It’s really tough to go against your own nature and I full on admit it. When it comes to running a small business, I’m pretty frugal and picky about the way things are run and where money is spent.
For example, you will often see me agonizing for days over a business purchase before pulling the trigger. The agony is even worse if it’s a recurring business expense because I’d rather pay a single lump sum payment rather than get nickel and dimed on a monthly basis.
Now in general, frugality and pickiness are not bad character traits to have as a small business owner, but sometimes these traits can hold you back.
In this article, I’d like to discuss common small business mistakes that my wife and I made early on that stunted our growth back in 2007.
The good news is that even though we screwed up majorly, we still cracked the 6 figure profit mark within our first year.
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Mistake #1: We Went With The Cheapest Vendors
There’s something about getting a great price or bargain that is irresistibly attractive. Early on, we tried to maximize profit by going with the cheapest Chinese vendors we could find to purchase our products in bulk.
Before you start shaking your head, the vendors we went with were a good 30% cheaper than the rest and the initial samples we were sent appeared to be good.
But while the products were cheap, the service was absolutely atrocious and the products had a very high defect rate. As a result, we had to devote a lot of extra time and manpower to sort through our shipments and separate out the sell-able goods from the junk.
To give you some perspective, our defect rates for our initial shipments were on the order of 25% which meant that we were scrapping 1 out of every 4 products. And if you were to do the math, we easily squandered more time and money than we were saving.
We also wasted a lot of time and mental energy complaining to these vendors but they didn’t care about our business and made no attempts to make things right.
Valuable time was spent sorting product when we could have been concentrating on business development. Don’t fall into the same trap as we did.
Low prices always come with a catch.
If we were to do things all over again, here’s what we would have done
- Ignore the vendors with the cheapest prices. If you are getting a price quote that seems abnormally low, it usually means that the vendor is cutting corners somehow. There is no such thing as a ridiculously good deal
- Consider hiring an inspection company to go through the goods at the factory. By the time your shipment reaches the US, it’s already too late. It will be too expensive to ship your goods back to China and the vendors aren’t obligated to do anything.
- Put together a quality control checklist specifying every last detail about the quality you expect to see in your products. Attach this to your PO when you place a bulk order.
Mistake #2: We Misjudged Our True Product Costs
Early on, we didn’t really do much competitive analysis nor did we do a good job of figuring out the “true landed costs” of our products. As a result, we made many mistakes with our pricing.
Certain items were priced too low and other items were priced way over market value. We also didn’t do a good job of correctly calculating our overhead costs. As a result, we didn’t charge enough for certain products and we ended up close to break even or even taking a bit of a loss on several of our items.
Here were the key mistakes that we made.
First off, we didn’t factor in the cost of import and customs duties in our cost of goods calculations. When you get a quote from a vendor from China, the price you are quoted is not the entire story.
In addition to what you pay the vendor, you also have to account for…
- The cost of shipping to your local port from Asia
- The cost of customs duties which vary depending on the type of item you are selling
- The cost of hiring a customs broker
- The cost of delivering your goods from the port to your warehouse which can often cost more than the shipping itself.
All told, you should expect to pay up to 30% more to have your goods sent to your home country on top of what you are paying the vendor. In other words, if you source your product for $10, then expect your true landed cost to be $13 depending on volume.
Related: I put together a quick and dirty import calculator that will give you an estimate of your real landed cost of goods depending on the size and volume of your order. Click here to check it out
Also, don’t jump on the “free shipping” bandwagon unless you truly understand how much it costs to ship your goods to the end customer.
You have 2 options.
You can offer free shipping and roll in the cost of shipping into your prices. However the disadvantage of increasing prices is that people will be less inclined to put your products in their carts.
The other alternative is to charge for shipping and keep your prices low. Personally, I prefer this method because there’s a higher likelihood of a customer going through checkout.
And once a customer goes through checkout you at least have their email address and can often salvage the sale.
If the customer never ends up checking out, you get nothing.
Mistake #3: We Waited Too Long To Hire Help
We wanted to maximize our profits and keep all of the money to ourselves so we never hired anyone to help out early on. As a result, my wife and I did everything. By everything, I mean even the most menial of tasks.
For example, my wife and I did all of our own packing, shipping and ironing of our products for quite a long time. Were these activities utilizing my bachelors and masters degree from Stanford to its full potential? Did I go through all of that schooling to iron linens? Probably not.
Looking back, I don’t think we saved any money at all by doing these things ourselves. By hiring someone to help out with the easy but tedious tasks, we could have spent our time on work that only we could do. We could have been building the business, thinking of new ideas and products to expand into.
Instead we wasted our time going through product, ironing, and packing our goods. Your brain is the most important part of your business. The sooner you realize that your time is valuable, the sooner that your store will become successful.
Mistake #4: We Didn’t Invest In Infrastructure
My wife and I didn’t have too much faith in the business when we first started so we didn’t invest too much time or money on the proper infrastructure. As a result, we didn’t take the time to establish an efficient flow to pack and deliver our goods to the end customer.
We also didn’t purchase the necessary equipment and/or software that could have saved us a lot of time when prepping our products for sale because it required an up front investment. Our main rational for thinking this way was that we would solve our infrastructure problems on the fly once business started to pick up.
This was a big mistake. Once orders started coming in, we found ourselves scrambling just to keep up. We pulled many long hours and wasted a lot of time trying to do things manually when we could have saved a ton of time had we been prepared for the deluge of orders.
If we were to do everything all over again, here are a few things we would have done right away
- Sign up for a shipping service – Today we use ShippingEasy for all of our shipping needs and it’s free for up to 50 packages a month. Saves a ton of time.
Embarrassing fact: I used to personally drop off all of my packages at the post office and every postal worker knew me by name.
- Get a laser or a thermal printer – If you think that you can print labels on an ink jet printer, forget about it! Go out and buy yourself a half decent printer and some labels.
- Get boxes for free from USPS – Did you know that USPS will send you free priority mail boxes directly to your home? There’s no reason not to stock up.
- Invest in software to keep track of expenses – Today we use an iphone app to keep track of all of our receipts which are automatically archived for accounting purposes
- Have a nice packing station setup – Another embarrassing fact. We used to pack all of our orders in bed starting out:) I vaguely remember rolling over at night and stabbing myself with a tape dispenser
Mistake #5: We Grossly Misjudged Demand
Misjudging demand was really a case of poor preparation on our part. We didn’t recognize the seasonality of our products or the times of year with the highest demand. As a result, we often ran out of stock during the peak selling season.
To compensate, we ended up buying a lot of product when sales were brisk which didn’t get delivered until sales were slow and we had a lot of excess product. Our poor inventory management probably cost us tens of thousands of dollars during our first year of opening.
Ideally, we should have taken the time to research the peak seasons for our category of products and stocked up on the proper items accordingly.
Today, we know that the holiday season often results in 3-4X our normal sales volume so we plan accordingly. We also know when our B2B customers are likely to order as well so we set aside inventory just for them.
In general if you have a product that is selling well, then it pays to stock way more than you think you can sell during the holidays.
Otherwise, you’ll leave lots of money on the table when you run out of stock. If you have chosen your niche carefully, the upside of having extra inventory grossly outweighs the downside of not having enough product for sale.
In the grand scheme of things, you can make a ton of mistakes and still be successful so don’t fret the small stuff.
In business and in life, common sense often prevails. So if something seems too good to be true, it usually is.
The best business advice that I can possibly give is to put your best foot forward, try to plan for as many contingencies as possible and let things ride.
Even if things don’t go as planned, as least you know that you tried your best.
Good luck and hopefully this post will prevent you from making the same mistakes that we did.
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