Ep 5: Product development and how changes to globalisation might impact the process
Helen (00:00):
This is the Startup Reality Podcast, bringing you honestconversations with founders, business owners, and industry professionals aimedat sharing what it means to find your voice, grow your business, and achievesuccess the way you define it, whether that's growing your career or starting abusiness. The Startup Reality Podcast shares insights for the journey ahead.The challenges are awaiting and the strategies used to overcome them.
Helen (00:28):
A really important topic as we highlighted in ourconversation with our meetup group is obviously product development. There aretwo types of entrepreneurs. There's the entrepreneur who's a technician, forexample, a designer who then used to work for someone, someone and doesn't haveany foundational business skills, but wants to take what they're good at, whichis their technical skills, and turn that into a business. And then the othertype of business person, um, very obviously wide category, putting them in onlytwo buckets. For the other business person is someone who is business savvy butdoesn't have a product because they're not a technician.
Helen (01:06):
In this week's episode, we are discussing productdevelopment. We are going to have a lot of conversations on this topic, um,because it is an important one, but we're going to introduce the topic in thissession and focus on predominantly product development for physical products asopposed to products as a service. But before we get started, in the spirit ofreconciliation, the startup reality podcast would like to acknowledge thetraditional custodians of country throughout Australia and their connections toland, sea, and community. We pay our respects to their outers past and presentand extend that respect to all Aboriginal and Torres Strait Islander peoplehere today.
Helen (01:49):
So what did come out of our conversations with that groupwere that there were a couple who were of the second bucket, and then therewere a couple who were of the first bucket and the second bucket. One of thebiggest questions that they have obviously is sourcing product.
William (02:06):
Um, yes, so of course, um, you're absolutely right. Howyou get your product made is, is obviously gonna be a key cost. So depending onthe type of business that you're looking at, if you're gonna be going for aproduct, uh, physical product, whatever shape or form that may take, thenobviously you wanna make sure that your costs of production are, are costeffective in order for you to have a profitable business. So historically, um,what businesses used to do is get their products made offshore in low wage, uh,co low wage countries such as China or Vietnam, where uh, they could get the,the goods manufactured at a low cost and then they can obviously ship themeither in parts or in full to the markets where they were then put together, orsometimes they were put together before they were shipped. Now that workedquite well when the cost of labor were quite low in countries like China, butin recent years that that has obviously changed. But nevertheless, if you aregonna have a product orientated company start up with a physical product, thenyou need to source where you're gonna get your products made. And, um, decidingwhat jurisdiction that you, what country you get your product made in willobviously have a huge impact on how profitable your business can be.
Helen (03:21):
So I think, yeah, that's really good for, um, productconsis considerations. Like what you said, there are different types ofproducts. If you are sourcing a physical product, naturally it needs to bemanufactured and made. And then obviously there's also services as a product,um, before you, before you make a final decision. Just because you like aparticular product doesn't mean the rest of the world or the consumer base isgonna like it.
William (03:47):
Whenever you come up with an idea for a product, um, youautomatically assume that it's the best new invention since slice spread.However, you need to appreciate that your views aren't necessarily the views ofthe market. Now, your gut instinct is to go to your friends and family and toask them for their opinion. Now, whilst that is no doubt the easiest way to getfeedback on your product or your idea, it's not necessarily gonna give you aproper representative view of what people will think of that product orservice. That's why the first thing you need to do when you come up with anidea for a product is to do market testing and to really look into the need forthat product. So you need to speak to third parties, speak to people who don'tknow you, speak to people who can give you impartial and honest feedback.
William (04:34):
Do market testing of the interest of the demand in thatparticular type of product that you're trying to, uh, sell. And obviously youwanna make sure that you are solving a particular product, uh, problem. Now,um, things like the Cano model and other models can be used to also validateyour hypothesis that there is a real genuine need for your product or service.And it's important that you do that before you spend any money on <laugh>actually developing that product or important or buying for that product.Otherwise, all you're gonna do is spend money on something where you dunnothere's a genuine need.
Helen (05:06):
And do you, and do you see that a lot? Do you see, um,entrepreneurs, business owners jump straight into getting their product madeand manufactured before they actually have considered the demand for thatproduct?
William (05:19):
Absolutely. That's one of the biggest problems and one ofthe biggest failures. One of the biggest reasons why failure, why startups failis because there isn't a genuine market need or demand for that product. So youcan save yourself an awful lot of time and an awful lot of money by properlydoing your research. And if there are, if your research tells you that thereisn't a sufficient demand or interest, then you shouldn't be developing thatproduct. And actually, if you do it properly, the research will probably pointyou in the direction of what you should be doing. So it'll probably say, well,maybe people don't want this, but maybe they want something similar or, uh,different, uh, you know, similar to it, but different in other ways. So that,you know, that research is a, is an, an important and crucial mostentrepreneurs skip over or don't do properly. You gotta do your research tomake sure that you really understand the need for the product and that it'ssolving a problem.
Helen (06:14):
That's, yeah, really, really good. And I think it'simportant we cover that because it's so easy to jump straight into product, um,development, I guess, um, something that we'll always try to convince ourselfto, to your point earlier is no, I know this product is the best, even thoughthe market doesn't know about it yet, once I put it out there and people hearabout it, it's gonna go off. And that might be the case because you might havefound a great product. But I guess the concept of someone thinking that I havea great product, once I put it out there, everyone and people know about it,it's gonna go off that concept, correct me if I'm wrong, is almost like, uh, anentrepreneur thinking I will create the demand. But creating the demand costsmoney because you need to have marketing budget to out to, to kind of likeeducate and inform. You can't just go straight into selling. Is that right?
William (07:14):
Absolutely right. Yeah. You have to, you have to be ableto ensure that your product or your service is so obvious that, or not soobvious that you, you almost wanting to sell itself, if that makes sense.Because the problem that you have is, as a startup, the one thing you lack isresources. In most cases, you don't have as many resources as be your company.So you don't have the p and l, you don't have the money to be able to throwinto the marketing. So it's important that the marketing is organic and theproduct can, to a certain extent, set itself. So in the best way it does thatis by solving a problem very clearly or by providing a benefit that is clearand unequivocal.
Helen (07:53):
So this is a key point that you're gonna hear meanWilliam, make over and over again, research is incredibly important, inparticular, when it comes to product development. Ensure that there is anappropriate level of demand in the market for your product to ensure that youare going to be able to produce that product at scale and be profitable.Otherwise, if you are looking at building a demand or educating and informing,because maybe sometimes customers they don't know what they want or maybethere's something that they should be more conscious about, such as moreenviron or mentally friendly options of those products, then you need to alsoensure that you've got a marketing strategy and a promotion strategy inparticular if you don't have a large budget strategy. So that need, that costneeds to come into cost considerations when you are making a physical productthat is going to require a substantial investment. In the next part, we'regoing to talk about now that you have, um, an idea of your product, how do youactually, or how do you actually go about creating a product and getting onemade?
Helen (09:07):
How do we go into, um, sourcing products and getting themdeveloped now that we kind of acknowledge that its first step is to really dothe research. Um, I guess more importantly, first, if you wanna highlight kindof, um, the core ways that you might be able to sell product, because obviouslythere's white labeling, there's services, which is a little bit different, anddepending if you're B2C or b2b, and then there is actual developing your ownproduct or being a reseller.
William (09:39):
Yeah. So if you're sending a physical product, there's amultitude of choices that you have. Uh, and, and look, first and foremost, it'sbreaking into its most basic things. Simplicity, which is B2C or b2b. No, youcan also just a really complicated things have B2B to C but anyhow, this isfocused on B2B and b2c. So B2C is you're gonna develop, develop a product whichis gonna be sold to the public un mass. Now that has certain benefits and ithas certain drawbacks. The benefits are that you're gonna, you should intheory, sell a lot more of that product because there's gonna be more people inthe world who can buy, there are more people than there are businesses, ofcourse. Um, the issue is that it's mass consumer. So then you've gotta put alot more money into the marketing and it's a lot more, um, difficult to scaleunless you've got traction or you've got something which enables to developyour organic growth.
William (10:27):
If you go for b2b, you probably will have a higher productwhich will, which will have a higher margin. It'll be more expensive becausebusinesses will spend more money on a product than consumers, depending on thenature of the product. So then your margins will be much higher. You won't needto sell as many of the product. But obviously, you know, the buying cycle forB2B is much longer. Um, in terms of developing, so that's, you know, B2B andb2c. The second stage is to say, well, how do you develop this product? Do youwhite label it? Do you franchise, blah, blah, blah, blah. So, um, there's a fewoptions here. A lot of companies have made a lot of money by taking a productout of taking a product developed in one market and basically copying it. Um, sometimeswith a license sticking, you know, taking a license of exclusivity in a certainterritory, sticking their label on their name on and relabeling it as their ownproduct.
William (11:19):
That's one approach. Another approach is to design anddevelop your own product. And then obviously you, you, you protect the ip andthen you get that made self. Uh, another product could be to do just to be areseller. So you might not have an exclusivity, but you might see there's aproduct which is really popular in one market and you think there's anopportunity to ship it on bulk or on mass, uh, in, into another market and sellit there. And then, uh, that would be the three main approaches that I wouldthink of for physical products.
Helen (11:50):
If we ignore services, just for the purpose of thispodcast, because we probably need to acknowledge that service productdevelopment is very different. Effective.
William (11:59):
Yeah.
Helen (12:00):
Or slight, yeah. Different to, um, physical productapproach, which we can obviously do a whole podcast on further down the trackas we start to explore product development in a little bit more detail when wetalk about physical products. Um, in this day and age, China has kind of becomethe manufacturing hub for the world. Uh, but obviously in recent, um, times,this is now changing probably, is this driven by China no longer wanting to bemanufacturing focused and be also recognized as a first world country that isdeveloping more than products? Or what are you seeing happening? And if Chinastarts to pivot, then our products will potentially from a low cost perspectivehave to be sourced elsewhere. Um, what's your kind of view on what's happeningwith China? China?
William (12:56):
I think you've hit an ad on the head. Uh, it it's a bit ofdomestic and international reasons. So firstly, on the domestic level, we areseeing the cost of labor increasing in China, living standards are going up,wages are going up. Uh, so it, it, it's, it's, what you're seeing is thatworkforce going from being a very manual labor intensive workforce toupskilling and becoming a much more sophisticated workforce, there's more andmore people move into the middle class and and become more affluent. So whatyou're seeing is the cost of production. So the co the economy is moving awayfrom being a manufacturing orientated economy to be in a services orientatedeconomy, which you get in a lot of Western countries. Now, what that means isthere's a, there's gonna be a much greater focus for Chinese businesses onserving the Chinese market.
William (13:43):
So the 1 billion plus market that exists in China is gonnabecome much more important to those Chinese manufacturers or those Chineseservice companies, coupled with the domestic reasons. You've got yourinternational reasons, which is where yes, because China's becoming moreexpensive, a lot of companies are now moving to other low-cost markets likeVietnam to get their goods made because it's cheaper. But also you are gettingthe trade wars between the US and China and between Australia and China, wherebarriers are going up and there's becoming a lot of tension between thosecountries in terms of the relationships and there's, you know, quasi diplomaticrifts that are taking place. So it's becoming more difficult to do businesswith China as the geopolitical tensions rise. So that, and that is only gonnacontinue as China begins to become more assertive as a, as a country and beginsto quote, threaten the US uh, economic and military, uh, machine, uh, dominanceof the world.
William (14:47):
Um, so I think you will see more and more companies moveaway from China. Now this is gonna be interesting. There's gonna be one or twothings. They're either gonna move away from China and try and get theirproducts made in low cost labor, uh, countries like Vietnam or, or in this earlydays, they may move their manufacturing back to their home countries. Now ifthey do that, that is almost certainly gonna lead to an increase in the cost ofthe products because the costs of producing those products at home are gonna bemuch higher. However, if the local population are now more focused on buyingmade in Australia or made in America products, then they're gonna pay more forthose products to get them locally made. So I think you're gonna see a changein the geo focus of how you get products made from being globalized productionchains to maybe be be more locally focused production chains. And that flowsout of, that was already beginning to take place before Covid. But I get thefeeling it's been accelerated by covid
Helen (16:05):
In countries. I think even in countries like America, theyprobably still have more of an opportunity to produce the, to produce productson shore, like because they are not as strict. Um, and this is based on myknowledge from years ago though. So my family is largely based in the US andthey all run being immigrant families, that's sometimes the only way that youcan go without having to work for $3 an hour. But realistically in the USbecause they have less, less regulation over wages, which is not necessarily agood thing. It does mean potentially if you kind of have small hubs ofmanufacturing grounds in the US you can probably still produce product for alow cost, not as low as China. But in Australia, what's your view? Cuznaturally in Australia we have, you know, minimum wage laws that really, youknow, Australia is really a great country to be a worker because there is somuch equality in that sense. Income distribution. You know what, um, I read anarticle previously that Australia's like the world of millionaires, but it'snot hard to be a millionaire Australia. You just have to own a home or two.
Helen (17:27):
You become, become a millionaire. And you know, I knowthat that is obviously founded and supported because of income and wagedistribution, which makes manufacturing in Australia incredibly difficult.
William (17:41):
Yeah. Um,
Helen (17:42):
Would you see Australia being able to manufacture onshorewith those kind of
William (17:50):
Um, so I think it boils down to productivity andautomation. So I think Australia has always been one of the leading countriesin the world for having higher levels of productivity and higher levels ofautomation. So I suspect if, if those productivity improvements in automationcontinue to be put in place and if the country continues to focus on that, thenthat should in theory lead to a decrease in the pro in the costs of making theproducts because fins will be made in a more productive and an automated fashion.Now if that's not possible, when it still becomes a very manual process formaking that product depending on what their product is, then I think it's onlynatural you're gonna see an increase in the price of products, which obviouslycould potentially lead to an increase in inflation. But it's too early to tell.But Australia's always focused on improving its productivity. It's always beena key driver of the Australian economy and, and a Australian economy does itWell,
Helen (18:50):
Obviously I agree with you, Australia because of highwages does have to become more focused on creating efficiencies throughtechnology, et cetera. Um, whether that's in manufacturing houses, investing inthe technology to reduce the number of resources required, um, Australia alsorequire, requires immigration because our white collar workers don't want to,don't want to do those cafe jobs. They don't wanna go work on a farm becausethey're, you know, we're such a privileged country that most of our Australians,including myself, just don't see ourselves as labor intensive workers and don'twanna work in factories. Which means Australia is substantially struggling,including in the hospitality sector because we don't even wanna work incustomer service cuz we re rely on backpackers, um, to find resources. Andfarmers are saying this like they can't find people to work on the farm eventhough they've got work and Australians say, I can't find a job, but then theywon't apply for those jobs. <laugh>. Yeah. So it's kind of like the covid19 has really impacted Australia because we don't have immigration happening,right? And they said unless we open our borders and bring lower skilled workersin who would do these jobs, Australia can't actually, can't actuallymanufacture or pick their fruit. The fruit is there <laugh>, it justcan't be picked because nobody wants to pick it. Um, isn't that a privilegedposition for Australia to be?
William (20:18):
Um, yes. So God, you just reminded me of something about20 years ago when I was first in Australia, I, I read geography at university.I was on an exchange student and I remember that I did a, what was the course,geographical analysis of population, I think it was University of Adelaide andthey, I wish I had the slides, but they uh, the professor did this, did thistalk where he spoke about how much the Australian economy has grown as a resultof immigration. And if it hadn't been immigration during the last 50 years,pretty much it continues. So think about the Australian economy in the, and I'mgonna get this all wrong. In the fifties and sixties you had Italians andGreeks in the seventies you had the Vietnamese and, and the nations. In theeighties you had the Hong Kong East nineties you had the Hong Kong East.
William (21:08):
Then the late nineties you had, oh, I'm probably gonna getthis run Sudanese and the Somalis. So you've had waves of immigrants, um, whichare broadly speaking related to geopolitical affairs that are taking placeelsewhere in, well be it the end of living Vietnam and war, be it Hong Konggoing back to China, be it mass Italian and Greek immigration worldwide andpost-war era. Um, now those flows of population has really driven the growth ofthe Australian economy in the last 50 years. And I can't remember the exactfigure, um, but it was, the economy would be something like one third of whatit was now if it hadn't been for these waves of immigration was some crazyfigure like that. So the growth of the Australian economy in the last 50 yearshas been driven pretty much to a very large extent by immigration. Now thehaving hard immigration border policies is only gonna weaken the ability ofstartups to tap into some of that low-cost way, uh, labor that they may need orthe ability of startups to tap into high skilled labor that they can't find inAustralia and they can't bring in either, whether it's low skill or high skill,all, all labor is gonna struggle to get into Australia as long as it has suchrigid and um, draconian board of measures.
William (22:23):
So all that's gonna do is weaken the ability for companiesto compete internationally if they cannot recruit the skilled workforce orunskilled workforce that they need locally.
Helen (22:35):
Exactly. And I think that's such a good point. Like Iworked with a, you know how when China, obviously it was just so much more costeffective to manufacture overseas. Um, and a lot of, I guess fashion housesstopped producing locally because a garment would cost them. For example, let'ssay if you were to manufacture a man's shirt, it would cost you $50. Youcouldn't compete with, um, products that were being manufactured overseas fromChina. Cuz I was selling for $50, you would have to sell that man's shirt. Backin the days when my fa my father was manufacturing, so it was over 20, 30 yearsago, you would have to sell that for $150 to make back from a retailperspective that's not even wholesale. So they just couldn't compete. My dadclosed down his warehouse in Australia cuz my mom was a skilled worker in the,as a seamstress because that's the skill she picked up in the third worldcountry.
Helen (23:31):
She came here, they opened up a manufacturing warehouse,they produced everything locally for David Jones and Myers. And then whenimporting became easier and all of the laws became importing laws became a loteasier, my dad saw that that was gonna be a threat to the industry. So hechanged industries because we would not be able to compete with the overseaslabor costs. Now, like I would say, 90% of um, manufacturing houses movedoverseas, all closed down. And one of the girls that I used to consult for, shestill had one based in Australia and it was great because it means she'sAustralian focused, she only manufactures for Australian brands. So there'snaturally a higher ticket price. You're talking about corporate wear that is beingbought at $500 as opposed to $150 because they're producing at a higher rate.But there are Australians who are willing to pay for it.
Helen (24:23):
But the challenge she started to experience, um, in themore recent years is that she can't find scene stressors in Australia anymore.Her, her team is aging, they will retire soon and she still has the demand tohave product manufactured in Australia and everyone still, because she's one ofthe few that remain, and if you wanna be an Australian brand and you wanna saymanufactured in Australia, you almost have very small selection to choose from.She said, I don't know how long I can keep my business alive even though I makemoney because I don't have workers. And to your point,
William (25:04):
Yeah, I mean
Helen (25:06):
It's it's crazy. Yeah,
William (25:07):
<laugh>, I think, I think a lot of the westerngovernments, be it us, uk, Australian, we are all, they're all starting to pullup these anti-immigrant policies and these anti-immigrant borders and that'sbeing driven by, uh, I guess you could saw, you could say some form ofnationalism or the na nationalistic, um, conservative approach to immigration.But the issue is that you're then getting a lot of skilled workers, not notbeing able to immigrate and consequently your economy is going to suffer andthe companies that are gonna suffer the worst are gonna be the smallmanufacturers or the small producers of the startups that are, are trying to dosomething more of in innovative or need a certain skill, which is not in commondemand or commonly available. And if you're a bigger company, you'll find a wayto get that skill in-house or that skill board across. But if you're a smallcompany, you don't have the money to be able to, you know, sponsor an immigrantfor a very long and arduous process. So all the economy, all these economiesare doing is shooting themselves in the foot on the long term view.
Helen (26:15):
Yeah, which impacts product development from a localperspective. That's why exactly. You said that we're, we're still to see iflocalization, um, will actually take place as opposed to reallocating low-costresources to a country like Vietnam. In order to localize, we need to have, um,the ability to find those skills locally if we don't have those skills. Lo andthere needs to be the demand for locally produced products. However, if there'sdemand but no skills you can't produce locally. If there's skills but nodemand, then you can't produce locally. So there are so many factors
William (26:52):
And we still don't know, we still don't know what kind ofpremium people are prepared to pay for a locally produced product. Uh, now, youknow, if it's for example food or if it's something where, you know, let's sayit's two bucks, but locally produces two bucks 50, then they'll probably beprepared to pay that. But if you know you're talking 1, 2, 3, 4, $500 extra fora locally produced product, which is exactly the same quality and exactly thesame kind of product that you'd get from being produced abroad, then it remainsto be seen whether people will pay for that stamp. The other thing to bear inmind, and this is me kind of rubbing my crystal ball and I've got no idea ifthis is gonna be true, but how many countries are there where you can go towhere the costs of labor and the cost of reduction are so much lower than theyare in Australia, right?
William (27:40):
So China's now becoming in a lot more expensive, so itdoesn't make as much as much economic sense to produce there. So now companiesare gonna Vietnam, but there's certainly gonna be amount of time before Vietnambecomes more expensive to produce it. So where to next? So then you are gonnakeep playing these, you know, one country to the next, so you know, searchingand looking for the cheapest places to produce. But there's gonna come anatural point where things are gonna level out to a certain extent, but thatmight be decades away. So who knows. Yeah.
Helen (28:10):
And it, and you know, it's just basic economics, right?That's how an eco and an eco any economy and country starts as physical laborand manufacturing, you know, growing products and manufacturing products andthen they, um, evolve into service-based countries as they become. It's justthe life cycle of <laugh> country. It's
William (28:34):
The life cycle of the countries economy. Yeah. So if youlook at the UK in the 17th and 18th and even 19th century, it was amanufacturing economy. The warehouse is the manufacturers in the north, theindustrial north of the UK produced, and then they went from the ports ofLiverpool and the Port of London and they shipped internationally. And that waswhy the u you know, Britain had colonies because they used resources from thecolonies to make products. Plus they also sold those products that they then madein the UK back to those colonies. Then it became a service base economy. AndAustralia's gone through that process as well. So is the US so who knows whatcomes after the service based economies.
Helen (29:14):
Yeah,
William (29:15):
We're Watching it's the life cycle of a country. Yeah,
Helen (29:17):
Yeah. We're just witnessing China go through what we'vealready gone through. And so for you it's just more about pivoting andacknowledging that this is just the next step for China. They're moving. Yes,
William (29:30):
Exactly. But China's doing an accelerated rate. Yeah. SoChina's getting into 30 years what we fitted into 150 years,
Helen (29:38):
Which is absolutely amazing To witness too though.
William (29:43):
Yeah, yeah, yeah. So it is gonna be very interesting tosee where China heads because as it begins to conflict, at least economicallywith the US and frankly the rest of the world, you are seeing a lot of tradebarriers going up, um, between well China and the rest of the world. So, um, Ithink you're gonna see the Chinese economy, the Chinese businesses focus muchmore inward on servicing and providing products to their own economy and theirown population cuz it's so large. So it's gonna be interesting to see how the,the geopolitical and dynamic plays out on the product development and uh, thestartup, uh, ecosystems.
Helen (30:20):
So in today's episode we discussed a number of differentfactors you should consider when it comes to product sourcing. Whether you arewhite labeling, manufacturing and designing your own product or just resellingit's important to keep, um, to complete your research. Other than that, if youdo go down the manufacturing route, um, you really need to start thinking aboutwhether or not you're going to do that locally or you're going to do thatoverseas. When we do think about manufacturing at low cost overseas, Chinatends to come into mind. However we all know and it's very widely publicizednow that the dynamics between China being a manufacturing hub and therelations, um, internationally with them are drastically changing. Um, and wedon't know where that's heading, so we may then pivot and considermanufacturing locally. However, manufacturing locally also has a range ofchallenges that we need to also consider.
Helen (31:24):
So it's important that you do your research and that youprice your products appropriately and that you test that price point in themarket to ensure that when you do make an investment in a physical productdevelopment process, that it is a reasonable price that will be received by themarket. So that's all we wanted to talk to you guys about today. There'sobviously lots and lots that we can talk about when it comes to productdevelopment, but we'll save those for a future episode. Hope you enjoyed the episodeand we will speak to you guys next time.