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The number one question that start-up product businesses ask me

How much it really costs to start a product business

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the number one question that start-up product businesses ask me

One of the questions that I am most commonly asked by people who are thinking of starting a product business is how much it all costs.

It’s a reasonable question - after all, knowledge is power and going into business with your eyes wide open is a great idea.

The trouble I was having was that getting decent information on this subject was really difficult.

We are all bombarded on a regular basis by FB ads promising to show us how to build a 7 figure business in a fortnight, but decent, actual data from small product businesses was not easy to find.

There was only one thing to be done - I had to find out for myself!

I put together a questionnaire and over 50 small businesses answered it. In this blog post, I’m going to run through who answered, how much they spent, what they spent it on and what factors influence the cost of starting a product business.

Who answered?

The make-up of the businesses that answered are below:

  • 52% of brands sold home, gift and stationery, 24% were clothing brands and 10% were children’s clothing brands.
  • The majority of the brands have been running for less than 2 years, with 20% in the 2-5 year bracket and 16% over 5 years. 
  • In terms of how these brands are getting their products, 22% of them were making the products themselves, 16% purchasing from another retailer, 28% were having them produced by someone else and 34% were using a combination of all of these methods.

What was the result?

how much does it cost to start a product business

The breakdown of the amount that these businesses spent in their first year of business was:

  • 10% under £1k
  • 36% £1-£5k
  • 16% £5-£10k
  • 18% £10-20k
  • 10% £20-£50k
  • 6% spending over £50k

So the majority (62%) of businesses started their business with less than £10k of expenses although a significant number were spending considerably more than that.

What were they spending their money on?

  • 53% said stock was their biggest investment
  • 12% said their website
  • 12% materials
  • 10% equipment

Other big investments included a trade show and the cost of branding.

What affected that number?

The cost of running a business definitely shifts with the type of product and the method of production. Looking at the data in more depth shows some interesting results.

Clothing costs more

  • Only one third of clothing brands were able to launch with less than £10k% of clothing.
  • In this category, a third of businesses spent 10-20k in their first year and a third were in the £20-£50k bracket.
  • It’s reasonable to expect that a clothing business is going to cost you more than £10k to start.

Handmade businesses cost less to set up

  • In terms of the method of production, those who handmade their products all spent under £5k in their first year, mostly on supplies and equipment.
  • This is logical - but it’s also unlikely that these businesses were considering how much of their own time they spent making the products, and you should really be factoring in how much your time is worth if starting a handmade business.

Manufacturing is hard to get into for less than £10k

  • The majority of businesses who were manufacturing products spent over £10k in their first year.
  • Costs included technical assistance, and above all, paying for the cost of a full production run.

Physical stores cost more

  • There were 20% of the respondents who ran physical shops. 38% of them spent £10-20k in their first year suggesting that the cost of physical vs. online is also higher.
  • In this case, the most expensive item that physical stores had to cover was their rent - although stock was a big part of their cost as well.

What does this mean for you?

how much does it cost to start a product business?

If you are thinking of starting a product based business, then you probably want to just know that answer to the question that I get asked all the time - how much will it cost for me?

Based on the answers that I received from my survey, a reasonable expectation would be -

A handmade brand would spend under £5k in their first year (excluding the cost of their time and labour).

A clothing brand would expect to spend £10-£20k but £20-£50k is also quite common.

A physical store would expect to be spending around £10-£20k also.

Home tends to be less expensive than clothing, with £5-10k being the band that the majority of these brands spent.

OK, so that’s how much it costs to set up, but when will I see the money?

53% of businesses are forecasting or were profitable by the 2 year mark, with 12% achieving that in under a year.

So expect spend up to the first two years of your business operating at a loss - making a profit more quickly than that means you are doing well!

And when will I be able to pay myself?

63% of product business owners are not taking a salary from the business.

In other words, of the businesses surveyed, two-thirds were not currently paying themselves.

Of those who were under a year, not a single business was paying themselves a salary.

Even in the 2 - 5 year bracket, 60% were not paying themselves.

In the 5 years plus, nearly all businesses were able to pay themselves a salary - 40% were in the £1-£2k per month category and 13% paid themselves £2-£5k.

Be prepared that getting to a point where you can take money out of the business may take time.

Not sure if you can wait that long? Profit First by Mike Michalowicz is definitely worth a read for all aspiring product entrepreneurs.

Tips to manage your finances

financial management tips for product businesses

Now you have an idea of how much it is going to cost you to get started, here are some tips to maximise your chances of success.

  1. Make a plan - 40% of the businesses surveyed were not using a cash flow forecast at all in their business.  Creating a simple business plan, sales forecast and a cash flow document will help keep you on track, allow you to keep a handle on upcoming expenses, as well as have the confidence to pay yourself when you have the cash to do so.
  2. Minimise your risk - don’t plough all of your money into your first production run before you even know whether or not the stock will sell.  Do what you can to minimise the risk by buying small trial quantities, or even pre-selling wherever possible (for example by launching a crowdfunding campaign).
  3. Work your stock - keep an eye on what is selling for you and what is slower to move.  By regularly reviewing slow movers and clearing them out with carefully planned promotions, you will be making room for newer, fresher stock.
  4. Avoid vanity spending - do you need a big PR budget or catwalk show?  Or should your time and money be spent meeting manufacturers and investing in design?  

Want more information about the cost of starting a business?

Sign up here to get the replay of my online workshop on this subject.

I was joined by two other product business experts, Elizabeth Stiles and Joanne Griffin, and we talked through the results of the survey, as well as the biggest mistakes to avoid, what you SHOULD be spending your money on and why and much more.

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