January 17, 2014

4 Reasons Why Having Too Many Products Can Be Costly For Food Entrepreneurs

Following up on yesterday’s post about how having an expansive product line can be intimidating to customers, today I want to touch on what all these products mean to you as the business owner too.

Every time a small business adds a new product to their product line, there is the opportunity for increased sales but that doesn’t come cheap.  There are additional costs the company will incur too and you as the business owner needs to make sure that reward of these new products outweighs these expense risks

1. Increased Cost Of Goods Sold (COGS)

When you carry more products and/or flavors, then you also need to purchase additional ingredients and different packaging.  Ideally you can use ingredients that are similar to your other products but with every new flavor, for example, you’re adding at least one new ingredient.  That means more ingredients you have to buy and keep on hand.

The same goes for your packaging as well.  Just like your ingredients, with every new flavor or product you need packaging that will help customers recognize the differences.  That means different labels, different tags, or completely redesigned custom-packaging.  All of that comes at a cost.

2. Higher Inventory Carrying Cost

If you were to look at your inventory right now – your ingredients, your packaging, as well as any unsold shelf-stable products you have – that inventory has a financial number to it.  Let’s say, for example, you were to add up the costs of all the ingredients and packaging in your inventory as well as your product costs for those finished products you haven’t yet sold.  What would that number add up to?

While it’s impossible to have a $0 inventory carrying cost unless you’re making your products on demand (and buying all your ingredients and packaging on demand as well), you have to remember that is money you can’t deploy elsewhere in your business.  It is, quite literally, just sitting on the shelf.  And as you add more products or flavors and bring more ingredients, packaging, and shelf-stable products into that inventory, then that’s even more money that’s sitting around that you can’t use in other aspects of your business like your marketing or promotions.

3. Storage and Warehousing Issues

All those new ingredients, packaging, and finished products take up space.  Where are you going to put those items?  If you’re renting commercial kitchen space, you might need to pay extra for additional storage space or even rent warehouse space to hold your products or packaging.  Once again, that’s a cost to you.

4. Production Limitations

As a small food entrepreneur, oftentimes the hardest logistical challenge is finding enough time to make your products.  The more products you add, the more production streams you add to your timeline.  Are you sure you have the capacity available to make a different product or flavor?  Cause what often happens is that when you’ve got a bunch of Product X, Y, and Z ready to be shipped out, the buyer or customer contacts you looking for Product A.  Since you always want to have product ready to sell, you need to make sure that you’ll be able to keep ahead of your inventory (without losing your mind!).

This isn’t to say that you shouldn’t add new products.  Just make sure that when you do you take into account the customer and how it will impact their purchasing decision and make sure that you have the capital, time, and space available to bring the new product on.

Related Articles:

• Food Cost & Pricing Tool
• Want A Healthy Business?  Keep Fixed Costs Down
• Working Smarter, Not Harder