Revenue and your consumer hardware startup: Know this before your retail launch

Best Buy placed a huge initial stocking order. We’re golden!

Not so fast. Before you bank on the revenue from that purchase order, consider these 3 key factors that affect your sales revenue in retail channels.

#1 Sell-in  = Your inventory ships against a purchase order to the retailer’s warehouses/stores (aka “Sales Out”)

#2 Sell-through = Consumers purchase your product from the retailer (aka “POS”)

#3 Returns = Either product returned by consumers to the retailer or a stock rotation of unsold inventory (aka “RTV”)


To eleborate….

Sell-in: Don’t get fooled by a large buy-in order.  While a PO is placed, inventory shipped and an invoice generated, it is wise to think of sell-in as a placement of inventory in retailers’ stores or distribution centers. Whether figuratively or literally (as in consignment), you essentially still own that product. Retailers rarely take risks, and they will expect you to stand by your product. It’s wise to have your Finance group take reserves against retailer shipments in the likely event of returns (see below).

Sell-through: The best indicator of demand is the rate of consumer sales.  Your company will live and die by it. Retailers count revenue by the “boxes” transacted at their stores and online, not by the amount of inventory they bring in.  Don’t be afraid to limit sell-in.  Setting up your revenue and inventory models based on forecasted sell-through versus sell-in will eliminate revenue risk. Setting a great example, smart companies like Logitech and Netgear ship inventory based on a sell-through forecast.  Such an arrangement may be challenging for a retailer in the short-term, especially if your product is in high demand. However, sell-through-mindedness will encourage mutual effort applied toward inventory turns with minimal risk to both parties.  Build your forecast and your P&L on a sell-through plan to avoid getting stuck with excess inventory in your warehouse or unexpected returns from retailers.  Keep in mind, you will need accurate reporting systems to stay on top of sell-through.

Returns: Your product ain’t sold until it’s sold through…and stays sold. Consumer returns and unsold inventory will negatively impact your recognizable revenue.  I’ve worked for consumer hardware startups that saw 8-22% consumer returns on their products.  Their goods were not necessarily defective, but returned due to poor user experience or buyer’s remorse.  Those consumer returns meant we experienced returns on the inventory we shipped into the retail channel.  Opting for a “returns allowance” could be an option to allow your Finance team some predictability, but either way preparing for the inevitability of returns will help to make your business whole.  And planning in advance removes risk of missing your Sales forecast.

While these aren’t the only factors affecting your revenue (I will elaborate on marketing programs later), being realistic about how inventory movement impacts your revenue is a great starting place.

Before you go…a word on Sales commissions:  While it can be controversial among your Sales reps, it’s important to include sell-through as a key commissions component.  Some companies incentivize Sales reps 100% on sell-through, which makes the commission formula straight-forward.

To responsibly address consumer channels your entire company, from Sales to Marketing to Operations to Finance, must be on the same page when it comes to recognizing Sales revenue. Don’t get caught in the sell-in trap.

About the author:

Suzanne Oehler is an energetic, driven business leader with 15 years in consumer and enterprise tech Sales. Widely regarded for opening and expanding business in brick-and-mortar Retail and digital E-Commerce for consumer technology hardware start-ups, she designs and implements winning Sales strategies that navigate the complexities of Consumer markets.