What is McDonald’s business? Some might say, the fast food business, or more broadly, the restaurant business. But what many people don’t realize is that McDonald’s is really in the real estate business.

Their real estate holdings include land and prime building locations around the world where their Franchisees build restaurants and pay them rent, month-in and month-out. That’s where McDonald’s makes most of their money, more money than selling burgers.

I remember watching, “The Founder,” a 2016 film about McDonald’s history. “You don’t build an empire off a 1.4% cut of a 15 cent hamburger, you build it by owning the land on which that burger is cooked.” Decent flick by the way if you haven’t seen it.
Southwest Airlines flies people around, but they are also adept at buying and selling oil futures. They do it really, really well. What started out as a way to hedge against fluctuations in fuel prices back in 2007, ended up being a major profit center for them. And while other airlines were losing money when oil prices skyrocketed, Southwest made money.

Another good example is Amazon. According to a February 2022 article in Investopedia, while the majority of Amazon’s revenues comes from online and offline retail sales, the majority of its operating income is from AWS or Amazon Web Services. It is the world’s most comprehensive and broadly adopted cloud platform.

Many car companies earn very thin margins selling cars but make up the difference both through financing those cars and inside their service departments. So are they in the car selling or the car servicing/repair business? Are they in the financing business? Of course it depends on the particular car company.

Which begs the question, do you know what business you are really in?
The best way to find out what business you’re in is to give the different departments (or product lines) inside your company their own financial statements. That amounts to extra accounting work, but not that much compared to the benefits that knowledge will give you. Break down each department’s sales, cost of goods sold, and expenses specific to them. You can apportion the time expense of employees who manage and work for different departments. You can also apportion rent, utilities, equipment, and so on.
Then analyze and compare the financials. Which department is making the highest profit margin? Which one is generating the most cash flow? Chances are, that’s your core business.
​
Why is this important?
This is important because once you figure out what your real business is, you have to protect that and feed it. Spend extra money to make sure it is well staffed and well stocked. Veer marketing and advertising dollars in that direction. Give it the most attention. Doing this will protect your overall business.

When I was a partner in the apparel business, XLARGE Clothing, we had half a dozen retail stores in addition to selling to major retail chains, bougie boutiques, and international licensees. What business were we in?

XLARGE designed an entire collection four times a year: spring, summer, fall/back-to-school and holiday. The collection included everything from graphic tees and sweatshirts to jeans and work pants to accessories (belts, backpacks, etc.), to button down shirts to outerwear and even shoes. We did a lot of collaborations too with artists and other designer brands like, Vans and The Hundreds. Our retail stores were in San Francisco, Orange County, SOHO, and Los Feliz. Licensed XLARGE stores were in London, Germany, Taiwan, China, Hong Kong, Australia, Korea and Japan. The licensed stores had to buy all their clothes from us. We had a girl’s line, X-Girl and later, x’e. And our kid’s line was called, X-Little. And we sold to retailers such as Urban Outfitters, Bloomingdales, Journeys, Hot Topic, Federated Department Stores, PacSun, and many other cool stores like, Colette in Paris.

It was really the best job in the whole wide world. The Beastie Boys were partners and we had a lot of great parties and store openings. Many wonderful artists worked for us and with us. My duties included traveling to Tokyo and New York City. It was hard work but great fun. Work hard. Play hard.

Where do you think we made the most money? Well, it certainly wasn’t our retail stores. Retail is a difficult place to make money even with the vertical integration and resultant hefty gross profit margins that affords. We didn’t make that much money for most of our clothing collection either. Our volume wasn’t quite high enough to get the pricing we needed to be competitive. Most of our licensees had one or a handful of stores so they didn’t really buy enough from us to be a contender for our largest generator of profits.

Diversification is good and we had many different sales channels that helped us achieve that; we didn’t want to throw out the baby with the bath water so we carefully evaluated all our different departments. Our true business, our real business, the thing that made us the most money was two things: graphic t-shirts and sweatshirts, and our Japanese licensees because they had eighteen stores. Nothing else came even close.

Since I was the CFO, I closed most of our stores except SOHO and Los Feliz and wrote off those losses as advertising expenses, because that’s what they were. We also quit selling to most of our wholesale accounts because they weren’t worth the expense of a sales force and the merchandise returns were shameful. There were more things we shuffled around and refocused on. We hired additional, talented graphic designers for more tees and sweatshirts. We transferred the manufacturing of the collection to our different licensees and they had to pay us simply a licensing royalty instead of buying the entire collection. They still had to buy tees and sweats from us. All of these moves made our company immensely more attractive to the point where we were able to sell it to our Japanese licensee for a spectacular return. XLARGE is still around today and still a super cool, niche, streetwear brand.

All of this analysis taught us we were in the business of making t-shirts and sweatshirts and selling them to Japan.

The role of the customer.
Sometimes a less profitable part of your business feeds customers to the more profitable part of your business. It’s similar to a loss leader in a grocery store. Using the car dealer example above, perhaps they make most of their profits in car servicing, but without selling customers the cars in the first place, they wouldn’t have a servicing business. That needs to be taken into account as well and can be established by doing a customer analysis. Think of it like computer analytics which tally where your customers originate. Are they being referred from a blog? Your website? Google searches? Social media posts? You should be able to track that. If most of your customers are coming from outside your website, then don’t invest too much time and money on your website. Or if the bulk of your business is coming from social media, then don’t spend money on Google ads.
​
The important thing is to know your business. Know where you make the most money, what has the most potential and where your customers originate. Then spend more time nurturing those things. And remember, the truth is always in the numbers.


Originally published at https://www.datadriveninvestor.com on May 12, 2022.

In the next couple weeks, a friend’s business is going to shut down and close its doors. Their customers canceled all outstanding orders. The only channel left for them is online sales, where their gross profit margin is 4%. Yes, gross profit margin, not net profit margin. In the meantime, their overhead costs are continuing unabated, eating all their available cash like a Pac-Man at warp speed. How can this company be saved?

I reflect on that now ghostly column started in 1952 in Ladies’ Home Journal, “Can This Marriage Be Saved”? A long time ago when I was a young girl, I would read my mom’s copy each month. Marveling at how poorly husbands and wives treated each other I thought, quite decidedly, that I would never ever get married. But if I did, I would never let my spouse treat me so shabbily!

Even today, if you Google, ‘can this marriage be saved’, there are over eight million results ranging from deep psychological probing to reading the ‘signs’ to taking pop quizzes, ostensibly because you cannot read the signs.

If you Google, ‘can this company be saved’, there are precious few results. Most are about saving money, a component to be sure, but not really about saving the entire company. The thing is, I’m not really interested in the question, can this company be saved? I’m more interested in how this company can be saved.

I’ve had more than a dozen of my former clients and friends call me in the last couple of weeks. They are understandably concerned about whether or not their companies are going to survive. This is something on everyone’s mind in the age of Covid-19 and the lockdown of America and the rest of the world. It’s everyone from CEOs and investors to bookkeepers and shipping clerks. I suppose the good news is that we’re all in this together and to some extent, we can assuage ourselves with the camaraderie of the situation. But if you own or run a company, the most vital question is, can it be saved? And how can it be saved?

Doug Yakola has been running recovery programs for over twenty years from the prestigious management consulting firm McKinsey & Company. In a post about leading a company out of crisis, he explains that even good managers are often working under a set of paradigms that no longer apply while letting the power of inertia carry them along. Nothing like a worldwide shutdown to shift your paradigm. The good news is, we all know that the rules have changed. So here we are, now what do we do?

Leaders need to make tough decisions and act quickly.

To navigate these challenging times, executive leaders need to make tough decisions, act quickly and remember that the number one goal is to save the company while minimizing collateral damage to your community and workers/employees. Every business is different to be sure, but these classic turnaround strategies will apply to almost all of them. I’ve outlined some steps to get you started, with additional detail below. Even if you don’t own a company, you can employ some of these strategies for your household.

COGS Formula​
Let’s start with the formula for COGS: beginning inventory plus purchases minus ending inventory. That’s it and it is logical. It’s what you started with (beginning Inventory) plus what you purchased to add to that (purchases) less what you have left over (ending inventory). Why subtract ending inventory? Logically, because it is the Cost of Goods Sold. If you don’t sell it, subtract it out and it will be your ending inventory for this period and your beginning inventory for the next period. Yes, it is calculated for a particular time period. For small companies that is usually monthly, quarterly and then at year end. The idea is that you want to find out exactly what it has cost you to make or buy the products you sell for that time period.

So it is only that. Not sales commissions or whatever it cost you to sell them. Not what it cost you to store everything in your parent’s garage. Not what it cost you to make samples or go to trade shows or advertise. None of that. Just, what it costs to make your products. The only exception to this rule is if you are doing your own actual manufacturing. Then you can include factory overhead expense into COGS for the time period in question.

Inventory Valuation
To drill down to the component parts, inventory is the entire cost of your products to get it to your warehouse and only that cost. Not what you’re going to charge your customers or retailers. That’s your wholesale price (if your selling to stores) or your customer price (if you’re selling directly to customers). And inventory should always be the lower of cost or market value. So if it cost you $10 to make a widget and you make 100 widgets, then the total value of your inventory is $1,000. If the market value (what you are going to sell it for) is $5,000, your inventory number is still $1,000. ( Lower of cost or market.) But if the market crashes for your widgets and you can only sell them for $500, then your inventory should be listed at its market value of $500. ( Lower of cost or market.)

A note about the gray area of inventory valuation
It is very easy to manipulate your inventory to make more money or lose more money. It is the easiest way to affect profits and losses in business. Why would one want to do that? If you have bank loans that require you to make a certain amount of profit, you would want to value your inventory as high as you can. If you have a privately held company and your goal is to pay the least amount of taxes, you would want to write-off inventory that has aged, as much as reasonably possibly. I am not suggesting you do that because you need to show an accurate inventory valuation and you don’t want to get in trouble with banks or the IRS, however, it is something that is often done. Don’t do it. And by the way, it will eventually catch up to you down the road.

Purchases
Purchases should include the total that you paid for your widgets, $1,000 in my example, and how much it cost you to ship it into your warehouse or parent’s garage (part of your cost and called “freight-in”). If you are importing, you should also add in customs and duties as a part of the freight-in cost.

Manufacturing

Research suggests that up to 70% of partnerships fail to deliver their intended outcomes. That’s an incredibly high number and one that borders on emergency status.

I’m reading “Klara and the Sun,” by Kazuo Ishiguro. It’s a wonderful book about an A.F. (artificial friend) named Klara. Klara is delightful, curious and observant — a good A.F. And the story, told in a first person narrative with Klara being the narrator, adds an element of fascination. I find myself considering, wow, this is how a robot might “think”.
​Klara’s “life”, so far (I’m about halfway through), is relatively simplistic as you can imagine a robot’s life would be. She knows her place, is well-mannered, puts her real-life friend, Josie, first, and isn’t emotional about any of it. It got me to thinking about business, specifically partnership problems in business that often arise because partners don’t respect each other or are simply too emotional about their issues.

I have one consulting client right now going through partnership challenges. They’re looking to sell their company to ostensibly buy out a couple of their partners. I also recently spoke to a potential client who is considering drastic steps with her company due to problems with one of her partners. And there’s more! Partnership problems seem to be coming to me more frequently of late. Sometimes I feel like I should have a degree in psychology instead of economics.

It brings to mind my own relationship with my partner in my last company. We worked together for twenty four years, sold our manufacturing company after my twelfth year, bought commercial property and multi-family housing units and kept going together for another twelve years investing in real estate. We did very well. In all our years working together I can’t remember one significant fight or argument. After much thought, I put together a list as to how I think we accomplished this.
​

1. We had very clear lines of responsibility, we stuck to those and respected each other’s decisions within our respective areas of expertise. It helped that our positions were quite different. Me? Finance. Him? Design.
2. We never made big decisions without running them by each other. What are big decisions? We mostly set them by dollar amount which grew as our company grew.
3. We kept reasonable and relatively equal working hours. We were both hard workers but had a good life work balance. He probably worked longer hours but I had a much longer commute and four kids to contend with. He respected that. And I appreciated his flexibility. He used to joke that I came in late so I could leave early. Funny. Ultimately, we treated each other with respect and understanding.
4. Neither of us was very emotional. Maybe on my part, it was because I grew up with three brothers and was taught at a young age to hold my emotions in check or else I would be made fun of. Mercilessly. To cope, I became very, well, robotic.
5. We both had integrity in our actions. Integrity leads to trust and trust is crucial. To help achieve trust, keep good track of actions taken and money spent. More is more.
6. We had a good Operating Agreement that put on paper in clear language in black and white, the rules and regulations of our company. I tell every new company to do this. DO NOT SKIP THIS STEP. It will save you from future problems. I can almost guarantee it.
7. We both had similar goals and ambitions. This is something that should be discussed before the partnership is formed. If you have very different ideas about where you want the company to go, then you probably shouldn’t go into business together. It’s like marrying a person who doesn’t want kids when all you want is kids. Of course, sometimes people change their minds, and in that case you can either compromise or sell the company, or go back to your Operating Agreement.

None of these things is revolutionary. Everyone can do them. Treat your partner like you would like to be treated. Even minority partners. If they want more information, give it to them. If they want annual meeting notes, write them.

Have mutual respect and keep your emotions in check.

Remember, it’s not personal. It’s business. In short, be more like Klara.

Business is stressful because things are always going wrong. As a CEO you might wonder, when is this going to end? When will it get easier? What level of sales or profits do I need to attain? At what point will my business be strong enough and healthy enough that I’m not constantly worried it will somehow crash and burn?

I was a founding member of a group of entrepreneurs called, The Startup Founders. We were all in various stages of starting and growing businesses. As we grappled with the day-to-day challenges that a startup must shoulder and solve, the group gave us a safe place to process “issues.” They could be anything from problems with a partner or in my case, a substitute for not having a partner. There were also the questions relating to raising money, formulating a business model, or pivoting when that model wasn’t working. It was a case of helpful collective intelligence.

One day I was talking on the phone to a fellow member who came up with a brilliant idea relating to photo storage. She was complaining how difficult the process was, and how she was so tired of fighting through all the problems that kept appearing at her doorstep, like that trick-or-treating kid who kept coming back for more candy. At one point she cried out, “When is this going to get easier!?”

​Before I answered her, I thought of a great book I had read that perfectly answered this question. It’s actually one of my top ten business books, “Losing My Virginity,” by Richard Branson, and I highly recommend you read it. The subtitle is, “How I’ve Survived, Had Fun, and Made a Fortune Doing Business My Way.” A little wordy to be sure, but it well describes the contents and pearls of wisdom contained therein.

Reading about Branson’s trials and travails when he started Virgin Airways is when I had my epiphany:
It’s always hard and it never gets easier until you sell the company.True story. Even when Branson was running an actual airline and he was a billionaire on paper, he was still fighting with British Airways almost every single day in addition to all kinds of problems like labor and mechanical issues and scheduling and cash flow and raising money and paying off debt and … you get the point. As Roseanne Roseannadanna, played so brilliantly by the late Gilda Radner used to say, “It just goes to show you. It’s always something. If it’s not one thing, it’s another.”

And that was my epiphany. It’s always hard and it never gets easier until you sell the company. If it is hard for Richard Branson, it sure as heck isn’t going to be any easier for me, for us.

​I told my friend that. I told her that it’s never going to be easier until she sells her company and just knowing that, going into it, makes it easier. Right? If you know this, you can roll with the punches, you can not be disappointed when your expectations are not being met, because basically, you cannot have any expectations. You just take it one step, one day at a time. And then you’ll be fine! Trust me! I’ve built three companies from the ground up.

It also brings to mind another one of my top ten business books, “How to Stop Worrying and Start Living,” by Dale Carnegie. It is chock full of helpful methods and processes to actually cure your stress and worry problems. Chapter 3 in his book is called, “What Worry May Do to You.” In that chapter he quotes Dr. Alexis Carrel, Nobel prize winner in medicine: “Businessmen (okay, it was written in the 40s) who do not know how to fight worry die young.” Then Dale Carnegie gives you multiple ways and means that you can deal with your stress and worries. I’ve read this book dozens of times.

​In an earlier Medium Article I talk about one of his methods that has worked for me every time, “Before You Freak Out, Ask Yourself These Four Questions.” 

In the end, my friend didn’t move forward with her business. The biggest issue was that Google happened to come out with a product very similar to hers and she felt that it didn’t make sense to continue. Understandable. At least she knew early before she pumped more money into her venture.

I’ve shared my epiphany with many others since that time, with the hopes that it would help them manage their expectations. I believe that it has helped. I know that it has helped me.

P.S. Congrats to Sara Blakely for selling her Spanx business to Blackstone yesterday. She can now take a well-deserved, deep relaxing moment. I’m sure she’ll be back at it soon.​

and how to get more of it.

In the last two weeks, my stock portfolio dropped significantly in value, and I don’t care. Why? Most of my stocks are dividend paying and thus far at least, the dividends haven’t been cut. What matters is the cash they’re generating which I depend on for a part of my income. That hasn’t changed. Also, I’m quite a ways from retirement, so I can sit tight and wait for the next upswing. The cash generated through dividends is more important than the value of the underlying stock. Cash is king.

You may have heard that old saying. Basically it means that cash is more important than the value of assets or even your profits. And most of the time it is.

Here’s another example. I bought a house with a 30-year fixed mortgage. My mortgage payments were not going to increase. I worked my monthly payment into my budget, and I knew, based on my income, that it was affordable as long as my income didn’t decrease — not likely. Then, the Great Recession of ’08 happened. My house dropped significantly in value and I didn’t care. Why? My monthly payment remained the same, my income remained the same, and I wasn’t going to sell my home anytime soon if ever. The value of my house didn’t matter and I knew it would go up again eventually because it is in a great neighborhood. And it did.
​
Cash for Your Business

What is a cash flow statement? It’s cash in less cash out. If your business is cash flow positive every month (more money is coming in than going out), you’ll be okay.

What is an income statement? It is revenue or sales, less expenses. The result is your monthly profit or loss. You can operate at a loss for a period of time, and as long as you are cash flow positive, you can still be okay. Here are some suggestions for how to manage your cash flow in a business:
​

1. First of all, you might ask how you can be cash flow positive while still operating at a loss. Usually it’s because you can borrow money or raise money by giving away equity in your company. As a side note, some income statement “expenses” do not result in cash going out. An example is depreciation. This is when you write-off fixed assets like a computer, for a specified amount of time (established by the IRS) but you’ve already paid for it, so it doesn’t result in cash out after the initial outlay.
2. Most startups operate at a loss. Their sales haven’t caught up to their expenses. So raising money is the difference between a pipe dream and a viable business. Money can be raised from friends and family, an angel investor, or your own savings. But, it has to come from somewhere.
3. Let’s say you decide to start a company to develop a revolutionary app. You have to find and pay programmers. You need to rent an office where they can sit, and office furniture to sit on. Maybe you buy a coffee machine so they can stay up late at night working. You will have to pay utility bills — electric and internet connection. Assume most of your programmers are subcontracted, but a few are employees and you will have to pay their payroll taxes and benefits. For our hypothetical example, suppose all of that adds up to $60,000 a month. That’s called your burn rate. You don’t have any sales yet because it takes eighteen months to build your app and test it. So your loss for your first year would be $60,000 times twelve months or $720,000. But you could still be cash flow positive. How? You sell 25% of your company to an investor for $1,080,000. That gives you enough money to make it to the point where your app is finished and you can start selling it. Things rarely work that smoothly in the start-up world. Maybe half way through it becomes apparent that it will take a full two years to finish the app. Then, no one buys it at first, so you have to hire a team of marketers. There are expensive Google adwords you have to buy. Even with your crack marketers, your app sells at a much slower rate than you anticipated. Although you were able to end your contract with most of your programmers, you have marketing and sales people to pay, and now you have to hire a bookkeeper. In the Startup Founders group where I was a founding member, I’ve seen all types of unanticipated problems. They are usually the result of founders being unrealistic about how much money they need to spend and how much money they will make. At that point, they have to go back to their investor, or find another investor and raise more money. If the founder can’t find more money, they close up shop.
4. Another big mistake I see is when a company is making an actual physical product and they have minimum order quantities (MOQs) they must buy. I wrote about this in another article called, “The Art of Pricing.” In this case all their cash is tied up in their products or their inventory. They think they’re going to sell everything and then they can’t. Let’s assume it is an apparel company and to make shirts with this really cool fabric, they have to buy, say, 2,000 yards of said fabric at $8.00 a yard. They’re making ten different styles, and all of a sudden they have $160,000 invested in inventory without enough orders to recoup that money. And that’s just for the fabric. They also have to pay the sewers. If they can’t sell those products in a hurry, they have to close up shop. Don’t buy products or the raw materials to make products unless you have orders for them. Or find raw materials (fabric in this example) that don’t have large MOQs.
5. Construct a realistic set of projections so you really know how much money you need to run your business. If you don’t know how to put together monthly and yearly projections, hire a consultant or an accountant. It shouldn’t cost that much and could make the difference between making it or not.
6. If you are making and selling products, you can use a factor. A factor is like a bank, but instead of loaning you money secured by collateral, they actually buy your receivables. They will loan you between 50% to 80% of the value and then pay you the rest after they collect the money. It’s a bit pricey (they charge from .5% — 2% of the invoice value plus fees and sometimes interest), but it’s worth it if you need the cash. That way you can pay your vendors the day you ship instead of waiting for the store to pay you. Stores usually take thirty days to 120 days or more to pay you.

Cash for Your Personal Life

As far as your personal life, there are several ways you can make sure you have adequate cash on hand for emergencies. Here are some tips:
​

1. Just like projections for your company, make sure you have a reasonable budget and stay within its constraints. If you can’t live on your income, then you have a different problem. You need to either spend less or make more. It’s kind of like a diet. The only way to lose weight is to eat less and/or exercise more. Same goes for your living expenses.
2. If you buy a house, the first thing you should do is set up an equity line of credit secured by a second on your house (as soon as you can do it). If you have spare equity, which is the value of the home compared to your mortgage loan, it is pretty easy to arrange. You will have equity in your house if you make a down payment. After you arrange the home equity line of credit, don’t borrow against it. Just sit on it in case you have an emergency and you need the cash.
3. I also have at least several credit cards on hand for extra cash. All but two have a zero balance and I keep it that way. If I have an emergency, I can use the credit cards. I have done this from time to time, and then I pay them off as soon as possible.
4. Save money for Pete’s sake. You should have at least three months salary on hand in case you lose your job or have some other emergency. Things always happen in life that you don’t expect. Expect the unexpected.
5. Try to decrease your expenses. Look at your personal monthly burn rate. Are there things you can cut out? Can you walk or run outside or ride your bike? Do that instead of joining a pricey gym. Make coffee at home instead of going to a coffee shop. Take a stay-cation instead of a vacation. Buy a cookbook and learn to make good meals at home instead of going out to eat. Make dinners out a once a month treat. Don’t buy something unless you really need it. Clip coupons for the grocery store. For me? It was gifts to my children that I was always splurging on. I established a reasonable limit on that and focused more on thoughtful gifts than expensive gifts. They still love me. There are a million ways you can decrease your monthly expenses. Get creative and get going.
6. This one is related to number two and there really is more than an ounce of truth to this adage: you should borrow money when you don’t need it because when you do need it, you can’t get it. Think about the fact that money is loaned only if you have collateral — or assets of some sort to back it up. You really only have assets when you are doing well — a home, stocks, savings, retirement accounts. Once you have the money, you can sock it away. Sure, you’re paying interest on it, but interest rates are ridiculously low right now. Sometimes banks will cancel lines of credit or reduce credit card availability. But if you have cash in the bank, they won’t take that away from you.
7. If you’re in a bind, get a second job. This won’t last forever. When I’m running and tired and don’t know if I can make it to my goal of six miles, I tell myself, it’s only for an hour. I can do anything for an hour. Tell yourself the same thing whenever you have to undertake a difficult task, like working a second job.

The bottom line is that you want to always have cash on hand one way or the other for both yourself and your business. Cash is king.

I invented one of the coolest new products in my industry (gardening) in the last fifty years and I didn’t know how much to charge for it. I knew after all my years in business that the one thing that probably has the biggest effect on sales is pricing. And most people have no clue how to set a price which can be equal parts, psychology, research, analytics, and trial and error.

An enterprising attorney I had met some time ago at the Licensing Expo in Las Vegas, set up a meeting with Vince Offer — the ShamWow pitchman legend who had become somewhat of a cult star with the millennials. He was interested in featuring my newly released product, the VeggiePOPS seed starters (now called SeedPops), on one of his infomercials. We met in nearby Santa Monica for coffee where he divulged that his name was really Offer Shlomi, and that he changed his name to Vince because he was a huge fan of Vinnie Barbarino, John Travolta’s character on the iconic 70’s television show, Welcome Back Kotter. “What a coincidence!” I said, “Because my ex is the late Robert Hegyes who played Juan Epstein in Welcome Back Kotter, and they were close friends.” John is the Godfather to Bobby’s daughter Cassie, who I raised as my own (and helped me develop the SeedPops). Vince was a fascinating guy who innately knew more about pricing than just about anyone I had met in my thirty years of business.

Vince went on to explain that before he agreed to take on any particular product, he insisted that a booth be set up at the Rose Bowl Flea Market in Pasadena so he could see first-hand how well the product sold. I had previously been a cofounder/partner in two successful companies — toys and apparel — and we sold to mass merchants like Target and Walmart for the former and “high-end” department stores like Bloomingdales and even Barneys for the latter. The idea of selling at a flea market seemed beneath my pay grade, but I agreed to his terms with curiosity, and wow, (or Sham-Wow), I was glad that I did.

I secured a booth at the flea market and roped Bobby’s son, Mack, who I also helped raise, into helping me transport, set up and man a pop-up tent, boxes of product, folding table, etc. and we embarked at sunrise for the Rose Bowl on a sweltering August morning, the second Sunday of the month. After setting up, we stood behind the table as buyers strolled by. I displayed the Pops on several lollipop stands — each holding forty eight. The whole presentation looked immensely colorful and appealing. Initially, when attendance was sparse, people would stop, marvel at the Pops, and buy one or two. We had priced them at $3.99 each. By lunchtime we had sold about half a single display — 24 pops.

How did I come up with that price? I used Cost Plus pricing, defined more fully below.

In addition, I researched packets of non-GMO, organic seeds and found that they ranged from about $2.00 to $4.99 depending on the vegetable, seed packager and store. My price point of $3.99 seemed reasonable.
​
Around lunchtime, Vince Offer showed up, looked around the table, observed the people buying the Pops, and after awhile said, “This is what we’re going to do. You have six different colors, six different vegetables. You’re going to offer people (Offer, ha!), $20.00 to buy five and we’ll give you the sixth Pop for fee.” Within an hour, we had sold out. In terms of price, that amounted to $3.33 per Pop instead of $3.99.
​
Price Setting Checklist

Does the World Need Your Product?
This is a tough question and not really within the scope of this article. There have been entire books written about it. I recommend reading, The Lean Startup, by Eric Ries. A good place to start by asking, “Is this a product that I want or need or could use that I can’t find in the marketplace?” To quote an old saying, “Can I build a better mousetrap?” Or, “Can I make the mousetrap more affordable? Prettier?” I recommend starting by observing your closest competition.

Competitive Analysis
If you are making a product that is not patented or otherwise protected, and other companies are making a similar product for $50, you are not going to be able to charge $100.00. So, keep that in mind. If you cannot do it for $50 without losing money, then you’re probably in the wrong business or you have to closely examine your costs and see where you can save money.

Also, if you can somehow give the impression that your product is super special, build your brand awareness so that everyone wants your baby doll or cashmere sweater, then you can charge more. Building brand awareness is hard and expensive though. If you are making your shirt out of silk and your competitor is making it out of polyester, you can charge more for yours. If your workmanship is superior, you can charge more for that. And it depends where you’re selling it, too — online stores or brick and mortar. These are all considerations in setting a price. So start with a competitive analysis. List all your direct competitors and what they are charging. Make a note of how they have differentiated their products.

For me, I knew that there are a lot of seed starters out there, but they are all the same, all brown and boring cups, and I felt like I could build a better mousetrap. Also, I had been working with schools putting in school gardens for several years. I noticed that there are three things that made a big difference:

1. It had to be fun for the kids or they wouldn’t do it.
2. It had to be easy for the grownups or they wouldn’t do it.
3. There had to be a story behind it. (I published books for this, but that’s another story.)

I knew I could build a better mousetrap and together with my daughter, Cassie, we set about building a better mousetrap — hence, the SeedPops were born or created as it were in our kitchen with newspaper, my food processor, some donut hole trays, paint, soil, fertilizer, seeds, and my oven. But what would we charge for them?
A lot of pricing decisions come down to competition, but, there are also pricing models to consider and they all have their plusses and minuses.

Choose a Pricing Model
Pricing of course, depends on what you are doing, e.g. software, consumer products, business to business, services. There are a lot of different pricing models and you’re probably personally familiar with most of them. Believe it or not, one pricing model is “free”. You may recognize Facebook or Twitter as free pricing that later — when they had enough users –could charge for advertising. There is also: subscription, freemium, hourly rates (many service providers), project-based, value-based pricing, equity pricing, velocity pricing, and cost plus pricing to name some. You can look all of these up, but for the purposes of this article, I’m going to focus on cost plus because that is where most of my experience lies and that is the most common method for consumer products. And I’m going to focus on selling directly to the consumer such as an online store or in my case, the flea market. It is the easiest way to go into business because you are not dependent on selling to a store and you can easily try different prices.

Cost Plus Pricing Defined
I have a friend who is a new entrepreneur and recently started her own apparel company with a really cool product. I’m a hard sell and I love it. She is concerned that her online price matches her store price and are her prices too high? Are they too low? Is she making enough money to make her side hustle worth it? What should her sales channels be and how much should she charge for each of them? Should she put her products on sale? And when?

I explained to her the idea of the cost plus pricing model and told her to start with that. Cost plus starts with a very accurate cost sheet including every tiny thing — every label, thread, tag, fabric, pattern, cutting, sewing, and so on. After adding all of your costs, double them — and that becomes your wholesale price. If you sell to a brick and mortar store, they would typically double it again for the end consumer. Understand that doubling the price is a 100% markup.

The Importance of Accurate and Complete Cost Sheets
What you don’t want to do is make a careless mistake on calculating your costs that will affect your sales price. I’ve seen that happen. You cost your sewing at $5.00 an item when it’s really going to be $15.00. How do you determine your costs? Get firm quotes in writing from all your subcontractors and suppliers.
​
When I say you have to include every teeny tiny item, I mean it. Not just printing your hang tag, but the cost of the safety pin that attaches the tag. The plastic bag that you place your item in. Everything little thing. Make a spreadsheet or list it out on a piece of paper, it doesn’t matter what method you use. Just make sure you are accurate. This is vital because you don’t want to price your product below your cost. Sounds obvious, but if your costs are inaccurate, how do you really know?
​

Minimum Order Quantities or MOQs
If you are buying component parts from another manufacturer and most likely you will be, make sure you find out if there are minimums (MOQs) that you have to buy. Example: You are in the apparel business. You are going to print your fabulous graphic designs on camouflage t-shirts and sell them. You think you can sell 500 shirts to your friends. You go to your t-shirt manufacturer and put in an order for 500 camouflage t-shirts. She says, sorry, our minimum is 1,000. Don’t do it. Haggle with her. Or, find a manufacturer who will sell you 500, even if you have to pay a premium. A very wise person (my accountant) taught me a saying for manufacturing or assembly:

First Loss is Best Loss. In other words, better to write-off fabric at $10.00 a yard than completed garments which use that fabric, plus sewing cost, thread, labels, etc. Fabric is a smaller loss than a finished garment. The most common reason why companies go out of business is because they make too many products (inventory) and all their money is tied up in those products that they can’t sell.

Because we are using a cost plus pricing model, the direct to consumer sales price has to be at least double your cost — more if you plan on selling to brick and mortar stores later because they will have to take their 100% markup.
​
For my example, because I was selling directly to the consumer, e.g. the Rose Bowl Flea Market, or if you selling through your own online store, you have the ability to do an A B Testing of sorts. You can change your price and see how that affects your sales! That was the genius of Vince Offer.

Construct Your Own Demand Curve
A typical Demand Curve is negative. This is just common sense. The more you charge, the less you sell; price and quantity have an inverse relationship.

This is a microeconomic concept and like anything in economics, it’s sometimes more of an art than a science. Why? Because other things may come into play — like the time of day or the weather or one location is better than another. That’s why it’s good to try to hold all other things equal. This is obviously difficult if you are selling to brick and mortar retail stores because you sell to them in bulk and they set their own price. You can’t sell them two sweaters at $20.00 and 5 at $30.00. But if you are selling online directly to the end consumer, you can easily change the prices.

That’s why I recommend you launch your product first by selling directly to the consumer.
​
Here is the very simple Demand Curve from that day at the flea market.

Pricing Psychology
You can see that when I charged $3.99, I only sold 24. But on the same day, with the same product, in the same place, when I lowered the price to $3.33, I sold 240. I didn’t sell it like that though — putting the price tag at $3.33 — I sold it in a different way: buy five get the sixth one for free. That is where the psychology comes in. People liked that they were getting all the different colors and all the different vegetables and they felt like they were getting it for a deal. Which they were.

Another way that psychology comes into play is when will buy more if the price is higher. This is called a Luxury Demand Curve — people think they are getting a more valuable item if the price is higher so they buy more.

What Price Generates the Highest Sales?
After you test your different price levels, you should then figure out which price generates the highest sales volume. Your total sales or gross sales are just the quantity sold multiplied by the price. In my SeedPops example, clearly, my total sales were much higher at $3.33 vs. $3.99: $799.20 vs. $95.76 respectively.

But let’s say you are selling blue jeans and the sales numbers were closer at the different prices.
​
Your customer’s demand might look like this chart to the left.

Emotional Considerations
Almost worse than inaccurate costing or building too much inventory is to lowball your price because maybe you have an inferiority complex or you don’t think your products are worth it or you don’t think you are worthy or deserving. You’d be surprised how often this happens (including with yours truly).

Remember these four rules:

1. I’m not going to be in business if I can’t make money doing it — unless this is a hobby.
2. My products are worth the price I’m charging.
3. My time/knowledge/ideas/processes are worth the price I’m charging.
4. I’m not going to sell this to you if you are not willing and able to pay a fair price.

If Vince had told me to sell my SeedPops at $1.50, I wouldn’t have done it.

Recap on Pricing

1. Make sure there’s a demand for your product.
2. Do a competitive analysis.
3. Make an intelligent decision whether you should go into business or not. If you can’t produce and price your product in a way that makes sense, don’t make it.
4. Make your product unique and special wherever and whenever possible.
5. Put together accurate cost sheets.
6. Construct your demand curve. a) Decide on a range of prices to try. b) Test selling to the end user at the different prices. c) Keep track of how much you sell at each price. d) Make sure those prices are close to double your cost.
7. Find your Optimum Sales Level — multiply quantity sold times your price.
8. Choose that price.

Final Note: you don’t have to make excuses for your pricing and I don’t think you really have to apologize for early adopters that your prices are now lower. Think about the first customers for the calculator. They paid hundreds of dollars for something that we get for free on our phones. Hewlett Packard is not worrying over the fact that early customers paid $200.00 for one of their calculators.

And what happened to me and my SeedPops? I decided not to do an infomercial with Vince — I went the way of getting a licensee to license my invention. They do the manufacturing and sales and pay me a royalty. My SeedPops are now found in thousands of stores all across North America including Target.

On a side note, my attorney also asked a friend of hers to meet me at the flea market that day because he was a consultant that helps companies expand overseas. I am currently in talks with a Dutch company to sell SeedPops in Europe, and a company for Australian distribution. That consultant and me? We are now a couple. Happy ending.

I’d love to hear your experience with pricing and any questions you might have.

I am a founding member of an active startup founders group. We started with a dozen or so entrepreneurs and I appreciated it because being a startup founder without a partner can be a lonely endeavor. I’ve seen a lot of fellow entrepreneurs walk in and out of the doors over many years. I can now tell if someone is going to “make it” after about three meetings. Here are my observations of why they eventually don’t succeed:

1. They don’t show up. If you want to be successful, you have to show up. I mean that literally and figuratively. You have to show up on a consistent and regular basis. Even if you are tired and can’t seem to find your customers, you are not booking sales, you are getting rejected and you know deep inside your gut that you probably have to pivot your plan, even though you are exhausted. You must keep going — putting one foot in front of the other, executing the marketing plan, calling on customers, pivoting if necessary — you just keep at it. Do they show up on time? If you can’t show up at our meetings on time, what about their business meetings? What if you have a meeting with a venture capitalist? Are you going to be late? Are you going to flake and not show up? Because you and your husband had a fight? Being a C.E.O. of your own startup company is being a self-starter in the truest sense. If you aren’t 100% committed to this, you just won’t make it.

2. They aren’t willing to sacrifice. There is a lot of inherent sacrifice in starting a company. Generally, you have to work long hours, drain your savings, if you’re lucky enough to have some, borrow from friends and family to get started, if you’re lucky enough to have some, give up the money you would make in another job which is called “opportunity cost” and give up time with your family and loved ones. Whenever I see that members aren’t willing to make sacrifices, I know that they are finished. And it has happened with regularity. Usually they will take a job and not come back. Prepare yourself for a lot of sacrifice and if you’re not willing to accept that, you won’t make it.

3. They don’t accept the fact that it’s most likely going to take a long time. This is closely related to sacrifice, but it’s more than that. There is a perseverance factor to it and a necessity of faith. A major problem that I’ve noticed is what I call, “The Spouse Factor.” It’s when the spouses, usually women because most founders are men, I’m sorry to say, think it’s taking too long and give up on their husband’s dream. It is sometimes accompanied by ultimatums and all kinds of bad behavior that I won’t go into here. And it’s sad, really. Because you have this person who is putting it on the line every day working as hard as they can. They are trying to have faith in themselves. Some spouses won’t even get a job. Sometimes the lack of support is breathtaking. My advice is to talk to your spouse before you start a company and make sure they are completely on board. For a long time. And make sure you are, too. The myth of starting a company and selling it to Facebook in three years is just that. It’s a myth. If you don’t know this going into it, you won’t make it.

4. They can’t, or won’t sell what they are making. My first job out of college (Penn State) was selling encyclopedias. I generated my own warm leads by doing magic shows at pre-schools and elementary schools. Yes, I became sort of a magician, and I was good. My low point in the job of selling encyclopedias was going into apartments, in the Housing Projects in Washington D.C., where the rats were as big as possums and the cockroaches ran along the kitchen walls with impunity like it was the Capital Beltway - at a time when my potential customers and I were sitting there talking with the lights on! That year, in between undergrad and grad school, I made over $40,000.00 (almost $119,000.00 in today’s dollars) and I was able to start paying for my first year of grad school at Georgetown University. Moreover, I learned how to sell. Steve Blank, the famed Silicon Valley entrepreneur and Stanford University professor says, “you will find no answers inside your office”. You have to “get out of the building and knock on doors”. I believe that is something very few people are comfortable with, but one that every entrepreneur must learn. I don’t care what you end up doing in life, and I don’t care how you do it, but learn to sell. If you don’t, you won’t make it.

5. They don’t take advice. In our group, members present the most pressing issue that they are dealing with that month, and we have a methodology to “process” that issue. It includes a lot of questions and a lot of feedback. When someone is taking the time to give you advice, especially if it is in a group and collective intelligence is at work, you should listen. Try not to be defensive. And you should take action on that advice. After every processing session, that person is given a Call to Action, or CTA. If they come back without seeing their CTA through, that does not bode well for them. As a startup founder, you are going to need advice from other people because there is no way you can know everything you need to know to do this. I’m not saying you have to listen to everything everyone tells you, but I am saying that if you have smart advisors, or paid professionals, you need to be able to evaluate their advice and act on it. If you can’t, you won’t make it.

6. They aren’t willing to change. Are they so entrenched in their vision that they can’t accept that the world doesn’t want their exact product or service, or that there is something wrong with their product, service, or business model and it needs to be changed? Almost every startup business has to pivot. What is a pivot? It’s when you change your business model in some way because your current model isn’t working. In my latest business, Bloomers Island, I’ve pivoted four times. I know it can be exhausting after your first try and it’s difficult to start over. If that’s the case, take a couple weeks off. I got so burned out after my first couple of years and first couple of pivots, that I went to South America for six months. It was the best thing I ever did. At the end of the day, if you’re not willing to make changes, you won’t make it.

7. They aren’t comfortable crunching numbers. I have seen many people start a business without knowing how to construct a basic income statement let alone a balance sheet. They try to make decisions based on imperfect information. In our group meeting, if a member is presenting an issue to the rest of us, looking for us to help them decide between two alternatives, I always ask: “What are the numbers?” I’m not saying you have to be a CPA, but it wouldn’t hurt to take a basic financial course, or sit down with a friend who knows numbers and cook them a dinner to show you how to construct a set of financial projections. If you look at the numbers — the cost of doing one thing with a projected outcome versus the cost of doing another with that projected outcome (otherwise known as a Cost Benefit Analysis), the answer usually becomes clear: crystal clear. The truth is in the numbers. Get comfortable with numbers or you won’t make it.

8. They are overly emotional. My favorite line in the motion picture “The Godfather” is when Sonny, Michael and Tom are talking about killing the bad cop. That is when Michael says, “It’s not personal, Sonny, it’s strictly business.” Of course, Sonny was made vulnerable because he was too emotional. His enemies knew that and they were able to kill him. Don’t be overly emotional. In A League of Their Own, Tom Hanks’ character says, “There’s no crying in baseball!” Well, that applies to business, too. You’re going to get rejected and criticized and insulted. Save your crying for the shower. Take solace in the fact that the more you are rejected, the easier it gets. Develop a tough skin. If you don’t, you just won’t make it.

What is an honest appraisal of my weaknesses? Number three and number six. I was unrealistic about how long it would take. I was too invested in what I wanted to do and took too long and wasted too much time and money before pivoting. I kept going though, because I do the other things really well. Now, it is finally paying off.

Several years ago, during a family vacation to North Carolina, a small contingent of us visited The Wright Brothers Museum at Kitty Hawk. Etched around the base of the memorial on the hill where the first flight was made were the immutable words, “In commemoration of the conquest of the air by the brothers Wilbur and Orville Wright. Conceived by genius. Achieved by dauntless resolution and unconquerable faith.” Numbers 1 through 8 on my list? Check, check and check.
​
In closing, “Ladies and Gentleman, start up your engines and good luck.”

​How do we bring our ideas to life? How do we bridge the gap between coming up with brilliant ideas and then following through on them? I did some research on this, and thought a lot about how I have been able to bring my ideas to life. This is what I do:

1. I honor my ideas. I write them down. I try to bring them to life.
2. I tell everyone I know. You never know who is going to share your enthusiasm. It might even be a potential investor.
3. I figure out a way, strategically and tactically to achieve my ideas. I make a plan.
4. Failure is never an option for me. I burn my ships.
5. I am patient, but not so entrenched that I am not willing to pivot.
6. I persevere. Character is sticking with a project long after the mood has passed. I forget who said that, but it’s true. Perseverance is about 90% of success.

Think about all the times you came up with an idea and then executed it. You can repeat that! It doesn’t matter if you work for yourself or work for a large company.

​Let me know the best idea you ever had that you were able to execute.

​Here are some great articles that may also help if you’re struggling with bringing your ideas to life.

My last article on Medium : Where The Heck Is My Comfort Zone And How Do I Get Out Of It?
The 12 Things That Successfully Convert a Great Idea Into a Reality by Glen Liopis for Forbes.
How to Execute Great Ideas by Marla Tabaka for Inc.
How Do I Actually Execute On My Ideas by Art Markman for Fast Company.

Eventually, Mimi Roma and I drifted apart. The funny thing is, she never went to Georgetown. But I did.

You've got to get out there to remain relevant. I am fortunate to live and work in LA. Being here in the City of Angels about half of the time, I get to experience all this world class city has to offer. Getting invited to parties at Vice Magazine doesn't hurt. Get out there, network to not only the places you want to be, but the places you have to be in order to remain relevant. Go to trade shows, events and parties. Always mind your manners, dress for success and bring your best attitude.

For businesses: observe, read, research, get creative, or as I famously once said, "Think beyond the box." Connect with your customers and listen to them. Ask them for their top ten suggestions related to your product or service. What are you doing right? What could you do better? According to Steve Blank, author of, The Startup Owner's Manual, “Rule No. 1: There Are No Facts Inside Your Building, So Get Outside.” ​