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‘We are thrilled to share with you a game-changing rule that can make or break your product’s success in a competitive market – the “One-Fifth Rule.” This rule focuses on the crucial relationship between your product’s retail price and manufacturing and delivery costs. By understanding and applying this rule, you can make informed decisions that significantly impact your chances of thriving in the innovation industry.
What is the One-Fifth Rule?
The One-Fifth Rule is deceptively simple yet profoundly influential. For your product to retail at a specific price point, it must be manufactured, shipped, landed, and delivered for one-fifth (20%) or less of that price point. For example, if your product is set to retail for $100, the production and delivery costs should not exceed $20. This rule holds true whether you sell your product online or through traditional retail stores.
Comprehending Retail and Margins
To better grasp the One-Fifth Rule, let’s dig deeper into retail pricing and margins. When you sell a product to a retailer, they typically mark it up by a certain margin. For instance, if you sell it to a boutique for $50, they may sell it to the end consumer for $100, thus doubling the price. This difference between the wholesale and retail price is known as the margin.
Considerations for Different Sales Channels
As we mentioned before, the One-Fifth Rule remains valid across various sales channels, including online platforms like Amazon and direct sales. However, you must account for additional factors when using these channels. For example, selling on Amazon entails fees charged by the platform and payment processors, which can impact your profit margins. Similarly, selling directly involves marketing expenses and the cost of building a customer base.
Determining the Retail Price
Setting the retail price of your product requires careful consideration. Gathering buyer feedback and conducting market research are essential steps. While you may have a specific value in mind, it’s crucial to align it with what customers are willing to pay. Major retailers like Walmart can serve as a benchmark to gauge your product’s perceived value and make necessary adjustments.
Be Aware of the Hidden Costs
Though the One-Fifth Rule simplifies decision-making, remember that additional costs may affect your profit margins. Retailers may demand a buyback clause or deduct a percentage from the wholesale price to cover unsold inventory and marketing expenses. Nonetheless, adhering to the One-Fifth Rule enables you to maintain a reasonable profit margin.
Early Feedback is your Friend
One significant advantage of the One-Fifth Rule is that it encourages seeking feedback early in the product development process. This approach helps avoid investing excessive time and resources in a product that may not meet the desired profit margin. Early feedback allows you to adjust your strategy, materials, or design to align with market expectations and ensure a viable and profitable product.
Apply the One-Fifth Rule to Your Business Plan
Implementing this rule involves collaborating with a product developer who can help assess manufacturing and delivery costs. Working closely with them allows you to explore various materials and design options to meet the desired price point. You should also consider expenses already incurred, such as tooling costs, when factoring the overall product cost.
Despite initial concerns about the various costs involved, the One-Fifth Rule is, in fact, empowering. By understanding and applying this rule from the outset, you can make informed decisions and avoid costly mistakes. It enables you to assess your product’s viability and profitability, even if it means adjusting your pricing strategy or exploring alternative sales channels.
Thriving in the innovation industry requires strategic decision-making and a deep understanding of market dynamics. The One-Fifth Rule provides a simple yet powerful framework to guide your product development process. By keeping manufacturing and delivery costs below one-fifth of the retail price, you position yourself for success and increase your chances of thriving in this challenging industry. So, before you tank, get with your financial advisors and product developers and workout how to implement the One-Fifth Rule and start your invention on the track to success.
