By Steve Owens
Small niche companies are great. They typically have high gross margin, little competition and long product cycles. What they do not have is scale; by definition a niche market will never sell millions of units.
The characteristics of small niche businesses create some unique challenges when it comes to developing products. Compared to larger companies, small businesses have limited product development budgets. Small companies simply do not have the scale or cash flow to support large product development budgets. They do not have to develop products as often as large companies (longer product cycles), but that also means they cannot afford the fixed cost of a full time product development team. This lack of team means they will likely be less efficient than larger companies — making the problem even worse.
It’s not uncommon for small companies to defer product development indefinitely because they can never see their way to a positive ROI given the development cost; or worse, they hire people/companies at less than market rates — who are even less efficient — and end up spending more, or never getting the project finished.
However, some small companies have found ways around these problems.
Borrowing design elements from other products can greatly reduce development cost — as very little, if any, development will need to be paid for (except for finding the design itself). There are three primary sources for reference designs: other products; Product Development Companies (PDC), and technology vendors.
Although at an application level, products can seem very different, dig a little deeper and you’ll discover many products solve the same problem. Design elements for a medical product can be the same as a tool used in the oil and gas industry. The sensor used in an industrial robot, can also be used to measure the environment for toxic chemicals. Why pay money to reinvent the wheel? Even if you end up paying a hefty royalty, without scale, you will likely be at a lower unit cost even if you amortize the development cost over many years.
Product Development Companies (PDC) that specialize in small companies have hundreds of reference designs. These companies know their customers cannot afford to custom design everything, so they cut costs by providing “pre-designed” elements. True, you share these design elements with other customers of theirs, but most PDCs are happy to sign a non-compete for a niche market.
Many technology providers use “demo systems” as a way of selling their products — very popular in the IC world. These demo systems are often available for sale, and can be used as blocks in your product. Again, the unit cost may be high, but trying to amortize large development budget over a small number of unit’s maybe a higher cost.
It may seem counterintuitive, but an expert, who typically charges more per hour, is almost certainly going to be lower total cost than a jack of all trades. An expert knows the answer already and a generalist often needs to first learn the answer. This leads to what is referred to as “learning on your nickel.” It is not uncommon for us to see a 100 or even a 1,000 to one ratio of cost between an expert and a generalist trying to learn the answer. Small companies often make the mistake of assuming they cannot afford someone with such a high billable rate, and it costs them more, sometimes a lot more.
One word of caution – if you’re a hammer, everything looks like a nail. So, if you hire a hammer, you must be absolutely certain your problem is a nail. This determination is not as easy as it may appear — and the expert is the last person you should ask. You need a skilled system designer to understand the subtle difference. In a small companies, this system designer is almost certainly not one of your full time employees — he is also likely an expert you hire on a per hour bases.
Good Processes and Procedures
Large companies are almost always more efficient at product development than small companies. Let’s face it, large companies do a lot more projects than a small company and each time they do one, they learn something. This learning gets integrated into their processes and procedures so that they rarely make the same mistake twice. With small companies, not so much. Maybe they do one project every five years. Often, the people that did the last project are not even around anymore. Whatever lesson they learned walked out with them and is lost on the new team. Inevitably this new team repeats the same mistakes.
There is an easy answer to this problem. You can rent processes and procedures from a Product Development Company (PDC). Many of them share these procedures on their website. Some will provide coaching and management on an hourly basis. Best of all, they are much more likely to be there in five years when you need them again – so you can benefit from the learning on the last project.
Another word of caution, make sure the company you’re getting your help from understands small businesses. What you do for a large company is very different than what you would do in a small company. Look for PDC that specialize in helping companies that look like you.
Just because you’re a small company in a niche market does not mean you cannot afford to develop new products. However, if you use big company methods, you are almost certain to end up with a big company cost. Many small companies are finding new ways to grow with new products without breaking the bank.
Photo credit: Product development idea concept from PureSolution/Shutterstock