How you can win. Why we went digital.

If you don’t follow the business behind the wakeboard or water sports industry, it is ripe with lessons learned from one failed company to the next. This isn’t exclusive to wakeboarding either. There are dozens of creative surf, skate and snow companies that eventually fold, never to be heard from again. The majority fail from hard to pinpoint, small costs eating away product margins over time ie. running out of money.

Organizing and understanding your finances so sales strategies are managed by numbers is often a difficult task for any company, and particularly difficult for new startups. Almost all new companies are underfunded and as a result employees are tasked with multiple jobs usually performed by a team. With plenty of distractions, the ability to focus on the truly important tasks for  the company then becomes a talent in itself.

We’re going to outline a few of the strategies larger market leaders use to retain their market share and make it difficult for your new business to ‘break through’ to sustainable, positive cash flow sales cycles.

Understanding these strategies can help new brands find success sooner, steering clear of the dangers learned from past companies. While understanding why companies fail certainly has informed how we plan our own strategy, we haven’t completely avoided the same difficult situations they have faced. This led us down the current path towards more lean, streamlined cycles.

What’s ironic is that despite the creativity that surrounds many new lifestyle [adventure] companies, they just aren’t that creative in their business strategy. They look at other direct competitors in the space and say ‘this is awesome and I want a piece of the fun’. They build the brand around the same principals hoping to score a small percentage of market share and join the lifestyle. Each situation is unique and we don’t have the full answer ourselves, but we do know heeding this same advice can get you into trouble.

Know The Industry Size

What can be measured matters for all well run businesses. So it’s really important to understand the size and scope of an industry to get an accurate estimate for projecting your sales and setting budgets. One standard indicator of industry size is total industry revenue.

Projected or current total revenue for an industry is very important metric to know for a few reasons. If you watch Shark Tank this is also the #1 qualifying factor for a shark’s investment besides the people behind the business.

The smaller an industry’s total revenue, the less resilient it is to the influences and finances of the market leaders. In smaller industries, this can make growth difficult if you play by the same rules and compete using the same sales strategies as the major players. We’ll talk more about this in a moment…

First let’s take a look at the size of the wakeboard industry for context. We’ve found the revenue of the entire wakeboard industry [everything except boat and cable sales] is around 100 million in total revenue for all companies combined. Keep in mind this is a cottage industry compared to other general business categories. The market leaders are not much bigger than the size of your local chain of fast casual restaurants.

If you’re surprised at that size, one reason is outdoor brands tend to be a more creative outlet for capturing emerging trends in design and media. Industry publications also help them appear more polished and larger than they actually are. While industry publishers are vital to the success of an industry, they also have a vested interest and the industry data supplied by them can be inflated or inaccurate.

As is common for most other industries, let’s assume that the majority of sales are captured by a single company or conglomerate. This happens to be the case in almost all general business categories, not just wakeboarding and other action sports industries. Furthermore, these market leaders tend to be under ownership of a much larger parent company where the main business operates outside the action sports / lifestyle industries. This allows brands to share the financial support and resources of a much larger entity.

Why industry size matters…

The outdoor or lifestyle / adventure industries can be exciting and rewarding industry to work in. These industries also tend to attract a lot of experienced and successful businessmen that come in and apply their broader business strategies to much smaller industries like wakeboarding, surfing, snowboarding, etc.

Unfortunately many also view the action sports industries as a rounding error or write-off for their parent companies.

You’ll find apparel juggernauts like Nike move in and out of the action sports like snowboarding or adventure type lifestyle space. The growth and demand is not large enough to move in unison with the company’s long term growth standards.

A small industry size also makes it difficult for most small startup businesses to operate profitably. A single mistake, error, or just bad luck can kill a business in a small industry.

In short, less cash is needed for an established competitor to ‘own’ the industry with shrewd strategies where their supply can outpace demand.

Second, know that competition is not a good thing…

Competition is not a positive sign of industry innovation or health. There are some pros to a competitive industry – yes, competition can drive innovation. However, there are many downsides to consider as well.

The single most important factor to consider is what heavy competition does to the price of a product. As more companies enter a market where supply outpaces demand, the very first thing that happens is price drops [as is the case for many industries]. Therefore price becomes the determining factor for sales when there is a bunch of undifferentiated products sitting on the shelf. Margins quickly start to erode. This means you have to sell more to make the same amount of profit. Low margins have an inverse effect on innovation as competition heats up.

So what happens with the industry?

It becomes a volume game…

What happens in a volume game?

The big guys win. Why is that?

Timing is everything. Let me explain.

The market leaders produce earlier and in larger numbers every year. This strategy captures the initial spike in demand and profit at its peak in the sales cycle. As the sales cycle matures, product demand weakens, forcing a reduction in price because supply outpaces demand. As demand continues to weaken, other competitors usually follow suit in the price drop to liquidate inventory through the same sales channels before the cycle starts over again.

The market leaders capture the spike in demand as early as possible and flood a product category as margins erode and demand weakens. They then take a loss to ‘tie up’ the remaining demand until the next sales cycle hits. They can accomplish this in smaller industries where a parent company has the financial resources to build and satisfy the demand for the product.

In short, newer companies should focus on the product, their customers and how to differentiate their sales strategy as early in the process as possible.

Now, remember most industry leaders own not only a single product category, but a broad assortment of different products within an industry.

So while smaller companies are left to fight for their small share of a single category of product and reacting to price drops, the larger competitors are focusing on other product categories that provide much larger profits. They fund those other products and their sales cycles quickly. They continue this cycle to offset the demand and profits between different product categories.

The key point to remember here is that as demand for a particular product category matures, the market leaders are willing to break even or even take a loss in one product category to ‘own’ a much more profitable category in another product category, locking the other competitors in a cycle that is extremely hard to win.

Try to compete in the same retail channel as the market leaders and we found a top to our sales very quickly.

So navigating the retail sales channel is really expensive, time consuming and difficult if you intend to compete using the same strategies and incentives as the big guys. Many also lose sight of the hidden costs to finance your product while it sits on the shelf of your local shop. I wrote about a few of them here.

When competing in retail expect financing terms up to 180 days [time before a store’s payment is due]. Providing incentives for the store is also required if you want them to be excited about selling what you have. Finally, customer service is needed to educate the shop sales team so they know as much of your product as possible.

So we learned there is a lot of distractions in the retail market that can drain your time, energy, and most importantly your cash as a young company. Be aware of those before heading down that path and make sure you have the resources in place before competing in a competitive retail channel.

FYI – Freeskier published an article about Jskis. In it he explains important insight from his experience of competing at a retail level.