Startups love to compare themselves to other startups. The race to win has resulted in a culture that copies, recycles, hurries, and defends itself with little thought to the question: How will we be remembered?

What Beyonce has shown us in the past few days is nothing short of amazing. Her willingness to challenge the music industry has resulted in unprecedented results. Even with record-breaking iTunes downloads it’s not the numbers that are the most inspiring part, it’s how she did it.

Her path wasn’t about differentiating from the competition. It wasn’t about launching her MVP, followed by more songs to come. It wasn’t about getting to market faster than an anyone else. It wasn’t about creating a new business model. It wasn’t about exclusive deals, marketing partnerships, or big bang PR.

Instead she did everything you aren’t supposed to do.

She took an unlimited amount of time to craft her record. She told her own story in her own way. She made her music only available through one store. She spoke directly to her own fans. She was completely vulnerable in her honesty.

And it worked.

Listening to her story has inspired me to remember that what we are building in companies is so much deeper than the products we create or the cultures we leave behind. They are imprints on the history of time.

Thank you Beyonce for reminding me of these important lessons.

1. Success Isn’t Overnight

“At the end of the day, when you go through all of these things. Is it worth it?” ~ Beyonce

The results of the last five days were 23 years in the making. As a nine-year-old, on the TV show Star Search, she learned a lesson I believe she has never forgotten.

“The reality is, sometimes you lose. You never are too good to lose. You are never too big to lose. You are never too smart to lose. It happens and it happens when it needs to happen. And you have to embrace those things.”

Losing my mom and my company are experiences I will never forget. They have forever changed who I am. And those experiences are so ingrained in my soul that they drive me to make every day matter.

Beyonce is here because she never gave up.

2. Be Willing To Share Your Story

”It’s important we made this a movie, we made this an experience.” ~ Beyonce

Starting a company is an incredibly vulnerable journey. It requires you to go against the cultural grain to create when everyone tells you that it can’t be done. And out of that drive comes a personal story. It’s a story you may not fully understand or even be willing to share, but nonetheless it is a story that belongs to you.

Beyonce’s album reflects her willingness to share the most personal parts of her story. Which makes the entire discussion not about the music or the features or the quality, but instead about her narrative. She captivates you with images and words that can’t be challenged, just accepted.

The best part is that her story is honest. She uses simple language in a conversational format that creates an instant connection with the audience. She knows not everyone will listen, but those who do, will be the customers she pours her heart into.

3. Have A Purpose

“At this point in my life that is what I’m striving for: Growth, love, happiness, fun. Enjoy your life, it’s short.” ~ Beyonce

Beyonce’s story comes full circle in this release. Through her victories and her struggles you learn that her motivations are both internal (love, happiness, fun) and external (changing people’s lives).

Having a purpose in the startup world is hard. The culture is built around ideas instead of meaning. Which is best exemplified by everyone’s two favorite questions: What do you do? and How big can this be?

Surround yourself with creators who first ask why you do it.

4. Your Customers Are All That Matter

“I didn’t want to release my music the way I’ve done it. I am bored with that. I feel like I am able to speak directly to my fans. There’s so much that gets between the music, the artist and the fans.” ~ Beyonce

I remember when our sales team used to tell me that GoPro’s strategy to focus on their customer first, and retailers second, was a mistake. Even though they committed high treason (selling on their own website before selling to retailers), they were right in making their product available wherever and whenever their customer demanded, regardless of what the retailer wanted them to do.

Beyonce did the same thing. She bucked the trend and demonstrated that if you focus on what is best for your customers, the rest will work itself out. Target is so angry they even went on record with a bullshit quote that if you read through the lines, can be translated to mean: All we care about is our bottom line.

“At Target we focus on offering our guests a wide assortment of physical CDs, and when a new album is available digitally before it is available physically, it impacts demand and sales projections,” ~ Target spokesperson Erica Julkowski

The people who buy and consume your product are the customer. Make every decision by putting them first, everyone else second.

5. Brand Awareness > Distribution
In an over-saturated society that communicates in 140-character sound bites, Beyonce demonstrated that brand awareness trumps distribution. By concentrating all of her marketing power towards a single store she proved that capturing consumer mind share is all that matters.

A lot of startups get hung up on partnerships and distribution deals that, on paper, promise incredible exposure for your small brand. These deals generally result in spending all of your time shouting at a partner that didn’t deliver. Instead, you can take that valuable time and those limited resources and use them to be obsessed with how to impact more customers.

It has taken Beyonce 23 years, but she has created a movement that is tidal wave in size.

Conclusion
If you are building something I challenge you to look outside the startup world to find your inspiration. Spend time with yourself, understand what really makes you happy, and from that your best work will emerge.

I’m just starting that path now and although I’m terrified about where it will lead, creators like Beyonce give me hope that if you put your heart on the line amazing things will happen.

*Image Credit: Asterio Tecson

“Reality is merely an illusion, albeit a very persistent one.” ~ Albert Einstein

It was well past 5pm and we were still at the office debating about how we should inspire our customers. We were debating the strategy to ‘be like Mike‘ or to ‘be like Joe.’

To be like Mike, meant we would only use famous influencers to inspire our customers to purchase the product. The videos would need to be jaw-dropping and amazing, filled with never-before-seen action by names familiar within the sport.

To be like Joe on the other hand, meant our customers’ personal videos would be the marketing. Instead of showcasing professionals we would make it easy for our customers to share their own videos online, resulting in their friends buying the product because they were so inspired by the timeliness [I would choose a different word here. “Timeliness” means “at the right time” or “in season”] of their videos.

Five years later and the category lost, it turns out the right answer was to be like Mike.

Over the years we came to realize that, for most of us, making an amazing video is really hard. Consumers are reluctant to share once they watch their own footage and realize that they rode a lot slower, their drops were a lot smaller, and the sounds were worse than they remembered.

In the end consumers were more inspired by the perception of what they could create versus the reality of their results.

So why is this?

You can find a wide variety of opinions about how perceptions are formed and why we create them. But the simplest answer is that perceptions are a form of stereotyping, which we use to recognize the patterns we want to see. These patterns can enable us to quickly draw conclusions that may or may not capture the truth of the situation.

Seymore Smith, an advertising researcher from the 1960s, found that people were screening what they saw based on their own expectations. In his research he noted that, “They do so because of their attitudes, beliefs, usage preferences and habits, conditioning, etc.” Seymore went on to conclude that people who like, buy, or are considering buying a brand are more likely to notice advertising than are those who are neutral toward the brand.

Seymore’s conclusion is powerful. It supports the notion that the more consumers that see your advertising in a favorable light, the more likely they are to buy. This helps to validate the old marketing adage, The Rule of Seven.

So does this mean that honest marketing doesn’t work?

Perhaps.

A recent study done by Alison Jing Xu and Robert Wyer asked men and women to rate beer and cleaning products after watching a series of commercials. What they found was interesting.

In cases where consumers were familiar with the category, gimmick advertising had a negative impact on their perception of the brand. While in cases where consumers were less familiar, they gravitated to commercials that used phrases they didn’t understand, assuming those phrases must be important.

In their conclusion they found that: “…puffery seemed to influence people who are not major consumers of your type of product, but it turns consumers away who are experts or have higher knowledge.”

The study didn’t conclude why this happens, but its findings begin to provide some insights into how you can engage your existing customers, while inspiring potential customers that have yet to hear about your brand.

If you are struggling with how to inspire your customers here are three things you can do.

1. Find Their Motivation
   Maslow’s Hierarchy of needs is a great tool as you think about what motivates your consumers to use your product. More often than not, they are driven by a need to belong or a need for esteem. Axe taps into the masculine need to belong, while Land Rover provides an instant status symbol.

2. Sell Emotion
   It’s easy to fall into a trap of telling people what you do. You’re so proud of your own product that you want to tell everyone the benefits associated with it. Instead, look at how brands like Red Bull, Patagonia, and Nike sell the emotion that their products are associated with. It’s not about the performance of the product, it’s about the lifestyle of the person using the product.

3. Stretch Their Imagination
   This is the hardest of all, but stretch consumers minds with all the ways they could use your product. Pencil’s new video shows people using their product in a variety of ways, while GoPro displays videos that are well beyond what the average user can create. People fall in love with the potential.

As you think about winning a category and grabbing consumer mindshare, get uncomfortable with perception. If you don’t care about being the largest in your market and you only want to market exactly what your product does, than you better consistently deliver the most amazing product in the category. Otherwise you will be fighting the battle over minute features that no one cares about.

Perception
Cell phones will better connect us.

Reality
They distract us from being present.

Perception
Fast food burgers are delicious.

Reality
They are a combination of bread and overcooked meat.

Perception
Drink this beer and you will be like this guy.

Reality
This girl to guy ratio is about right.

Perception
Your surfing videos will look like this.

Reality
When you aren’t the best surfer in the world and don’t have a professional video crew.

Perception
This car is for driving to amazing, desolate locations.

Reality
Most owners just take the car to Safeway.

Perception
Amazing athlete.

Reality
Teenager who also likes to party.

Perception + Reality
Capturing the essence of what people think will happen.

Image Credit: Joe Plocki via Creative Commons.

Hardware is a cash flow business. It takes money to get to market, and even more money to scale your company. This means that your funding strategy is second in priority only to creating an amazing product.

I got the funding strategy wrong at Contour.

Despite being a $30 million business with award-winning growth (#7 on the Inc500, we couldn’t properly fund the business. Being number two in a fast-growing category wasn’t enough as every investor wanted to lead the market, not follow it. In the end Contour ran out of money, which is still mind blowing when you consider that the company had hundreds of thousands of customers.

Contour losing the category wasn’t a result of the decisions made at the end. In reality Contour lost almost two years before when our competitor raised $80M to our $5M. It was at that point that we should have stepped back and re-thought our strategy, but instead we plowed forward and assumed number two could get just as much funding. We couldn’t.

A lack of proper funding prevented us from fulfilling customer demand, growing brand awareness, and staying in front of the innovation curve. Our lead in product quickly deteriorated as a lack of cash prevented us from moving the business forward.

In the end I learned a very painful lesson: Your funding strategy is critical to your survival. Get it wrong and you go out of business. Get it right and you can become super successful.

If you are building a hardware startup, here is a guide to help you think about how to fund your company.

Getting to Market
I’m a big believer that a successful minimal viable product (MVP) in hardware is all about the fastest path to cash. It’s definitely not about over promising features and under delivering on quality. Instead it’s about picking a single feature and not only delivering it amazingly well, but quickly.

A solid hardware MVP should cost $500K or less to get to market. That includes any tooling, engineering, design, brand, and people costs. If you are spending more than that, limit the features. This is true especially if you are a first-time hardware entrepreneur because you want to keep your MVP simple to limit your cash exposure.

If, during the process, you create enough momentum to raise more than $500K, then great. But most likely you will be scratching and clawing your way to complete this first round.

You can raise this initial capital in a combination of ways.

• Friends and Family: Finding $50-100K from close relationships is a great place to start. With this amount of capital your goal is to validate your idea by creating a solid prototype.
• Supplier: The costs of getting a supplier off the ground is your most expensive hurdle. Depending on the complexity of your product, tooling will run you $50-200K, engineering services could be up to $50K, and test fixtures another $25-50K. To help minimize your cash requirements you will want to negotiate with your supplier to roll these fees into your per unit cost. Without a track record, this isn’t easy, but if successful it can dramatically change the amount of capital you need to raise.
• Consulting Firms: You will need design and engineering services to produce a great product, which means if you don’t have those skills on the team you can outsource this to a consulting firm. Often this can be cost prohibitive, but it’s worth finding a firm that will be creative in cash requirements to help you get to market. With Contour we found a design firm that charged us $50K for the work and then a $3 per unit royalty until the bill was paid. It was a risky proposition for them, but it worked out as we paid them the full $350K over two years.
• Pre-Sales: Whether you use Kickstarter, Indiegogo, Dragon, or your own website, pre-selling your product can drive significant cash flow. Even after your campaign ends you can continue taking pre-orders on your own website to increase the amount of cash you raise. Only pre-sell your product once you have a supplier on board and a firm understanding of the schedule.
• Angel Investors: Are not easy to convince before you have pre-selling momentum. A lot of hardware entrepreneurs assume that angel investors will give them capital as they reach development milestones. The reality is most won’t, especially when most hardware prototypes look like crap. Unless you have pre-existing relationships, the best time to approach angels is after you have a prototype and momentum from your pre-sales.
• Crowd Funding Equity: Now that you can publicly raise capital, both Angel List and your own customers become potential sources of equity capital. This form of capital raising is still in its infancy, but the startups finding success appear to have solid momentum both in media attention and customer interest.
• Venture Capital: There are a handful of funds participating in seed rounds, based on the quality of your prototype and the momentum of your pre-sales. You often don’t get a second chance at the same funds so unless you have a previous relationship or incredible momentum, I would save these discussions for your next round of funding.

If you end up raising equity dollars I recommend using a convertible note that converts into your Series A round, using standard series seed docs. Be sure to give yourself enough time to complete the series A round (up to 24 months) with an automatic conversion for investors, as you can’t afford a massive cash outlay down the road.

To reward your earliest investors you can change the discount they receive off the Series A depending on when they invest. For example you can raise the first $100K with discount X to complete your prototype and the remaining $400K with discount Y, after you pre-sell your product. Whatever you do, keep it simple!

A few things to keep in mind:

• Terms with your supplier will be an ongoing discussion. If you can get momentum with investors they may be willing to give you better payment terms.
• Don’t over promise to increase your pre-sales results. It may help to increase the amount of cash you collect up front from customers, but if the product is poor quality or significantly late, you could have an even larger problem down the road.
• Build your financials projections and product pricing based on today’s costs. Don’t make decisions based on what your product will cost at volume, or you risk running out of cash as soon as you ship your pre-sales.

Reaching Market Fit
Now that your product is shipping you begin to control your own destiny. Although your actions are still dictated by how much cash is in the bank, you can begin to think about how much capital is required to reach product market fit, an important milestone in validating that you have a profitable, repeatable business model.

At Contour it took us two years, and two iterations on the hardware, to reach market fit. Not until our product was under $300 and High Definition (HD) did customer demand go through the roof. Overnight the company went from $2M and unprofitable to $7M and very profitable. Despite making dozens of mistakes, we reached market fit with less than $1.5M in capital raised.

The right amount of capital to raise depends on the complexity of your product and the cost to acquire new customers. As a general rule of thumb it can take from $0 to $10M in capital to reach product market fit.

You should consider the following to calculate the right amount of capital.

• Product: After shipping an MVP you need to follow up quickly with version 2 to fix all the bugs and poor customer interactions. You’ll want to calculate what it costs in people and production to make your existing product F*#$ing great.
• Customer Love: A key part to reaching market fit is having customers that can’t stop using your product. Understand what it takes to fully engage your existing customers, including offering amazing customer support.
• Cost to Acquire Customers: One of the hardest parts of making a successful hardware business is profitably reaching new customers. You need enough capital to try a variety of tactics with financial systems to measure which are and aren’t working.
• Limited Distribution: Reaching market fit has nothing to do with building successful retail channels. To be great in-store it requires experienced people and a heavy investment in training. On top of that, it will strain your cash with delayed payment terms and lower margins. Save retail for after you reach market fit.
• Working Capital: Your most important cash consideration is your working capital (the time between collecting cash and paying your supplier). Managing your cash flow is critically important as you try to grow from an interesting product to a profitable business.

When you are ready to look for capital you can consider:

• Cash Flows: You don’t have to raise money. If your business is driving great cash flows you can use that cash to fund the business.
• Debt: Banks will give you about 80 cents for every dollar in receivables and 50 cents for every dollar in inventory. The key is that you have to be profitable. If not, it will be hard to get bank debt.
• Factoring Receivables: If you have strong receivables, but are not yet profitable you can factor your AR. It’s insanely expensive, up to 20% interest, but it can work to move cash flow if you get stuck. This is a last resort option.
• Your Supplier: Continuing to work with your supplier to improve your payment terms is critical to minimizing your cash requirements. You can offer to pay more per unit in exchange for better terms.
• Angels: If you are raising a smaller amount, say $1.5M, then you can approach angels, but asking for more will be an uphill climb.
• Venture Capital: Find a partner with experience investing in hardware and a belief that founders can become great CEO’s. You want the right partner so don’t make this choice lightly. Once you raise institutional capital, the requirements change dramatically.

Scaling Your Company
If you survived this far, congratulations. Hopefully your cap table is still intact and you have some understanding of what is driving your business.

Your vision for the future, from this point forward, will dramatically change the amount of capital you need to grow your business. If you want to win a category, you need a minimum of $50-100M dollars. If you don’t, you need a highly profitable, cash flowing business so you can invest in product at the same rate as the category leader, without bankrupting your company. Otherwise you will suffer from the Law of Increasing Returns, a fateful result Contour experienced.

To provide some perspective on category leaders:

• Jawbone: $310M
• FitBit: $66M
• Roku: $127M
• Sonos: $300M
• Nest: $80M

After Contour reached market fit I never stepped back and painted the picture of what kind of company we wanted to become. Did we want to be the largest camera company in the world? Did we want to be the category leader for action video? Or did we want to make a small, kick-ass company that was highly profitable?

Because I wasn’t clear about the future, I didn’t raise the right amount of capital. Instead I raised $5M from two small funds, which essentially meant I wanted to win the category, except I didn’t raise enough money from deep enough pockets to do so. Instead I created a situation with mixed expectations and in the end a dynamic that made it very hard to raise future capital.

To calculate the amount of capital required you first have to decide IF there is a category to be won and IF SO, do you want to win it?

If the answer is yes, you need a serious amount of capital to become the brand of choice, and from investors that believe in your same vision. A venture return is not possible if you don’t win the category. Boxee is a great example, they raised almost $30M and in the end couldn’t win the category, so they had to sell for about the same amount that was invested.

If the answer is no, prioritize your business model to be highly profitable, raising as little capital as possible. Selling a $20M business with very little capital raised can be a larger return than falling short on a quest to be the category leader.

The places to look for capital include:

• Cash Flows: If you aren’t trying to win the category, continue to optimize your cash flows to keep the business moving forward. You have to keep innovating on the product and creating a sticky brand experience.
• Supplier Investment: Either through your existing supplier or through a new supplier, you can explore them investing in your business. Vizio did this early on and it fueled their growth.
• Venture Capital: Assuming you have a product, technology, and category advantage this can be the right group. You have to present a path to winning the category.
• Private Equity: If you have at least $10M on the top line and 20% on the bottom line, private equity can be an option. Just recognize that they are looking to resell your business in 3-5 years so you have to demonstrate category leadership with minimal technology risk. They want a business that is cash-flowing so they can multiply what is already working.
• Strategic Investors: Of all the types of strategic relationships, distribution seems to be the partnership of choice. Either from a brand that can take you into mass distribution (i.e., Monster investing in Beats Headphones) or from a brand that opens up new geographic markets (i.e. Softbank with FitBit).

Conclusion
Success isn’t binary with hardware, which means you don’t have to create a billion dollar company to be successful. Because hardware drives cash, you can create a fantastic company that is small, profitable, and produces amazing products.

All that really matters with funding your hardware startup is that you have a clear picture of the future. And from that picture, find the right capital to fulfill your dreams.

Image Credit: Aresaburn via Creative Commons

The hardware revolution is not only challenging the existence of billion dollar brands, but altering the very metrics we use to define their success.

Previously held hostage by retail, consumer hardware companies used to measure their business by the number of units sold, growth in revenue, points of distribution, and gross margins. Mainly because the hardware experience ended when the product was shipped to retail, hardware companies used the only metric they could track: Sales.

At Contour I got stuck in this same trap, and because of it, I build the company in the wrong order. We often prioritized our retail channels over our customers, and so we focused on channel growth without really understanding our customers, how often they used the product, and how to profitably reach more of them.

The good news for hardware startups is that these metrics are now irrelevant. The new expectation is that hardware ships with amazing software, and that means you can track your customers after they buy the product. This is new for hardware and opens up fantastic opportunities to measure lifetime customer relationships, metrics that were previously impossible.

The bad news is that this will expose hardware’s dirty little secret: Customers buy and then stop using your product.

If you are building or investing in a consumer hardware startup you should be thinking about the following metrics.

Cash Is King
Hardware is a cash-flow business. It takes cash to build your product and when ready, cash to build your brand. It’s why I’m a big believer that your hardware MVP is about the fastest path to cash.

When getting to market all you care about is how much cash it takes to start shipping your MVP. Whether you raise capital or pre-sell your product through Kickstarter, most hardware products should get to market for under $500K. If you have been around the block you can raise additional capital upfront to make a more robust MVP, but otherwise you want to get your MVP selling as soon as possible to start driving positive cash flows.

Once your product is shipping, and for the entire life cycle of your company, you care deeply about the cash float between when you get paid and when you pay your supplier. If your supplier provides 60-90 days of credit and on average you collect payment in less time (known as your average days outstanding), you are in good shape. But if not, this float gets very expensive to fund. Banks will only provide cents on the dollar against existing assets, while equity requires you to give up big chunks of your company just to fund customer demand.

Running out of cash is a very expensive problem to fix.

Reaching Market Fit
This is an incredibly important milestone for hardware startups. Not only is it the point people can’t stop buying your product, but it’s also the point you understand how to replicate a profitable business model.

Not everyone will agree, but growth is not the most important metric in reaching market fit. Although growth is great for getting investors excited, it doesn’t help you fully understand what is and is not working in your business. In trying to reach market fit you should care about deeply understanding your customers, why they buy the product, and what works to grow your customer base.

In addition to cash you will want to track three more metrics:

1. Customer Love
   I’m a big believer in Net Promoter Score (NPS). It is the single metric you should use to measure your customer even when you only have a few hundred of them.

2. Customer Engagement
   You want customers who can’t stop using your product because it will help you learn even faster about why they bought the product, how they use it, and which features you should be prioritizing. You can track this metric in a variety of ways, but make sure you pick a single metric that tells you how often they are/aren’t using your product.

3. Customer Acquisition Cost
   One of the most expensive parts in building a hardware company is reaching new customers. You want to understand what is and isn’t working in reaching new customers, especially early on when you are experimenting with every kind of marketing channel you can think of. Don’t make the mistake in ignoring how much it costs you to reach a customer through retail. Your true customer acquisition cost is what you spend in sales/marketing and the margin you give up in selling through retail.

Growing Your Company
Once you reach market fit you are ready to build a company. It’s a point that most hardware startups never reach and a point most entrepreneurs will find less exciting because once you get here, you spend most of your time repeating the same 18-month cycle: Introduce a new product, advertise it, repeat.

On top of the cash, customer love, customer engagement, and cost to reach a new customer you should care about four more metrics:

1. Market Share
   You have to be the brand of choice or you risk losing your very existence. Investors don’t fund number two without a clear path to how you become number one in the market.

2. Number of Customers
   You care about customers, not units. Reaching 100K annual customers with a single product is important, reaching 2M puts you in a small class, and passing tens of millions makes you one of the largest hardware players in the world.

3. Lifetime Value
   People get it wrong when they ask how much of your revenue is from hardware vs. software. The real question is how much is your customer spending with you over time? Whether it’s from buying another unit, accessories, or paying for your software doesn’t matter. What matters is that you can continue to drive more revenue (and profits) from existing customers. Apple and Amazon both demonstrate how important this metric is. The larger the number, the stronger the business.

4. Profits
   In hardware profits ultimately drive everything. Not only are they important for raising working capital, but they allow you to properly re-invest in the business. A handful of investors will fund losses as you build a massive empire, but most will demand you are profitable as you scale your business.

Conclusion
Picking the right metrics for your hardware startup matters. What you track will shape the decisions you make. Getting these metrics wrong, will leave you with a company you can’t fund.

No longer held hostage by retail, hardware startups can begin measuring their business by the only metric that really matters: their customers.

Image Credit: Louise Docker

Startups are about choices. Lots of choices. From small to big, short to long, cheap to expensive, these interlinking series of choices shape your journey and ultimately your level of success. But within the thousands of choices you will make along the way, there is one that is bigger than all the rest.

What is your company going to be the best in the world at?

I’m not just talking about what differentiates you in the market. I’m talking about THE one area in which you are going to deliver better than any company on the planet.

Amazon’s choice: to deliver the best customer service in the world. That’s bigger than e-commerce, marketplaces, cloud storage, grocery delivery, reading devices, or the dozens of billion-dollar businesses they have created. They have organized their people, resources, values, and decisions around how to deliver the best customer service, period.

At Contour we weren’t the best in the world at anything. We designed thoughtful, easy-to-use products, but they weren’t heads and shoulders above everyone else. We sold through every kind of retailer, but profitably building channels wasn’t our differentiator. We created a solid brand, but not a marketing machine of dominance. We supported our customers, but the experience didn’t leave them ecstatic with joy. We did a lot of things right, but unfortunately nothing world changing.

Instead we lost to a company that created one of the best marketing vehicles anyone has ever seen. A content generating machine that is bigger and more successful than nearly every brand on the planet.

So how do you decide what your company will be the best in the world at?

Understand the Lifecycle
Ideally a magnitude better than what currently exists in the market, most startups begin with a clear advantage in their product. Resulting in early customer traction and outside capital, these startups move from an idea to a company.

But in order to scale, these companies begin to invest in areas other than their core competencies. Spending valuable resources on people, systems, distribution, and customer acquisition, they begin to dilute themselves. Adding more capital, board members, and expectations along the way, these companies leverage their initial differentiator to feed the never-ending growth machine.

No longer owning a world dominating strength, they do a lot of things, well.

• Microsoft’s dominance in operating systems has resulted in cash they now have to spend just to stay relevant.
• InCase’s design focus turned into cheap product that maximized investor margins.
• Monster’s product engine has been replaced with a channel marketing machine that Beats abused to own the headphone market.
• Facebook’s existence is being challenged by a collection of vertical apps, while it tries to build walls around its one billion users.
• Cisco’s dominate networking products are being eaten by the cloud and a culture that isn’t scaling.

Being consistent about the unique value you bring to the world is hard, especially as the pressure to grow distracts your valuable resources.

Be Committed to One Thing
Entrepreneurs love to build, which means we generally fall into three traps. First we think our time is unlimited. It’s not. Second we treat one incremental objective on the list as equal to the next. It isn’t. Third we think growth is the true metric of success. Guess again.

What we often forget to realize is that every choice has a cost. Whether it’s mind share, cash, or energy, everything added to the list is a multiplier, not an addition. Especially as we learn how to grow from being a founder to a CEO, we have to replace our intuition of doing with thinking.

When Steve Jobs returned to Apple he made it very clear that their world-dominating strength was to deliver the best portable and desktop products in the world for both consumers and professionals. Drawing his famous diagram on the wall, he made it clear that the company was going to focus on a single solution in each quadrant, delivering a product experience that would forever be better than any company in the world. He did that.

IBM on the other hand, has survived 100 years because along they way learned how to shift their core competency. Even in the face of $8.1 billion in annual losses, they were able to pivot from making the best technology to creating a service organization, integrating existing solutions. Changing their focus from hardware to people, they have spent the past 20 years re-learning their focus.

Picking your superhuman strength is much deeper than identifying the technology or features in your product. It requires you to think hard about the DNA of your company and what competencies you want to build into your history from day 1.

• If you want to continue delivering the best products, then what do you need to be amazing?
• If you want the best customer service in the world, what does it require?
• If you want the best engineering in the world, then how do you accomplish this?
• If you want to create the most efficient distribution channels, then what should you constantly be investing in?

When you select the strength at which you want to dominate, you have to be maniacally focused on being the best in the world. As you constantly re-think your own experience, you have to resist all temptation to indulge in the team’s growing list of additional needs.

Even if your superhuman strength shifts over time, that’s ok. As long as you are clear about why and consistent about where you invest, you can develop core competencies that keep you dominating for a very long time.

Focus The Rest
An important element of defining what you will do better than anyone else, is deciding what you aren’t going to do. It doesn’t mean you can ignore key functions required to make your business sustainable. It just means you’re going to be incredibly selective about what areas you gain competency. Just because you can hire someone to execute a new function, doesn’t mean you should.

Beats headphones is a fantastic example. Focused on brand, they partnered with Monster, whose expertise in manufacturing and retail was the perfect complement. It would have been easy for Beats to spend countless cycles finding their own supplier, building retail distribution, learning how to execute in store, etc. But they didn’t. Instead they found a partner who overnight enabled them to blow past Skullcandy, Sony, Phillips, and every headphone maker in between.

Nixon watches, a $400M company that few in Silicon Valley have ever paid attention to, sold their business early on to Billabong. This enabled the founders to focus on their brand and product offering as the company leveraged Billabong’s capital and reach to scale their business. Eventually buying the company back, Nixon took a unique path to market.

Several successful software startups have followed a similar journey. Instagram relied on Facebook for distribution. Pandora built their customers on the back of Apple. Twitter accelerated their growth with a robust developer network. Kickstarter created a network effect with every project shared on its platform. Amazon’s marketplace encouraged 3rd party sellers to promote the platform, driving more customers back to Amazon.

Being the best in the world at product, distribution, marketing, systems, and service isn’t possible. But deciding what you don’t invest in enables you to preserve the few resources you have to be remembered for one thing.

Conclusion
Resisting the temptation to build is hard. I meet plenty of entrepreneurs who think they need to hire someone to solve their problem. I understand, because I tried to solve my problems at Contour the same way. I hired people.

Without a clear understanding of what we were going to be the best in the world at, we did a little bit of everything. Solving our problems by doing instead of thinking, we built a nice company that didn’t survive the marketing domination of our competitor.

Be incredibly amazing at one thing and the rest will work itself out.

*Image Credit: via Wikimedia

Have you ever seen a story about a startup firing its investors?

Me neither.

The reality is that investors don’t get fired. They may get squashed in a recapitalization, minimized in a down round, or bought out, but they don’t get removed.

Because the minute they give you money, they aren’t going anywhere. Unlike an employee that quits or a founder that gets replaced, your investors aren’t walking away until they get their money back, regardless of how painful the process is.

Investors are professional at one thing: Investing. Yes, some of them can bring incredible operational experience to help you grow the business, but at the end of the day their job is to return capital. Not only that, but it’s your job to help them do that. Which means the investors you let in the front door are more permanent than the co-founders you originally chose. Especially when their legal rights are almost guaranteed when you took their money, something you probably glossed over at 11pm when you read the term sheet.

Don’t be confused, if you’re raising money you’re not only saying that you want to accelerate the growth of your company, but that ultimately you want to sell the business. And to be successful at that financial transaction, you are choosing investors you believe can help achieve attractive growth and a significant return. Saying you’re trying to do anything different from eventually selling the business, is a lie.

What nobody admits, is that the contributions you provide aren’t specifically measured. While dollars can be modeled on excel spreadsheets, your time can’t. Which means that if you made the wrong investor choice, too bad. Your only options are to buy them out or find an investor that will replace them, both incredibly hard things for a startup to manage.

Taking money isn’t a bad thing, to the contrary it’s incredibly important if you want to create a category winning company. Just recognize the relationship you are choosing to begin: grow or die.

Here are a few things you can do to make sure your investor relationships stay strong.

Don’t Speed Date the Process
Getting to know someone takes time. No different than getting to know your spouse or your co-founders, you want to take time to get to know your investors. Unless your business is Pinterest hot, your new partners will own a significant chunk of what you are building, which means you want to find someone you like.

The right investors will want to take their own time getting to know you. As Mark Suster likes to say, he invests in lines, not dots.

A similar mentality you should have as an entrepreneur, is that you want to spend time with a handful of investors long before you need to raise money. Sharing the strategic decisions you are wrestling with and asking for their input, is a great way to see how they think about your business. Having helped their portfolio companies through similar issues, they could instantly provide you with insight as to the value they can provide.

Trying to close a round as fast as possible is a fantastic way to wake up in the morning hating who you just married.

Control Your Board
If you don’t know how a board works, it’s pretty simple. There are x number of seats with x number of votes. Unless you are a magician, each seat comes with one vote. If the investors have one more seat than you, guess what, you just sold your company.

An important negotiating point with any term sheet, you only want to give up board seats for significant capital raised, anything else is just giving up control too early. It’s not an easy discussion. Investors who are focused strictly on board ownership are giving you signs that control is incredibly important to them.

It is true you want to put as many independents on the board as possible, but don’t be confused about who owns which seat at the end of the day. Hopefully you will never get to this point, but you may need that one extra vote to keep your company alive.

Constantly Communicate
Bringing on professional investors means you are ready to be a CEO. No longer a founder, your time instantly shifts to spending a significant amount with your board members and key investors.

Although they say they want you focused on the business, what they really mean is that they trust you to keep them lightly informed until something goes wrong, at which point they want to know what’s going on minute-by-minute. This is a place that you never want to end up in, and so creating a consistent communication process early in the relationship is super important.

Every entrepreneur has their own format, but providing the same weekly update will keep you in a consistent rhythm. Sharing key metrics with a simple update about what you did, are doing, and need help with, is a sound foundation. Your investors are no different than your leadership team, they need to know the details so they can provide the most value.

Don’t be naive in thinking the partner on your board is responsible for keeping the rest of his partnership up to speed on your business. Yes, he will provide summaries on a weekly basis, but expecting the single partner to defend your performance is a slippery slope, especially when times get tough.

Building trust is a full time commitment.

Keep Dating Other Investors
The only way to keep your investors honest is to have other interested investors around the table. That’s why it’s important for you to spend time building relationships with new investors you don’t yet have. Even after you close a round, you need be thinking about the next capital inflection point and which investors you think would be a good fit.

If it comes time to raise capital, and no one else is around the table, the terms will get incredibly expensive. No matter how much your investors like you, they will do what’s best for them. Capitalism is based on what the market is willing to bear, so if there aren’t any new buyers to set the price, your existing investors will set it for you. This process can quickly take control of your company.

Beat Your Numbers
At the end of the day, you have to beat your numbers. No matter how much pressure your investors place on you to provide aggressive targets, resist. Because if you miss those targets they will punish you.

You may not realize this, but most investors don’t remember the conservative numbers you originally provided. Instead your aggressive plan becomes THE plan, shifting stretch goals into expectations.

The simplest way to understand this is to ask an investor about how one of their portfolio companies is doing. “They’re crushing it,” can be translated into “They are beating their numbers”.

Conclusion
Selecting your investors is a monumental choice, that often looks fantastic early in the relationship when the company is moving up and to the right. But none the less a choice that has permanent consequences, because unless you find new investors along the way, you are stuck with the ones you have until the end.

And the end doesn’t even mean the lifetime of the company. The end really means until your time is up.

Image Credit: Gage Skidmore via Creative Commons.

“Don’t ship crappy product.”

An obvious statement to the rest of the world, it’s not that simple.

Shipping a quality device is by far the hardest part of building a hardware company. I’m not even talking about the extra work it takes to deliver an amazing customer experience. I’m just referring to a product that doesn’t break, feels great when you use it, and delivers on the promise. Not just once either, but multiple times over, across thousands of units.

To put hardware life into perspective, a Contour camera has over 200 parts inside. That’s over 200 opportunities to make a product that is misaligned, loose, or dead on arrival. Tested by hand, you never have a 100% guarantee of knowing your device will last for the hundreds of hours you promise, until enough customers tell you it does.

The unfair advantage that hardware startups face is that every consumer has an Apple product in their pocket. Comparing your crooked and under polished device to a product that required an army to build it. Managing a single Apple factory line with more people than your entire company.

To make matters worse, consumers don’t give a shit about how small you are, how hard your product is to build, or that you are running out of money. All they really care is that they paid you and now they expect your product to not only deliver on the promise you offered, but surpass it.

I still remember the first VholdR camera that came off the production line. Envisioning that it would be as beautiful as an Apple device, my heart dropped into my stomach when I realized we weren’t even close. The switches were loose, the rotating lens wouldn’t lock into place, and the back door didn’t “click” when you shut it. Yes, it was an action camera, but it didn’t carry the craftsmanship I had been dreaming about.

Running out of cash, we had two options. Ship and stay in business. Don’t ship and go bankrupt.

We fixed as much as we could and we shipped.

Replacing customer’s cameras as needed we constantly made small improvements, turning a near death experience into something manageable. A never ending quest it took almost six years and seven devices to make the product F’ing great.

Now if that introduction didn’t scare the s@#*! out of you, the financial impact will. Even with a lot of capital in the bank, a defective product can drain your cash, and quickly.

Assuming you retail your product at $100 and it costs you $50 to deliver the finished product to your customer, you have $50 in profit.

Each time you deal with a defective unit it costs about $15 in shipping (to and from the customer), requires you to replace the defective product with a new unit from your warehouse that you can no longer sell, and spend about $5 to ship it back to the factory in buik. Even though your factory says they will reimburse the costs, it will take 60-90 days from the time you send the product back to agreeing on the root cause and in turn the financial reimbursement. In the meantime you are wasting your limited inventory and cash reserves replacing defective units.

On top of that you drop to a 3 star product on amazon, which means you sell less units, lowering your overall profitability.

Here is what the math looks like…

So as a hardware startup, how do you ensure you deliver a quality product?

Nail the Basic Experience
In a rush to build the next amazing product, a lot of startups develop right past the features they have to be great at. Always wanting to do “the new thing” it is incredibly hard to keep a team focused on delivering less features, at really really high quality. Because to do this, you have to work on the same few features over and over and over.

Nail the basic features and you will have a solid product. Miss them and customers will punish you.

At Contour we realized we had to be really great at capturing action video, which meant it had to be rugged, easy to use, produce amazing video, and be mountable on a variety of locations. Often trying to push the envelope, our customers made it clear when they felt we missed these basic features or half delivered on what we promised. Blinded by the technology arms race, it was hard to just focus on the basics when we wanted the product to do so much more.

Although your scaled back features won’t impress the media, your customers will reward you with much higher reviews. A result that Amazon can prove drives higher sales.

I wish I had done this more.

Work With Production Engineers Early
The moment you begin to design your product, you should be working with a production engineer. An under appreciated expert, their years of producing high volume product, can save you thousands of dollars down the road.

If not, you will get to the end, hand the factory your beautiful design and realize it can’t be made. It’s not that it’s impossible, it just means that with a yield rate of 80% they are not willing to make your product. The 20% loss is not something you or the factory can afford to cover.

So what happens if you design a product that can’t be reliably produced?

They start changing your beautiful design, turning your elegant product into a frankenstein pile of plastic. Or even worse, you have to start over because you forgot to ask someone if what you are designing can even be built.

The first VholdR camera was a beautiful design. So beautiful it couldn’t really be produced.

Constantly Be Checking Quality
Quality isn’t a job title or a single department in a startup. No doubt you should absolutely have people who are 100% focused on testing, but as a startup it takes the whole organization to help deliver a quality product. Always understaffed you need all the help you can get to test the product, document the issues, and fix them. Although you hope a ‘quality process’ will help you find a lot of bugs, most of them are found by accident, using the product in random ways.

Shifting the company’s mentality from expecting the product to be flawless to expecting to find mistake, is a small step you can make to keep everyone focused on constantly checking for issues. Assuming someone else on the team will find the bug is a fast way to a massive defective rate.

Even without the expertise in house, you can hire great third party companies who will work with your supplier on their quality process, evaluate their test fixtures, and sample units as they come off the production line. Most frustrating of all, is just because a bug didn’t exist before, doesn’t mean it won’t magically appear down the road. A slight change in production process or parts ordered can turn into a massive problem that isn’t caught until you have thousands of units sitting in your warehouse.

Have Amazing Customer Service
Every company should have fantastic customer service. But if you don’t, it will become very apparent when your product sucks. Read any Amazon review and you can see the customer process goes like this.

• The customer buys the product, uses it, and breaks it.
• The customer calls the retailer who tells them to call the company.
• The customer calls the company and unloads on the first person who answers the phone. Or if no one answers the phone they unload on every voicemail they can reach and every email address provided on your website. Continuing to rant on every forum and in the comments on every article about your company, until you address their issue.
• After a few exchanges the company sends a replacement unit.
• This process repeats until either the product works or the customer gets so fed up they return the fifth replacement to the retailer.
• The customer then gives you a 1 star review online and tells the world how broken your product and customer service are.

You will produce poor quality product along the way. Regardless of the process, you will have customers who unfortunately get their hands on a defective unit. An angering experience, how you handle the issue will speak louder about your company than the broken device in their hand.

Faulty product is understandable, crappy customer service is not.

Conclusion
It’s easy to critique a hardware startup from the sideline. Expecting every device to be Applesque in quality, most people don’t understand how a massive number of defective units could have ever made it into customer’s hands.

Unfortunately the ticking clock and draining bank account force these startups to make decisions they would never want to admit. Ship or go bankrupt, every hardware startup finds itself at a quality crossroads.

A crossroads that can be mitigated with advanced planning, you eventually realize that producing quality product is the heartbeat of your company. And just because you make it to billions in sales and millions in capital raised, doesn’t mean you are immune from this constant battle. The bigger you get, the more expensive the mistakes become.

A lot of startups get this backwards.

I know I did at Contour. We spent our money on great product and distribution, leaving nothing left to compete against GoPro in the marketing arms race.

Even though you started your hardware company to build an amazing product you quickly find yourself doing everything but building product. Which is both confusing and frustrating, especially as the Kickstarter buzz wears off, leaving you wondering how you grow your business.

Unfortunately this is where a lot of startups head the wrong direction. Focused on growing, they ask themselves the wrong question, “How do I sell more units?” A subtle difference, the right question is to ask, “How do I get more customers?”

When they prioritize more units, startups end up down the wrong path of growing distribution first, brand awareness later. They proceed to spend all of their energy, profits, and capital to reach the retail shelf only to realize the retailer then expects them to pour millions into marketing to sell the product off the very same shelf. A tough reality, they eventually figure out that retailers are simply order-takers for the demand already created.

The right question, how do you get more customers, is much harder to answer. It requires you to spend a lot of time understanding your customer, why they bought the product, and what influences them to tell their friends. Never a single answer you spend a lot of time trying, measuring, retrying as you push towards the magic point of Product Market Fit.

If you get this question wrong, you’ll end up where I did. The best product, with lots of distribution that no one knows anything about. But get this question right and you become a marketing powerhouse (i.e., Apple) that can profitably dictate the terms to its retailers.

So, if you survived your Kickstarter experience and are wondering how you get more customers, here are some things you can do.

Understand the Funnel

A simple framework to help you identify who to target, the marketing funnel helps you prioritize the most profitable path to paying customers who influence their friends. The funnel has three parts:

1. Ready to Buy – closest to making the purchase decision they are by far the most familiar with your category and specifically with your product. Generally their friend has the product, they have touched it, and now they are researching it online.

2. Have Heard of You – their level of familiarity will vary, but they have heard of your product and remember your brand name. Perhaps they saw an advertisement, read about it in the media, saw a Facebook promotion about it, etc., A general rule of thumb is that people need to see the brand multiple times before being ready to buy.

3. Everyone Else – ignore this group for a very long time. They have no idea that your category exists and they aren’t likely to buy until the price is affordable and everyone else around them has made the purchase decision.

Start With Existing Customers
Most startups skip right past this group of people and try targeting potential customers who have never heard of them. Having existing customers is fantastic, so facilitating them to tell their friends is critical.

The best way to enable existing customers is to understand when they talk to potential buyers. At Contour we realized this was happening on the chair lift when the person sitting next to them would ask, “What is that?” Unfortunately the conversation ended when they got off because we failed to enable the Contour customer to sell the product and/or send them a special offer. The fact that our customers already had an existing Contour mobile app, should have helped to turn these conversations into sales.

Outside of direct word of mouth you can try any ideas that get your existing customers talking about you, reviewing the product, sharing photos, or receiving credit for bringing you new business. E-commerce companies have been rewarding their customers for a long time, even offering discounts, credit, and cash for bringing new buyers.

Regardless of which tactics you choose be sure to learn how your existing customers heard about the product and what influenced them to buy. It will help you prioritize which channels are most effective.

Online Search
These people are the most ready to buy, already searching online for your product. Strong SEO and SEM strategies are great ways to make sure people don’t miss you because they couldn’t find you. Or worse, they find a competing brand because you show up way too low in the search results.

If you don’t have this experience in house you can hire a consultant who can set up your system, figure out the most important key words, and help you manage your campaign. Just keep in mind that the volume of interest is correlated to how well your other marketing tactics are working. Search captures the interest you created elsewhere, it doesn’t create new demand.

One last point, search is a basic way to measure the impact of your overall marketing. If more people are searching for your brand name it means the rest of your marketing efforts are working.

PR
PR will continue to be one of the most rewarding channels, sworn by everyone who has successfully built a consumer brand. Not only because the press keep the brand relevant, but because they provide third party recommendations for the product. A double edged sword, negative press can bring you down as fast as positive press can bring you up.

A lot of startups try to outsource this from day one, which I think is a massive mistake. Even at Contour we didn’t hire a PR firm until years down the road when we understood what stories the press liked and who was most likely to write about us. Being great at PR takes time, patience, and willingness to understand which editors like you and what stories they find interesting.

If you can target a variety of publications you can begin to learn which verticals are most interested in your product and convert into sales. Thankfully most of the PR efforts are done online, providing you valuable data on which media sites bring the most traffic. Something you want to know before you start advertising.

Trial and Error
The rest of your marketing tacts are a continuous cycle of trial and error. A horrifying realization, you have no idea what is going to work until you try it. Even if you copy other successful brands, you have no understanding of how it will impact your own sales until you see the results. This is where the Lean Startup mentality of try, measure, and repeat is valuable as you learn to listen to customers and measure the results.

Tactics that have been successful….

• Building Community. You had this when you launched on Kickstarter, so figuring out how to carry this forward to build a larger group of passionate people is super important.
• Product. Announcements for new versions and new features can be powerful to reaching more and more customers.
• Content. Whether it’s content to entertain, educate, inspire, or inform content that people are willing to share is especially effective.
• Give Aways. Unfortunately free stuff does work and being consistent about it through social media does drive people to sign up.
• Email Blasts. Finding new email lists and partners who will help you target their users is a fast way to learn which demographics will buy your product
• Retargeting. Focusing on people who visited your website but didn’t purchase is an awesome way to stay present, making them think your brand is everywhere!
• Events. High touch and high cost, they are great for talking to real people to learn what they think, what questions they have, and what ultimately influences them to buy.
• Creative Ideas. Anything out of the box that gets people talking about your brand, including the media.

Limited Distribution
What do you do with all the retailers who want to sell your product?

The answer is to limit the distribution, opening up select new retailers.

First, make sure it is easy to buy and fast to ship from your own website. Focusing on english speaking only, you eventually want to make it convenient to buy your product from anywhere in the world.

Second, open up a handful of e-commerce partners who can hep you reach customers, deliver a great experience, and provide data. You need online retailer partners who can use a variety of marketing tactics to help you reach different demographics, while providing you consistent data on what is and is not working.

Third and only when the two channels above are working really well, can you add select specialty retailers with a high touch experience. You are looking for partners that will experiment with you on point of purchase, training, packaging, local events, etc. You have a lot to learn in being successful at retail so assuming you can just open a national account without any understanding of what works, is a massive recipe for disaster. Remember, retail is expensive..

Keep in mind that if you hire an internal sales team they will blow this distribution strategy up. They will push you to open every door saying, “We have one shot with this retailer, we have to do it now!” You can always find consultants or independent reps that can help you open these initial doors until you are ready to grow distribution.

Conclusion
Focusing on brand awareness first enables you to deeply understand your customers, while having real data about which tactics convert into sales. Only until your select points of distribution sell through at increasing rates, for several months, should you think about growing your distribution.

Most startups severely underestimate the cost of opening and supporting retailers, including the missed opportunity to grow your brand awareness. Every dollar spent on a retailer is one less dollar spent on telling the world you exist.

I learned a very hard lesson at Contour. The best product doesn’t always win, the product everyone knows about does.

This originally appeared on Hackthings as part of a series about how to bring your product to market. The first post was “How To Price Your Hardware Product.“

The death of brick and mortar retail has been pounded into our heads since web2.0. The failing of major retailers (Circuit City, Blockbuster, Kmart, etc.) with Amazon’s continuous domination has the whole world assuming retail is in its dying days. I agree, online purchasing will continue to rise, forcing retail to change in significant ways. But it doesn’t mean it’s going away.

So if you are making a physical product, what should you do about retail?

Staying out of retail is the first answer. Post your Kickstarter campaign, selling exclusively through your website and e-comm channels, is a great way to build a healthy margin businesses and figure out which initial marketing tactics are working. Once these sales channels are exhausted, retail is still a real option. Whether you make your own stores like Warby Parker and Chrome Industries, or sell through existing retailers, it can offer a touch-and-see experience that online can never provide.

The following is a short guide about what it takes to be ready, to succeed, and to fund your retail dreams.

Retailers Are Not Marketing
Retailers are not marketing vehicles, they are order-takers for the demand you have already created. So before you enter the door, understand this…creating customer demand is entirely up to you.

Gaining distribution doesn’t mean that more people know who you are, it just means your device is available for sale in more locations. Understanding your brand promise and hitting your marketing stride is critical BEFORE you think about retail.

When you are ready, every retailer will tell you they can help you create more awareness. Disguising programs such as email blasts, website placement, better store real-estate, training events, etc., all in an attempt to maximize their margin. But despite the marketing story they sell you, just recognize that the more consumer demand you have the easier their job is to sell your product.

Creating “national” awareness is not easy and nor can it be done with a few advertising campaigns. True brand awareness takes years and costs money. Controlling your retail growth to match the awareness of your brand is super important because having product sitting on shelves that doesn’t sell is the fastest way to bankruptcy. If it doesn’t sell fast enough retailers will ask for more marketing dollars, discount the price, and if all else fails return the product.

Focus first on awareness, second on growing distribution. If not, you risk losing all the leverage in the relationship, turning retail partners into cash eating machines.

Retail Ready Product
Every time I pick up an Apple product, I am blown away by the packaging. The simplicity is amazing, but even more impressive is the level of detail they deliver on, which I can tell you is painstakingly difficult. Being retail ready doesn’t mean just slapping your logo on a box, it comes with a full list of requirements and expectations. The bigger the retailer, the longer the list.

Before you can even start with the box you need to find both a designer and a vendor. If you are going to retail for the first time I highly recommend working with a design firm or a freelancer who has designed packaging for retail. No substitute for experience, a quality new box design will run you $20-40K, including all the imagery, copy, and material selection. The right person or group will save you time and thousands of dollars in mistakes. They will also have a network of suppliers you can work with both in the US and Asia.

Designing the box is hard. You will spend hours debating what should and should not be on the box. Regardless of how much the box is expected to influence the purchase decision, I recommend going with something simple. Make sure the box stands out on the shelf, people can understand what the product is, and your logo is subtle. Also make sure you have plenty of room on the back to explain how it works and why they want it. When it comes to copy, less is better than more.

The out-of-box experience matters and the right designer will help you make it thoughtful as well as compact. The smaller the box the cheaper the product is to ship (very important) and the better it fits on the retail shelf. Just remember, the fancier the inside of the box is the more expensive it is, and don’t be shocked when you get quoted the price for recyclable materials. Saving the earth is expensive.

The most painful part is nailing the user manual. Not everyone is part of the internet generation, which means they do expect a manual in the box, no matter how easy your product is to use. If you can get through v35 on the manual without killing each other, completing the legal jargon and sku information is a breeze.

And oh yeah, make sure your product is theft proof. You may think that is the retailer’s problem, but when your product gets stolen and the retailer returns their inventory, you will be reminded whose problem it really is. Taping the box doesn’t count. If it can be ripped off the peg, opened with keys, or anything in between you will have a big problem. Even Apple stores aren’t safe from theft.

In Store Expectations
I like to think of retail as an extension of your team. The people in the store represent you, which means that if they don’t use your product, understand its differences, or prefer it, you will have a hard time succeeding.

Seeing your product on the shelf at Best Buy is really cool, until you realize there are some 3,000 blue shirts you have to train. To make matters worse, employee turnover at retail is high, which means that training is an ongoing experience, not a once-a-year event. Growing retail at the speed you can train is important and if your staff can’t cover this, you can hire firms that can help. At the end of the day you need them to successfully answer the question, “So what’s the difference between these two?”

Training can carry you a long way, even without Point of Purchase (aka POP) materials in the retailer. Flyers and crappy counter top stands are a waste of time, so if that’s all you can afford then wait on producing POP. If you are really going after retail you will need to design POP that stands out, doesn’t break, and requires minimal maintenance. Even more expensive than packaging, POP design can run you up to $100K. It’s not the messaging that costs so much, the right vendor will help you make POP that is light, cheapest to ship, updatable, easier to manufacture, and less likely to break.

Get the POP wrong and it is incredibly expensive to update, or worse they get thrown away because they don’t work.

Big Box is Really Big
Getting your feet wet with smaller, specialized retailers is a great way to start. Because the larger the retailer, the more you need to make them succeed.

By the time you hit national retailers your marketing awareness and retail formula needs to be dialed. Learning with thousands of stores is a recipe for disaster. And generally when you get there you will need a designated person to manage the account, a strong channel marketing person who knows which programs to maximize, POP that is working in smaller retailers, and capital to fund the growth. Net 90 payment terms are painful and if you can’t keep their shelves full, you will get the boot, faster than you got in the door.

International Is a Multiplier
Being able to say your product is available worldwide is great for the ego and terrible on your bottom line. International partners will help your start-up cash flows by pre-paying for product, but the margin expectations as well as the retail demands are significantly higher. Succeeding in English is hard enough, multiplying that to Europe or Asia, is just that, a serious multiplication in costs, time, and expectations.

On top of what we already discussed, you will need even more to succeed internationally. Hiring a designated product manager is imperative because getting the product and packaging ready is a full-time job. Time from your engineers and designers will be necessary to make sure your experience doesn’t suck in different languages. Translating the product, support documents, and website can cost you $10-25K, even with grammar errors. Hiring a designated support person is preferred to spreading out your existing team, especially if you want to deliver a great customer experience. Lastly, traveling is important to understanding the market and ensuring that proper training is happening.

Going global can be a strategic advantage, just understand that it is a multiplier in costs, not simply an addition.

Financial Model
Retail is not a cheap game. Once it gets cranking, it provides thousands of points of distribution, while exploding the number of people talking to consumers on your behalf. Before you enter, make sure you get your pricing right, so you understand what it takes to be profitable. Unprofitable retail channels don’t work.

Here is a cheat sheet to help you during the planning process.

Conclusion
Brick and mortar retail is slowing, but it’s not going away anytime soon. Smaller, high touch focused stores are working to educate consumers, which means you can build a successful retail channel. It can also provide powerful, category leading, real-estate. Reminding everyone which is “the” product to buy.

Retail is not a burning fire you want to run into, especially if you have zero experience. Most of the mistakes start-ups make are scaling distribution too early, before they have all of the kinks worked out. Spending time to get the experience right and the in-store formula working, is the difference between stardom and failure.

If retail is where you are heading, just be ready to play the game necessary to succeed.

Image Credit: JavaColleen via Creative Commons

This post originally appeared on Hackthings.com

So you have a hardware product in the works? Before you can launch it, one of the most important things you need to figure out is pricing. Unlike software, you can’t AB test your pricing and change it for different customers, which means your product has one price and everyone wants to know what it is.

I have found pricing matters for two reasons. First, it determines your profits, i.e. how long you can stay in business. Second, you are stuck with the initial price you set, which means you need to get it right.

Although you may want your product to be affordable, it likely isn’t cheap to make when you get started. You have a cart before the horse problem. Your pricing is determined by your volumes, which you have no understanding of until you launch your product, which you can’t do without a price. It doesn’t mean you can’t change your price on future models, but the rule of thumb is you can always lower the price, you can’t raise it.

The mistake most hardware startups make is they don’t charge enough because they don’t think of the problems they will encounter at scale. They don’t calculate the real cost to deliver their product to a customer’s door, they leave no margin to sell through retail down the road when opportunities arise, and they can’t easily raise the price after it has been set.

After some painful lessons, this is the process I would go through if I was bringing a new device to market.

Profits Matter
At the end of the day you are picking a price that enables you to stay in business. As @meganauman says “Profit is not something to add at the end, it is something to plan for in the beginning.”

Before you can calculate your price you need to understand how much money you need to make per unit, which in the hardware world is called gross margin. It’s the difference between how much cash you keep from the customer and the amount in cash you paid to deliver a final product to your front door. This spread stays in your bank account as your profit.

Because gross margin dollars between products can vary so widely, I prefer to use gross margin percentage. Unless your product includes ongoing service revenues, i.e. the Kindle that makes money on book sales, you want to make at least a 50% gross margin on the sale of your device. Especially when you start, your volumes will be low, your mistakes will be high, and you will wonder where all the money went after you fulfill the initial customer demand.

Know Your Costs
This seems obvious, but it’s not. You start by calculating the cost of the physical product, with packaging, shipped to your door. Don’t get fooled when the supplier gives you an initial price without packaging or a price with packaging you have never seen before. Assuming anything is a mistake, especially when the Apple like packaging you are thinking about is a far cry in cost from the packaging they initially quoted you.

Once you come to an agreement on the final price of the product, you can call on a handful of logistics companies to figure out the shipping costs. You are a long ways from shipping palettes or containers full of product, which means you will be airfreighting everything, the most expensive option available. Be sure to shop around for the best price.

Your cost analysis doesn’t end here. You also need add in the cost to support the customer and manage defective units.

Although it’s only you and your dog when you start, you should expect to hire 1-2 people at $10 per hour to help you with customer support, shipping, and managing random surprises. This is something you can scale up after you determine the success of your product, so for now use it as a rough guide.

Defective units on the other hand are very real. A 2% defective rate would be amazing, but don’t be surprised if it’s 15% when you start. Yes, 15%. If you haven’t already, you will need to have worked out in grave detail with your supplier, who is going to cover what, as well as the process to repair units. Regardless, expect to cover the customer’s shipping costs (both directions) to replace the the crappy product you sold them.

To demonstrate how you calculate your product cost, lets assume I am launching a new device that costs me $50 (with packaging), has a 15% defective rate and requires me to hire my first employee. You want to estimate a monthly sales volume for your product so as that grows over time you can see how your cost per unit changes. I picked a flat number of 1,000 units sold per month to be conservative, recognizing that with larger volume I can likely drive my costs down across the board. But until I am at that point, I’m not.

What you notice right away is the $50 per unit price I get from my supplier is a far cry from my final cost. If I had missed this $8.10, I would have been $8,100 short in the first month and almost $50,000 after six months.

Top Down Pricing
In school they teach you about top down pricing. It’s where you look at the market, compare similar products, and try to guess what the price should be. Regardless of your cost structure this exercise is an estimation of what you think people will pay. Largely irrelevant when you start, I recommend using top down pricing strictly to guide where you ultimately want your product to be priced in the market.

Early in your product development process you can ask people how much they would pay. This exercise can be helpful, but often misleading because they quality they are picturing for your product is a lot higher than will come off the production line when you start. And until they actually give you the money you can’t be certain how much they will pay.

Next you can look at your target customer and think about what else they buy. At Contour we recognized that our customer was an outdoor enthusiast, therefore spending significant money on gear, travel, and sport. We compared the prices of helmets, goggles, clothes, and select accessories to give us an idea of how much they were spending on their existing sport. Hoping to be an accessory to their gear, this gave us an idea of what price range our product needed to fit into.

Last, you can look at adjacent products. Again using the Contour example, we researched both digital cameras and video cameras. We found similar pricing for both categories, where $149-299 was for every day consumers, $299-1000 was a large enthusiast range, and $1,000 was the beginning of the professional market. These numbers helped us understand where our prices needed to be over time to reach different types of customers. Even though a Contour camera is now $199 we spent many years in the $299-399 price range.

Continuing my example I have created a top down analysis for my new device. Wanting the product to retail at $200, I calculate how much it will cost me to reach a customer and therefore my gross profit. Whether you go to retail or not, it’s important to build a model that shows you the impact on your margins either way. Pricing your product to sell direct when you aren’t yet sure on your distribution strategy can be a costly mistake, especially if you want to be in retail down the road.

Please keep in mind I used general retail channel percentages based on my experience at Contour. Although applicable to most consumer electronics, you will want to spend time understanding what margins retailers expect to make on your category.

If your gross margin is less than 50% your price is too low.

Bottom Up Pricing
As a start-up and first time maker of your new product, I highly recommend this method of pricing. Sure, you want your product to be affordable out of the gate, but picking a retail price (MSRP) that enables you to stay in businesses is even more important.

To calculate bottom up pricing, you start at the bottom (your costs) and work up to what the retail price would be. The number you arrive at will freak you out, thinking there is no way someone will pay that price. You’re right, millions of people probably won’t, but when you start you’re focused on hundreds to low thousands of first customers.

Again continuing my example I assumed I needed a 50% gross margin and that I wanted to understand the pricing impact both in and outside of retail.

In this model you can quickly see the price impact to the customer if you leave room for a healthy retail channel. It is why a lot of products, including FitBit, started online only, enabling the company to build cash flows, lower its costs, and ultimately it’s MSRP price.

Conclusion
Everyone wants to deliver a great price to their customers, but recognize that if you don’t make enough money per unit sold you won’t be in business very long. You are a start-up and it does take time to efficiently deliver a quality product to market. You can’t short-cut this learning curve and reducing your own margin is one of the fastest ways to become non existent.

I believe that bottom up pricing is the best way to go. And yes it will make the MSRP of your product more expensive than you first imagined, but that’s okay. Your initial customers will be early adopters and if they aren’t willing to pay your high price, you most likely didn’t create a product they can’t live without.

Don’t be afraid to charge more. Long term, your loyal customers will thank you for staying in business.

Image Credit: Savings by Enjoy The Fresh