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This answer has been completely re-writtenOver the past several years, drop shipping has emerged as the ‘go to’ strategy for most e-commerce retailers. This method has become the de facto standard for most of the uber-successful e-commerce startups from the last several years including:Everyone here at Brightpearl talks with customers and new prospects dozens of times per week about drop shipping, but we definitely found that there really wasn’t a great overview of the process to give growing retailers a detailed analysis of this process as part of a lower-risk vertical expansion strategy.For a how-to guide on shipping & fulfillment, please check out: Matthew Carroll's answer to How do e-commerce startups, like One Kings Lane, Manpacks, and Dollar Shave Club handle the inventory fulfillment side, without a lot of initial investment? Are there drop-ship suppliers they work with, or manufactures outside of the US?What is drop shipping?Let’s start out by getting a good general definition of drop shipping to make sure that we are all on the same page:Drop shipping is an inventory management technique that enables a retailer to sell a product for which the retailer is not currently holding in inventory. The retailer is able to do this because they have have setup a drop ship arrangement that allows the retailer from the product manufacturer's inventory of Available To Sell* products.There are three primary drivers for employing this methodology are:Positive Cash Flow: Once the drop shipping agreement has been arranged, the retailer is in a prime spot - they have product to sell, but they are not financially obligated to purchase any of it. When a customer places an order, the retailer receives the cash for the transaction and then enters into a financially binding relationship with the brand / manufacturer / supplier for transferring ownership rights of the product.Reduces Inventory Risk: We all remember how scary and painful the Great Recession was and it actually becomes one of the most significant driving forces to widespread adoption of this technique. Drop shipping provides the cash flow flexibility to the retailer (only paying for what you sell) without the shackles of inventory from pre-packs or case-packs (pre-defined assortments that most of the time sticks the retailer with odd sizes or odd colors). Additionally, the manufacturer retains ownership of the product, so it reduces much of the apprehension and risk from consigning goods.Reduces Transportation Expenses: The theory of drop shipping is brilliant because it cuts out the retailer’s Inbound Shipping (the amortized cost for the shipment from the brand’s / manufacturer’s store to the retail shop) - this figure is about 2.75% to 4.25% of Retail Price ( for a $100 Retail Price item).[* Available to Sell is a report of the available inventory from the brand / manufacturer that is currently not allocated to orders (i.e. Qty. of Medium Green T-Shirts - Sum of all future orders with a Medium Green Shirt Currently remaining to be sold = Medium Green T-Shirts Available to Sell. Basically, the report tells the retailer how many units are able to purchased by the retailer - not necessarily how many are on hand at the warehouse. This is an important difference because, as you’ll see, sometimes drop shipping can get a little messy - so that distinction could potentially be of use to grease the wheels to make your customer happy ]Three primary implementations of drop shopping?For purposes of explaining the different the different drop shipping models, we are going to define just a couple of terms to make sure that we are all on the same page:Customer - the person who has engaged in the transaction with the retailerFashionSite.com - the retailer who is selling the product that the customer has purchasedBrandXYZ - the brand / manufacturer / supplier of the product to our retailer, FashionSite.comThis process is designed to feel completely painless with the customer never knowing that FashionSite.com never took physical ownership of the goods. This process is designed to be efficient and reduce the considerable transportation costs and inventory risks associated with FashionSite.com holding the inventory while enabling the brand, BrandXYZ, to sell more product in more venues.This process generally takes anywhere from 4 - 12 business days:Until a brand reaches about $20m in top-line revenue, it does not make financial sense to own your own warehouse and manage the shipping and fulfillment process yourself - we are all over-worked and over-stressed, handing the actual order fulfillment is something that we simply do not have time for nor physical ability to do (well... some of you do and my hats are off to your supermen … or superwomen - we are gender inclusive here at Brightpearl). This is all by way of saying that the majority of brands / manufacturers will be working with a 3PL (third-party logistics) or outsourced warehousing & fulfillment company (i.e. a vendor that warehouses the inventory and whose sole job it is to manage inventory and ship orders that are submitted).Hence, the two numbers that are probably making you raise an eyebrow are:BrandXYZ Warehouse Fulfills Order: After working with five different 3PLs or outsourced warehouses over the years, pretty much every contract that I have read and signed stipulates that the warehouse has a one (1) to three (3) day ship window from when the order is “received” by the warehouse to be fulfilled (i.e. out the door the shipping company - usually DHL / FedEx / UPS).Shipping to Customer: FedEx / UPS Ground service in the US will take approximately 2 - 5 days depending on where you are shipping from - If BrandXYZ’s warehouse is in Los Angeles (LA) and the customer is in New York City (NYC) that is a Zone 1 to Zone 5 timeline and it’s 5 business days. This is essentially not an issue for the UK, but certainly an issue that many of you are facing in shipping to Western Europe.Figure 1: Model 1 Drop Ship from Brand to Customer2. Drop ship to retailer on a per-item basis and then shipped onto the customerNow this may appear inefficient, because FashionSite.com is basically incurring all of the same transportation costs. However, for retailers who are hyper-focused on customer experience need to control the product risk and make sure that every customer receives their box with branded by the retailer.Adding this extra node to the link will obviously add some time, this process pushes back the delivery window pretty significantly:This is the logic for how these types of relationships can work - hence why this method has become so popular with the Private Sales phenoms like Gilt Groupe and Fab.com. The customer receives the “Private Sales Price” (i.e. a large discount on designer goods) in exchange for longer delivery windows, where the discount is designed to compensate the customer for the lengthy delivery window.The three windows that we should explain are:BrandXYZ Warehouse Fulfills Order: Same explanation as above, the warehouse’s contract states that the warehouse agrees to ship the order in one (1) to three (3) days after the order is received. Now the interesting little detail that I am going to add to that is: most 3PLs / outsourced warehouses will only accept orders for fulfillment that are submitted before 10am local time. Let’s take a look at how this can start throwing wrenches in the machine:Shipping from BrandXYZ to FashionSite.com: This is the same logic as in Model 1 - BrandXYZ’s warehouse is in Los Angeles and the order needs to travel to FashionSite.com who is in New York City - this is a 5 day window. Now maybe the Retailer will tell BrandXYZ to “Ship the order on the FashionSite.com’s DHL / UPS / FedEx Account.” BrandXYZ is generally going to try and avoid that because we generally add a 20% markup on shipping to cover the cost of outbound warehouse fees. Hence the shipment is going Ground-service to FashionSite.comShipping from FashionSite.com to Customer: FashionSite.com is in NYC and the Customer is in San Francisco, California - this is another cross country trip that takes 5-business days via DHL / UPS / FedEx Ground service.As retailers grow into larger companies and their inventory needs grow this process becomes more and more refined with better integrations with systems, agreements, and vendor compliance on shipping times that reduces the majority of these concerns.Figure 2: Model 2 Drop Ship from the Brand to Retailer and onto Customer3. Large orders are drop-shipped from factory to a major retailerThis version of the drop shipping model involves FashionSite.com placing a large order with BrandXYZ pre-season - roughly about six to nine months before the product is scheduled to be available to purchase by customers at retail. Considering the large quantity of the order, BrandXYZ instructs the factory to break their order up into two shipments - one explicitly for FashionSite.com and the other part for the balance of BrandXYZ’s customers.This model applies to when you are doing business with a large retailer that - most likely an Special Makeup Unit (SMU - a special color way or model that is designed & produced especially for a particular retailer). When a brand like BrandXYZ is doing significant business with a retailer like FashionSite.com, picking the order here in the US is too expensive (about $1.30/unit at standard 3PL rates) - hence BrandXYZ issues special instructions to their Chinese factory to cartonize the FashionSite.com order (where the FashionSite.com’s order is put into specifically delineated cartons) and then in a specific FashionSite.com container so the shipment can be easily separated at the Port and shipped to FashionSite.com.Figure 3a: Model 3a Drop Ship from the factory in China to retailer’s distribution centerFigure 3b: Model 3 Drop Ship from the factory in China to StoresThis approach is a more common approach to drop shipping when BrandXYZ is dealing with retailers with physical stores. The drop shipping agreement is setup to drive down the costs associated with fulfillment in the mannerWhat are the advantages of using this model?Positive Cash Flow:Once the drop shipping agreement has been arranged, the retailer is in a prime spot - they have product to sell, but they are not financially obligated to purchase any of it. When a customer places an order, the retailer receives the cash for the transaction and then enters into a financially binding relationship with the brand / manufacturer / supplier for transferring ownership rights of the product.In order to emphasize the biggest advantages of drop shipping, let’s use the hypothetical example of a product that:Retail Price: $100.00Wholesale Price: $50.00In this simple example, we are ignoring Sales Tax / VAT and Shipping Expenses (Inbound & Outbound).Reduces Inventory Risk:We all remember how scary and painful the Great Recession was and it actually becomes one of the most significant driving forces to widespread adoption of employing drop shipping as an inventory management technique..Drop shipping provides the cash flow flexibility to the retailer (only paying for what you sell) without the shackles of inventory from pre-packs or case-packs (pre-defined assortments that most of the time sticks the retailer with odd sizes or odd colors). Additionally, the manufacturer retains ownership of the product, so it reduces much of the apprehension and risk from consigning goods.Reduces Transportation Expenses:The theory of drop shipping is brilliant because it cuts out the retailer’s Inbound Shipping (the amortized cost for the shipment from the brand’s / manufacturer’s store to the retail shop), an example of which, we see below:In practice, the process of drop shipping - saves time & money to your organization.What are the disadvantages for using drop shipping?Uncertainty on Inventory AvailabilityDrop shipping relies on open and robust communication lines between the retailer and the brand. When you are working with a fully integrated system like Brightpearl, this process becomes infinitely easier as the Brightpearl API ensures that your retailers can have accurate up to the minute information about stock levels - in short, Brightpearl makes drop shipping a dream!However, most e-commerce retailers and brands / manufacturers / suppliers are just coming into the modern age of technology and as much as we would like the entire retail world to be flourishing under Brightpearl-enabled systems - this is not always going to be the case.In the US, there is only about 55% - 65% accuracy into the actual supply levels of retailers and brands at any given time in the country - in other words, the stated inventory levels of retailers and their suppliers (brands) will be inaccurate by 35% - 45%. This presents significant risks to the drop shipping model that we want you to be aware of and cautious in protecting your brand against.Brand Value RiskWhen employing a drop shipping model for your retail shop or e-commerce store, these inaccuracies can cause significant turmoil for your brand and do considerable harm to the customer experience that you are looking to cultivate. For example, if there are not appropriate inventory accuracy safe guards in place and a customer places an order for a “drop shipped” product then the retailer must manually contact the customer and inform him or her of the mistake. This process is always messy and involves a lot of time and frustration for your staff and your customer.In the age of Twitter, you can destroy any social traction by virtue of screwing up one order. Think about it - the prevailing theory for employing social tools is that it is supposed to market a brand effectively by virtue of communicating the fact that one member of the social group “likes” something and thereby his/her social network is more receptive to it being applicable to them.Do you want to know how pissed off a customer gets if they have executed a transaction, transmitted funds, and established an emotional expectation for the product - and it DOESN’T come? You can destroy any social traction & eliminate a large segment of potential users. In addition, you are competing in the age of Zappos & free overnight shipping. Even under the BEST timelines, you are still between a rock and a hard place.Now we are going to run through a couple of scenarios that underscore this risk:Scenario 1: Drop Ship Orders Compete with Brand Wholesale SalesDrop shipping relies on one inventory set from which the retailer has arranged to be able to “drop ship” orders from, but it is also the pool from which the Brand / Manufacturer / Supplier is selling to other customers from. To illustrate this point, the following example should offer some clarity as to the risks of this scenario:FashionSite.com has an existing drop ship arrangement with BrandXYZAt the beginning of every week, BrandXYZ forwards an inventory report to FashionSite.com to update their inventory levelsDuring the week, a customer places an order on FashionSite.com for 1 Medium Green T-ShirtOn that same day a major retailer like Nordstrom places an At Once order with BrandXYZ that pulls all of the stock of Green T-ShirtsFashionSite.com submits the order to BrandXYZ who is hyper-focused on the Major Retailers order and does not respond promptly to FashionSite.com about the unavailability of the inventoryThis creates a big problem for FashionSite.com - the odds of a prompt response to FashionSite.com are unlikely and FashionSite.com’s customer is the one who is adversely impacted by the relationshipThis major retailer, Nordstrom, most likely represents a large strategic interest for BrandXYZ that will be a launching pad for future growth. BrandXYZ will bend over backwards to fill every possible piece of this Major’s order leaving the drop shipper, FashionSite.com left out to dry.Additionally, BrandXYZ will generally send out the inventory reports one time per week - pushing the responsibility for inventory accuracy onto FashionSite.com, who understandably has no control over the situation. Furthermore, BrandXYZ will be frantic to hit jump through the hoops that major retailers require, meaning that it will be one (1) to three (3) days before the new inventory levels are sent back out to FashionSite.com. An information discount that can adversely impact sales and customer experience during the state of inventory availability flux.Scenario 2: BrandXYZ’s Competing Sale for Sale InventoryWhen dealing with drop shipping relationships, the retailer needs to be careful about protecting themselves. Most Brands / Manufacturers / Suppliers have explicit goals of driving 15% - 25% of revenue through consumer direct channels - meaning that your suppliers will come into competition with you more and more.Let’s use our favorite Medium Green T-Shirt example that we have been working from this entire series - both FashionSite.com and BrandXYZ.com receive orders for 1x Medium Green T-Shirt - the last one in stock. Both orders hit the system at the exact same time - when you take a look at the numbers, BrandXYZ simply cannot fulfill FashionSite.com’s order:BrandXYZ is seeking to build their e-commerce presence and it is in their best interest to fulfill the order to BrandXYZ.com’s e-commerce order. Simply put, FashionSite.com is in no negotiating position to command priority over BrandXYZ’s e-commerce orders - FashionSite.com’s customer suffers by virtue of this example.Vendor Risks1. Credit Risk WAY beyond your controlLet’s assume that we are talking about a 3PL model for warehousing & fulfillment and subsequently the 3PL warehouse is a vendor of BrandXYZ. As you know sales in Consumer Products are highly seasonal (Spring/Summer & Fall/Winter) and cash varies widely (i.e. BrandXYZ have HUGE cash outlays at the beginning of the season and gradually recoups them during the cash build cycle leading up to the end of the season when we dump it all back into the next season’s product).Think about the risks that you are taking on by virtue of not controlling your inventory and the fulfillment process. For example, let’s say that it is 1-mo into the season - I have just spent all my cash on buying the product, my revolving credit line is max’d because of just paying my suppliers, and my US Customs duties are scheduled to ACH my account. At this point, 70% of my product has already shipped to the stores, and BrandXYZ owes the warehouse $155k for receiving inventory and then shipping to all 300 retailers in the US. It is still a little early for reorders, so the 3PL is one of lower items on the Accounts Payable. It would not be uncommon to allow the 3PL to freeze BrandXYZ’s account for exceeding credit terms for 5-10 business days.The drop-ship person is screwed in this case as a 5 unit direct ship order is not going to incentive me to to deviate from my “Cash Expenditure Plan.” Cash Expenditure Plans are detailed analyses that every CEO/CFO knows about the most effective use of crucial cash that will be spent at the exact time that it needs to be to ensure the effective functioning of the brand.[Note: One of the main reasons that this happens for brands under $75m in Revenue is that a Major Customer’s (e.g. Nordstrom) invoice becomes un-factorable, meaning that I cannot sell the invoice to a bank and generate cash. This can destroy your cash management and is something that smart CFOs are constantly preparing for.]2. FedEx/UPS will only deal with the shipper (e.g. BrandXYZ as the owner of the shipment)One of the biggest problems with drop shipping is the use of shipping accounts for the actual fulfillment of the shipment from BrandXYZ’s warehouse to FashionSite.com’s customer. There are three main problems with this:BrandXYZ Insists on Using BrandXYZ’s FedEx Account: BrandXYZ is trying to aggregate as much business with FedEx to gain purchasing power that will be used to drive down rates for the entire company. More importantly, it is common for Brands / Suppliers / Manufacturers to “mark up” shipping - meaning that I always add 20% to FedEx Posted Rates to achieve the amount that I bill FashionSite.comFashionSite.com MUST use the FashionSite.com FedEx Account: None of the shippers will speak to anyone that is not the registered shipper on the account. Meaning that if the drop ship order for FashionSite.com gets screwed up, lost, or the customer needs to make a change - FedEx / UPS / DHL simply will not take to FashionSite.com. In a world where customer service is do or die and the lynch-pin for all retailers - this is a major risk that can significantly hurt customer experience3rd-Party Logistics (3PLs) / Warehouses Want in on the Action: After having worked with 7 different 3PLs (outsourced warehouses) in 3 different countries for 5 different brands - these people see shipping fees as part of their revenue model. Many of them will force their clients like BrandXYZ , for example, to use the 3PL’s FedEx Account - since they will be handling all the shipments and the warehouse pools the discount, it will be in every one’s best interest - WRONG!This seemingly simple shipping issue can cause huge problems for drop shippers and something that we want you to be aware of and protected against.Based upon Model 1 illustrated above, the order will most likely be fulfilled via BrandXYZ’s FedEx/UPS account. This means that I own the customer data & the shipment. What happens if the customer needs to change the shipment? FashionSite.com has no authority to act on the customer’s behalf. FashionSite.com cannot call FedEx/UPS to change delivery details or the order. Here would be the process:Customer Calls FashionSite.comFashionSite.com has cannot solve the customers problemFashionSite.com must place a call to BrandXYZ - who is under no obligation to respond in a timely mannerBrandXYZ will maybe get to it later today or tomorrowFashionSite.com’s customer experience suffers as a result3. Return ErrorsWhen an order is drop shipped from BrandXYZ’s warehouse to FashionSite.com’s customer - the order usually doesn’t look pretty. You know what I am talking about when you receive an order from ASOS / Gilt Groupe and it’s in the stylish Retailer packaging that makes you feel all good to open it.Traditionally brands like BrandXYZ have been hyper-B2B focused - meaning that making shipments look good was a distant second level priority to getting the shipment to the retailer as quickly and cost effectively as possible. However when you employ the Model #1 method of drop shipping, FashionSite.com’s customer is going to receive a packing list from BrandXYZ and most likely a packing slip from BrandXYZ’s 3PL / warehouse.Returns are a fact of life, but having the documents in the FashionSite.com shipment for BrandXYZ’s warehouse creates a huge level of uncertainty. About 70% of the time when I have shipped orders in this method - the order goes back to BrandXYZ’s warehouse and not to FashionSite.com - creating a whole world of headaches for BrandXYZ and FashionSite.com.Customers ALWAYS make mistakes and don’t understand how the business works. When BrandXYZ drop ships your order, BrandXYZ’s return details are included in the packing slip. FashionSite.com’s customers will most of time ship back to BrandXYZ. BrandXYZ will not have created a RA for the order and it will most likely get lost. BrandXYZ has no liability in this case as it’s FashionSite.com’s customer and order.You might be sitting there thinking that we spent an awful lot of time talking about problems that arise out of Model 1. Ironically enough, Model 2 arises to popularity in most e-commerce circles circa ‘08 / ‘09 when I started seeing the Privates Sales startups like Gilt, RueLaLa, and Hautelook almost universally adopt Model 2.Model 2 was created to provide retailers like FashionSite.com with the same drop shipping capabilities without the risks that we have described in detail here.For more specifics about shipping & fulfillment, check out: Matthew Carroll's answer to How do e-commerce startups, like One Kings Lane, Manpacks, and Dollar Shave Club handle the inventory fulfillment side, without a lot of initial investment? Are there drop-ship suppliers they work with, or manufactures outside of the US?

Customer Development: 4 StrategiesCustomer Development: 4 Key StrategiesWhether you are a startup or a business exploring new areas of venture, the success of your company starts your customer. The traditional approach was to build a product in isolation and hope that a customer would buy it. Unfortunately this approach yields a lot of waste. If you are a start-up or a small business, you cannot afford to burn the resources which you don’t have. As a result, your customer development approach will be key to define your operational methodology.There is often very little benefit in completely developing a product and then going to the market for a sale. You end up wasting a lot of development time. Consequently, it also means that you have not spent enough time talking to your customer or understanding their real need.In order to avoid this waste, the customer development approach offers 4 important facets for you to consider before jumping into full scale product development. The 4 factors are shown below:1. Customer Development: Customer DiscoveryCustomer Discovery : Identifying customer needsThis is your first step in identifying the real customer needs. It is of primary importance to note that your product development starts from the customer. You cannot initiate product development in vacuum. You need to understand the person you are selling this product to. Or else, you start from a point of complete isolation which has a greater propensity of failure.1.1 Customer Discovery: Define your customerIn this process, you need to identify who your real customer is? Define this person using your product.What does this person’s average day look likeTheir painsPleasuresYou must go into details about defining this person. Their age, earning bracket, everyday life, etc. Keep this as detailed as possible. It helps you identify the person you are selling to.1.2 Customer Discovery: Identify Pain and Pleasure PointsOnce you define your customer and add their persona, the next step is to identify their pain and pleasure points.In his/her everyday activity, what causes this person pains?What are the pleasures in this person’s everyday activity?Once you identify this, mark where you stand. Do you try to address this customer’s pain or pleasure?1.3 Customer Discovery: What can you do?What can you do to solve this problem? Make sure you don’t get technical in this customer development phase. You are in the process of addressing a business need and not a product need. The product development phase comes later.Think about how you can ease this problem. What are the solutions you can provide? In other words, what are your key selling points?Once you identify the above, you have created the necessary hypothesis to start product development and start the next step in customer development.2. Customer Development: Customer ValidationCustomer Validation in Customer Development processOnce you complete your detailed customer discovery phase, your technical/product team comes into picture. Until then, as an operation/strategy, you are in the listening phase of customer development. Don’t try to skip steps – it will not provide you any favourable results. In this stage – customer validation, you try to verify your hypothesis about the customer you have identified.2.1 Customer Validation: Minimum Viable ProductOnce you have completed customer discovery, the next step is to create a product. You cannot afford to invest heavily into product development right away. The most important factor for you to consider is to avoid as much waste as possible. In this context, we are talking about both time and cost.To keep things simple, you start with a Minimum Viable Product. A minimum viable product is the bare minimum you can do to show your customer a glimpse of your ideas. Note that this is a stage even before you enter prototyping. This is the cheapest product you can do which can tell your customer what this is about.A few examples of MVP’s are:Software Company – Wireframes / Front end UI Mock UpsComplex Softwares – Videos (Dropbox started with an MVP of a simple video)Manufacturing Companies – Outsourced DevelopmentMore detailed explanation about Minimum Viable Product can be found here:The point is very simple – this has to be the most minimal product you can go to the customer with. This product will not be of the greatest quality. Ultimately, your goal is to find out your customer’s inclination to this before you spend a huge amount of money developing something people don’t want.2.2 Customer Validation: FeedbackThis is a process where you will need to be most objective. There are numerous ways you can gather customer feedback:InterviewsFocus GroupsRecording customer’s use of your MVPThere are plenty of ways for you to conduct these interviews to gather the actual feedback. These are extremely useful customer ideas which you can use to develop a better product. Your MVP will never be the ultimate product. It will be a simple way to see what your potential customer’s feel and a key step in customer development process.2.3 Customer Validation: HypothesisOnce you gather this feedback, you are now in the process of verifying your initial hypothesis. This process is highly iterative and takes most time in the development cycle.Test your hypothesis and see if your customer actually likes this product/service. If they don’t, understand why they don’t like it, what you can do to improve. This gives you a running list or product backlog to create items needed in your product development process.As you are developing a product, you are also in the process of customer development and you must ensure that you are doing this in a highly iterative manner. Testing is the key.3. Customer Development: Customer CreationCustomer Development: Customer CreationOnce you complete the above processes of customer iterations, you need to ask yourself a few objective questions:Is the product now ready to be sold?Is there a compelling market demand?What is the price a customer is willing to pay?After you address these key questions in the customer development process, you are now ready for customer creation.3.1 Customer Creation: Product LaunchOnce you are convinced with the developed product, you are now ready to consider a product launch. You have gone through the effort of creating a new product. You now have the responsibility to shout about this product at the top of your voice.This can be achieved through traditional PR approaches, news release, etc. A modern approach is using ‘Influencers’ on social media to reach to their followers. This would involve some initial free trials with these ‘influential customers’.This step is all about creating awareness about your product.3.2 Customer Creation: Product PositioningOnce you create an awareness about your product, you need to identify the right market segment for this product. Market Segmentation helps you identify the area of customer you are targeting. It helps you identify whether you are a high cost product/low cost product. In effect through this process of customer creation, you will be able to identify where your core selling opportunity lies with the customer. Not only this, it also helps you consider how you are positioned with respect to your competitors.Once you are complete with the market segmentation, you need to define your marketing approach for this product. The Ansoff Matrix offers a great starting point to define a marketing strategy for you to employ. Through this, you can identify the right market penetration strategy to reach your ideal customer.4. Customer Development: Company BuildingCustomer Development: Company BuildingIn the first three steps, you have reached out to early adopters of your product. Now that you have established a market need, it is time to capitalise on this.You have now unearthed a niche market, mapped your customer. It is time to build the foundation to expand your sales to embrace the product potential. This foundation involves building robust operational measures so that you are ready to service more customers.4.1 Company Building: PipelineNow that you have established your product, it is time to pull out the customer list from your pipeline. Before you rush out to talk to them, you need to prioritise these customers. The simplest strategy for this is to use the Pareto Principle : 80% of the business comes from 20% of the customers.Identify these big ticket customers from your list. Reach out to these customers and introduce them to your sales cycle. You need to ensure that these customers have key account managers. The sales team needs to be completely equipped with your product capabilities. They are the spokespersons, representatives of your product. Ensure that they have the right tools to cope.4.2 Company Building: SupportOnce you have the right sales team, you will feel the orders pouring through. You will need to create supporting systems for the increased orders. This involves development of your customer support team, invoicing, contract teams. This part of company building exercise ramps up and is usually promoted through venture capitalist funding.At this point, the company has proven itself to be of lower risk which makes it an exciting opportunity for investors. You can capitalise on this demand to push your company’s goals and ensure that the customer development process continues to feed this exponential growth.

Pricing shouldn’t be scary, it’s just a part of business. Let’s dive into two of the business models that exist: Market Pricing and Perception Pricing. We’ll walk you through both of them and help you pick the one that best fits you and your industry.MARKET PRICINGA quick glance at a site like Upwork will show you how varied prices range across different regions. If you dive into the economics of it, the cost for a nice meal in North America could often feed a family for a week in Southeast Asia or some parts of Europe. As such, the market rates in comparison to international freelancers can be quite alarming.That said, recognizing that most clients are looking for services from people in their region, you need to understand the local or national market. It’s here where you may lose a deal based solely on the pricing strategy you’ve taken. If two freelancers are both offering the same services and both are considered equal in terms of skill and experience, but one charges $100 an hour while the other charges $20, there’s no way the one charging $100/hr will win the project.If you’ve just left the comfort of a traditional office, this structure may make most sense to you. And if you’re a solo-preneur who spends the majority of your billable time hammering out the goods, it’s a great option. Think graphic designers or transcriptionists, rather than consultants or marketers. In this case, you’ll also have to research based on external factors, such as location and experience level, rather than just bare-bones cost of goods and target profit margins.PERCEPTION PRICINGValue-driven pricing is when you base a product or service’s price on how much the target audience believes it is worth. For example, if your client is a company doing hundreds of millions per year in revenue and they want you to redesign their website, the right design, messaging and execution could result in a significant return on investment. As such, you want to ensure that what they pay for the website is commensurate with the value you deliver. If you’ve become a force in your freelance niche, this pricing model is best for you. Within this model, you’ll leverage your unique skills to command a higher rate. Be prepared to have case studies or demonstrable experience to back your quotes. A hefty social media following doesn’t hurt either, since you can also promote yourself as an influencer.With either pricing model, you will have to consider five important things. Be sure to check off the following:DEMAND Pricing according to the demand and the economy. If there isn’t much demand or if there is an economic slump, you’ll want to make certain you aren’t pricing too high.OVERHEAD Keeping your lights on is a critical component of pricing. Calculate your yearly utilities, wif, heat, rent/mortgage, marketing and insurance costs. If your project is one month, divide everything by twelve and you’ll know how much your overhead costs.BILLABLE TIME Knowing how long certain tasks take you is extremely important. You should always be able to estimate a baseline or reference point for your project pricing, whether you bill per hour or not (more on that in just a bit!).BILLABLE EXPENSES Regardless of your area of expertise, there will be supplies, equipment and necessary expenses related to your project work. Record those! And bill them appropriately to your clients. It’s their domain name, ad space, or photo rights after all.PROFIT Consider your talent and expertise when it comes to pricing your services. But bottom line your profit is what you are charging over and above your expenses. Determine the yearly salary for your needs and then begin to calculate your desired profit goals (typically 10%-20% more than your salary).Co Tip: Whether you’re a writer, consultant, or web designer, pick the business pricing option that makes the most sense for your work. Test the waters early on by trying both pricing structures discussed. Your business is going to evolve, so if your first option does not work out, give the other one a try! But no matter which option you ultimately decide on, your pricing needs to sustain your business and allow you to earn each and every penny you’re worth.HOW TO CHARGE YOUR CLIENTWhether you choose to price your services via the market or perception, it makes sense to keep an eye on the clock while you work and know how much time you spend on your work (or writing emails, making phone calls, tweets etc.). And all the while time flies by, your business depends on the price tag attached to those seconds, minutes, and hours. You have a few choices, and it comes down to you in making the final decision. The question really comes down to two different roads to take. Let’s explore the pros and cons of both.HOURLY BASED RATETo be frank, hourly pricing is simpler. And it is something you are already going to do while you are working on all your projects (elbow nudge). Hourly rates are also useful if you are doing a small, short-term project. It could also benefit you if you are working with a client over a long-term period or on an ongoing basis. When project goals and timelines are unclear, choose to charge hourly – that way your client will be forced to respect your time and consider clarifying the project. Get paid easier for items outside the original scope of the project by billing an hourly rate.But clients may be wary of the rate if there is no project ceiling. Ask the client about budget expectations before you quote an hourly rate! If the project proves to be very demanding, your hourly rate typically needs to be adjusted and that may result in negotiations which will be very challenging – hourly rate adjustment is a much harder sell. If you are fast, then your hourly rates do not take this into account! It may be difficult to raise your hourly rate, especially if your clients are coming from referrals. Clients will mention your hourly rates to each other when they refer you! Lastly, if your client does not understand the work that you do they may see the activities listed on your invoice and be confounded why it took you so long to do something that seems simple.PER PROJECT RATEBy charging per project, you can tailor your rate to the project and the client. Further, you can predict income much more easily by billing per project as you won’t be estimating the amount of time it takes you to do something. You have the flexibility to include packages for different services you offer which allow you to vary the rate. Charging per project allows you to increase your rates easiest and test out your market’s tolerance for higher rates.A per project policy for rate intuitively shows your clients that there are multiple factors going into your pricing. Further, charging per project maximizes your income because you become limited only by how quickly you can finish the work. You’ll find productivity incentives soaring and ways to do things quicker as a result of per-project rates. And that allows for extra time to search for new clients, which means more work and more profit!It can be a challenge to calculate a project rate though. And that could take time which is a precious resource. And the more time you take, the higher chance you’ll have at losing the project to a quicker bid. Again, go back to the five necessities aboveǿ demand, overhead, billable time, billable expenses, and profit! If you are the type of person who is nervous to ask for more money, per project rates cause you to lose out on money in the long run especially if scope creep becomes an issue.Overall, many freelancers use a combination of the hourly rate and per project rate. For example, you may choose to set a project rate for the work outlined in your scope and contract agreement, and then you charge an hourly rate for any work required outside the original set of terms.Defining feedback loops in your project schedule is a must, that way you avoid project fuzziness throughout the entire working relationship. It is also recommended that you stick to the schedule agreed upon between you and your client.Ultimately, make sure that your rate is high enough to allow you the flexibility needed in your new freelance life. And with regard to fully embracing your freelancing pursuits, make sure that you don’t let any client treat you like a full-timer aka long hours or rough tone. Communicate your point of view and your client will understand.Do you like what you just read??For even more tips for getting started with your freelance business, download AND CO’s free e-book, Welcome to Your Independence.Learn how to turn your passion into a business:Establish a business entityDraft bulletproof proposalsAcquire clientsPrice your services rightManage client expectationsRun projects successfullyMarket your businessGet paid fasterUnderstand taxes as a freelance