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Back in 2018, we acquired Restaurant Furniture Plus, a B2B ecommerce business that sells food service furniture to restaurants and other hospitality companies. We recently received a request for proposal from one of the most recognized restaurant brands in the world. If secured, the project would have doubled our sales overnight. We walked away from the opportunity, which may sound silly to you. But, here’s why.
Our core business.
First, let me give you a little background on our business. To date, our core business has revolved around two key things. First and foremost, we are marketing company, which means we resell the products of others and don’t typically take part in product design, manufacturing, importing or warehousing. And, second, our average B2B transactions are typically in the $5K-$200K range, sold typically to up-and-coming chains that have yet to build in-house procurement departments like the national brands. In no year has any one of our customers comprised more than 10 percent of our sales.
The new client opportunity.
The proposal we received was a huge order for more than 1,000 franchise locations of the chain, which meant it would have been a huge multi-million dollar order, around 25x bigger than any other order we have ever closed. It was a complex order that involved custom manufacturing new designs exactly to the customers’ specifications — and the customer required us to build prototypes upfront at our own cost. And, it was not an ideal contract. The customer was not buying from us; their individual franchisees were (one at a time), and the contract included a 10-year product warranty.
Why the project size was a problem.
If we had closed this deal, yes, we would have loved doubling our sales. But, all of a sudden, we would have a customer that solely comprised more than 50 percent of our sales. That’s a really high concentration of sales in one customer, especially since the nature of the transaction was a “one and done” project. Those sales would have evaporated in the following year. So, instead of showing nice growth in 2020, we would most likely have shown sales declining in that year, which was not an optic we wanted to share with banks or other investors down the road.
Plus, when you have a client as large as this one, it is really easy for that project to become all-consuming at the expense of our long-term clients. We didn’t want to risk mis-serving our loyal base of customers by investing the vast majority of our energy into this one big project.
Why the complex project was a problem.
If we had been selling “off the shelf” products from our typical vendors, this project would have been a layup. There would have been no new product to design or warehouse. But, the fact we needed to custom manufacturer a specific solution meant we needed to go around $50,000 out of pocket to build the required prototypes for the customer to approve, as they would not fund prototype development. To us, that was a big number to swallow without any guarantee of a sale on the backend. And, this particular product had to be manufactured with required components only available from one overseas manufacturer, which would have made assembling the product with other U.S. or China-based components a logistical challenge.
Why the contract was a problem.
This $5,000,000 project wasn’t going to be funded in one check from the customer. It was coming in $5,000 at a time from 1,000 individual global franchisees over the course of a year. That meant going out-of-pocket around $3,500,000 worth of inventory day one to get the best-priced manufacturing terms, without any financial support or guarantees from the customer, and then, crossing our fingers all the franchisees actually buy the product over time as there were supposed to.
Then, there was the issue of having to send the orders individually to 5,000 locations across the globe; it wasn’t simply going to one customer warehouse. So, the warehousing of the items and the shipping logistics for heavy furniture going overseas would have certainly created its challenges, operationally and financially, as that was not part of our core competency of selling only to U.S.-based customers to date.
And the final deal breaker was the 10-year warranty. How many products have you purchased with a warranty of 10 years. This was for outdoor patio furniture getting baked in the sun and being used in a commercial setting where things could naturally go wrong. The last thing we needed were warranty claims showing up in years eight, nine and 10 that could have bankrupted the company down the road.
Why we passed on the deal.
As you can see, there were a lot of reasons we decided to pass on this opportunity. It would have been so tempting to close the deal, and pat ourselves on the back for doubling sales. But, the downside risks here were way too high to swallow — the upfront prototype costs, the upfront inventory financing, the global warehousing and logistics, the 10 year warranty. These were all potential pitfalls.
The lesson here is be careful what you ask for because it could be your undoing. Don’t get so romanced by the idea of driving revenues that you don’t think through the operational or financial challenges. Only bite off what you can easily chew, otherwise your business will choke. Know what your core competencies are, and stay firmly focused on what you can do best. It is perfectly acceptable and prudent to say no to a sale if there are high odds it will end up capsizing your boat.
For more insights here, be sure to read this companion article Pitfalls to Avoid When “Reeling in the Whale.”
April 6, 2019 at 11:10AM