentioned, just to break it down, you said four to five times, right? So if you divide 20 by four or five, you know, you’re looking at $4 or $5 so that range, that’s the dollar range that you would go to a supplier and know that you could comfortably pay up to this amount to a supplier. Is that correct?
David (13:11):
Absolutely. And in the exercise that you just mentioned, kind of backing into that per unit, cost is great for negotiation, right? Cause oftentimes, and I know you’ve run into this, the price that they quote you or the price that they have listed on their website, that’s their best case scenario. They, I think that they generally inflate prices just in my experience, they inflate prices knowing that they’re going to get haggled on price.
Ken (13:37):
Yeah, just think of a used car lot.
David (13:39):
Yeah, exactly. Exactly. And I think knowing that number before negotiation is really important and it works in the opposite direction, right? So backing into that number may give you a couple points that you can argue to beat that price down. But say you have a great supplier that’s offering you great recommendations and really knows the market and produces awesome products, that’s generally not the person that you want to argue with on price. And so if you know you’re going to be profitable at say $5 per unit, well then and he quotes you $5 per unit, we’ll just sign an order for them. I mean it, yes it is all about profitability, but you know, relationships can be hurt by some hardcore negotiation. And I know I’ve, I’ve tried various methods of negotiation and, and I think there have been relationships that I’ve harmed just with suppliers because I’ve tried to be too aggressive.
Ken (14:40):
So David, you mentioned a lot of costs. Is that it?
David (14:43):
Nope, that’s, that’s not it. So there’s a couple more costs that you’re going to want to consider. One is your fulfillment fees. So I sell on Amazon quite a bit. These are going to be, you’re fulfilled by Amazon fees. So I’ll send them a thousand units and they’re the ones that are packaging up and sending out my products to the end user, to the customers and they charge for that. So there are two primary, and I’m going to talk about Amazon, but this can really be applied to any type of fulfillment situation there. But on Amazon there’s an FBA fee and then there’s a referral fee. So an FBA fee that is based on the weight and size of your product. So a larger product is going to cost more to fulfill than a smaller product. And you’ve talked about, you know, I think on one of the episodes you had talked about having something that measured 18 and a half inches, which we now know as a mortal sin, uh, but at the time, like it was a rookie mistake, right?
Ken (15:43):
Yes. It was a learning opportunity is what I like to call it.
David (15:46):
Exactly. A learning opportunity. I like that. So, um, so that’s one is your FBA fee. The second is going to be your referral fee. And a lot of the categories that I sell in this is 15% of sales price.
Ken (15:59):
So this is the fee that Amazon takes for, for letting you sell your product on their platform.
David (16:04):
Correct. Okay. You know, if you look at that, you think are 15% that’s huge. And yes, it is. I that is a, that is a high fee. However, Amazon gives you the privilege of, you know, if you think of Amazon as a mall and you compare it to your local mall, it’s giant. It is humongous. Think close your eyes right now and think of how many people are on Amazon. It’s huge. And so these fees allow you to be part of this giant mall.
David (16:33):
And uh, and you know, ultimately we should dive into this more, but ultimately you’re passing these charges onto your customer, right? You know, I’m not taking 15% out of my pocket and it’s not a donation to Amazon. You know, I’m factoring this, all of this in on the front end. And ultimately it’s the consumer that gets charged the, the FBA fee in these referral fees. Uh, cause you know, everybody, it’s an even playing field, you know, me as a medium sized seller versus a multimillion dollar conglomerate. If, if we’re selling in the same category, we have the same referral percentage, the same referral fee. And so, uh, it artificially, so in this example, it artificially raises the price of all goods by 15% is kind of the, the economics behind that.
David (17:24):
So we have, you know, a worst case of best case in a base case scenario and we do that on sales price. I think you ought to do it on your costs as well. You know, some of these things are fixed. For instance, 15% referral fee in the particular category I’m talking about, that’s standard across the board right now if you look at volume. So a lot of my suppliers, the more I purchase, the less expensive per unit things are. And so that’s a great spot to say, all right, well, you know, I’m placing an initial order of say 500 units, but best case scenario, I ramp this up and I’m ordering 3000 or 5,000 units, my price is going to go down. And so you know, and, and you’ll see this on the downloadable spreadsheet, there’s a best case, worst case in a base case for all of the costs as well. And so that, that’s something that that can vary and something that needs to be factored in
Ken (18:26):
With this calculator that you built, our listeners can go download it, www.firingtheman.com/calculator download this Excel spreadsheet, go in there and put in like at the price that they want to sell for or the price they can purchase the product for less. For our example of of $20 you know, you’re going to sell something for $20 or you think you could sell it for up to 30 right? So you go and you plug those numbers in and then you plug in that you found a supplier that you can buy this from for $5 and then the calculator will show you all the other fees and then how much margin you’ll have leftover. Exactly. To make an intelligent decision whether you should do this or not. Whether you have a higher likelihood of of making profit of being successful. Correct.
David (19:08):
Yeah. Yeah, absolutely. And so you know, if you’re thinking about launching in a particular category, say you were, you were on the fence between three products, downloading the spreadsheet and going through this exercise would be a great way to understand which product is going to be the most profitable. And at the end of the day, and, and I probably sound like a broken record, but it is all about margin. It is all about profit margin, right? You’ve got your sales price, you have your costs, what’s left over for you to take home at the end of the day, that’s the name of the game. That’s how you pay yourself. That’s how you fire the man. That’s how you get freedom. If you liked today’s episode and would like similar content, go to www.firingtheman.com or check us out on social media at firing the man on Instagram, firing the man Facebook page and firing the man on YouTube for some digital shorts. Thanks for tuning in and we’ll see you next time.