One Smart Way to Manage Cash
Pre-orders. I know what many of you may be thinking…’that won’t work in my business.’ And while that may be right in some cases, we are seeing more and more business launch, or cover cash shortages, with pre-order strategies. For example, Johnny Cupcakes, a pop-culture t-shirt company, uses the occasional pre-order strategy when they notice a quick trend they want to take advantage of, but which they’d not seen coming. They can secure the order while the idea is hot, but before they’ve secured the product. You can see Johnny discuss in this 1-minute clip on Inc.
One client of ours is using the pre-order strategy to launch his company. The founder had a brilliant idea, but simply did not have the resources to launch quickly and secure market share without taking capital from somewhere. His solution was to create a killer product video with a working prototype that went viral. Several million dollars later, and before he’d begun production, he had great product feedback, the capital he needed to launch, and significant attention from future investors. He opted for a direct model rather than certain sites of growing popularity like Kickstarter. However, Kickstarter can be an effective tool for launching products.
The authors of a book called The Entrepreneurs Guide to Finding Your First Customers share some of the advantages and strategies of pre-selling in one of their chapters. Their 5-step formula for pre-selling include the following:
- Product co-creation: customers, real-paying customers and not just those that suggest that they’ll buy, are an invaluable source of feedback. They, in the act of purchasing, are providing validation of the product. However, these evangelists are frequently also willing to engage in a dialogue with you and give you great insight into the product and why they bought.
- The Early Investor Narrative: while you won’t give your first customers an equity stake, you can convince them that they’ll receive early adopter benefits. As an example, you can offer early adopter discounts.
- Scarcity: as you limit availability, whether real or artificially created, through a period of time in which they can order or a limited amount, you will create an urgency to buy.
- Social Proof: Generating some social proof will maximize the effectiveness of the pre-sell campaign. Find a ‘big-name’, or generate chatter through a variety of social strategies. Then utilizing the social proof effectively will assist in convincing the buyer to buy.
- Status Indicator: a status indicator is some social reward that will indicate to the social sphere in which your buyer lives that they were “first”. Most do not buy only for a status indicator, but a special badge in your product forum, or a t-shirt is a motivator to get a buyer across the line in many cases.
There are a few cautionary items to consider around pre-selling as well.
- This should be intuitive, but don’t take a customer’s money, unless you’re sure you can deliver a product. This is a sure fire way to end up in significant legal trouble.
- A pre-sell, by its nature, is not a sale – as defined by generally accepted accounting principles. You haven’t delivered the product, so it isn’t a sale. It shouldn’t be shown as a sale on your income statement.
- Unless you have a working prototype, your campaign will likely be perceived as a fund-raiser, rather than a pre-sale, and therefore less effective.
Pre-selling can be a terrific strategy for raising early funds in a product life-cycle, or for taking advantage of a current trend ahead of your ability to deliver, or simply for generating cash during seasonal cycles of your business. If you stop and think creatively about your business, your may find there are hidden opportunities for pre-selling that can generate needed capital.
David Chase, Managing Partner at Advanced CFO Solutions, has experience in small to medium private companies and large public companies as a senior operational and financial leader. With 17 years in finance, a CFO of multiple entities and divisional EVP experience, Dave has a breadth of experience. Dave has led or been instrumental in raising multiple rounds of equity and debt in excess of $500 million.