Profit margins and target markets.

Profit margins

Selling items with high profit margins is where the money is at. Ask Apple! In just 18 months between October 2010 and March 2012, gross margins on iPhone were between 49 and 58%, an almost unheard of figure for a consumer electronics product. Apple didn’t get to be the worlds single most valuable company by selling phones for a hundred dollars with only a two dollar profit. No, it sells its phones for between $500 $700 with 49 to 58% of that going straight into the Apple coffers. (Before taxes of course)

I think, if you are a start up, your goal shouldnt be to be to compete with the large stores and companies who can afford to only a meagre 1 or 2% profit on each item. That will only result in you bleeding money, and not having enough to grow your business on. If you have massive cash reserves then by all means go ahead!

The percentage profit of a item your selling should be in the region of at least 25% 50%. That way its actually worth your while. Then as your cash reserves grow you can start competing on products that have a smaller % profit but a product that might be more affordable to customers and have a larger target market.

 

Starting high end

A good example of a company who is doing this is Tesla motors( I know I love Tesla way too much ). They started out by releasing the Tesla Roadster, the worlds first fully electric sports car. At US$109,000 this car was out of reach for the most of the car buyers market, but if you plan on distributing an entire industry you have to play the long game. The cash generated from the sale of the proof of concept that was the Roadster, enabled Tesla Motors to then get the necessary lones, and a basic cash flow going, to design and start producing the Model S, which was a lot more affordable at the price of US$57,000.

Yes, your right $57,000 is still too expensive for your average Joe. So, with the knowledge and money gained from the sales of the Model S, Tesla are planning on releasing a US$30,000 vehicle, codenamed BlueStar in the near future. This trickle down method of sales is something that is very useful, if what you have is a brand new technology idea which has surrounding technology that is still in its infancy. The one thing to keep in mind when using this method to start off your business is that your product must be worth it. By this I mean it must really be amazing on all fronts, design, technology, usability, safety etc. If Tesla had failed in any of these critical areas then they would have been a massive failure!

 

Starting low end

A big question that you have to ask yourself if you are planning to target the lower end of the market first, is whether it is going to be worth it, not just financially, but time wise as well. For example you could be selling items individually to customers at a much higher percentage profit but then the time it would take to box and ship all these items singly might not be worth the extra money you would be making on selling them singly. You might be better off selling them in bulk to larger stores and then only have to pack and ship a few large orders instead of hundreds or thousands of smaller ones. That is of course unless you have an amazing, fast, efficient distribution network such as amazon. But then…. you’d have invented amazon wouldnt you?

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