Editor’s note: Jim Vorhaus is President of Product Connection (located in Chapel Hill, N.C.) a consulting practice focused on helping companies take the great idea that’s the kernel of any new start-up and turn it into the great product that will make that business a success. This article is the latest in the Entrepreneurial Spirit series produced in partnership through the Council for Entrepreneurial Development and WRAL Local Tech Wire.
RESEARCH TRIANGLE PARK, N.C. – The FUBaR had gone the way of the Hindenburg for FizzBin Tech. The product was sound, but the market it addressed was just too small. Once again, gloom descended over FBT and the end seemed near.
Fortunately, the company’s founder, Dr. Corey, had been doing research on the side on a whole new way to use the TiTaNiC technology. He had found that the same process that went on in the material to turn watts into fizzbins could be made to work in reverse. In principle, you could take fizzbins in the environment and convert them into electricity. And since fizzbins were plentiful in sunlight a new, and potentially more efficient, form of solar energy was possible.
Once again, the company accelerated into survival mode. New IP was quickly secured around the solar cell technology, a brand new business plan was created and yet another CEO change was made. With solar energy expert Sunbeam Equinox Ferguson (the daughter of ‘60’s era hippies) on board, FBT was able to successfully raise a B round of financing from VC funds focused on renewable energy and green investments.
Realizing Corey’s vision was far from trivial. The entire Hindenburg product had to be re-designed from the ground up. But a crash program accomplished this task in just over nine months and, once again, FBT was ready to sample product to potential customers. And this time the customers loved what they saw without any reservations. The product did everything they wanted and more. They were poised to place initial orders totaling one million units at $5 each with production quantities ramping quickly to 10 million per year and likely accelerating from there. FBT had a tiger by the tail.
There was just one problem.
The new product (christened the SunBin) was basically the Hindenburg with the wires reversed and a completely new version of the basic TiTaNiC material. The Hindenburg had been originally targeted for the telecommunications market and a selling price of $10. Its projected cost was consistent with that price, coming in at just under $4, leaving enough gross margin to be profitable. But the new energy-generating TiTaNiC material was significantly more expensive to manufacture. Since little else had changed from the original Hindenburg design, the SunBin’s projected cost was now very nearly equal to the price ($5) the solar cell market was willing to pay. Bottom line: There was no way to avoid losing money, much less make a profit, with the present SunBin design.
Yet again FBT had failed to pay attention to a critical part of the product development process. They had not considered the product’s manufacturing cost while designing it.
Even if there are enough customers willing to buy a start-up’s first product to generate the revenue the company needs, eventually those sales need to generate profit or the company is doomed to failure. You can’t lose money on each individual sale and make it up in volume.
The target manufacturing cost of a product needs to be established at the outset of the product’s development. It is determined by what the customer is expected to be willing to pay and what gross margin the company needs to cover its indirect (non-labor and material) costs and still make a profit. When designing the product itself, the team needs to keep this cost target firmly in mind so that choices of materials, processes, features, etc. are consistent with that target. Only then can there be a reasonable expectation of transferring the design into production and having it be built at a profitable cost.
FBT clearly did not think about the cost, or consider the expected cost relative to the market price, until the very end, when it was too late to do anything about it. Another painful lesson learned by the FBT team.
How can FBT possibly survive? Find out in the next installment of “The Saga of FizzBin Tech.”