American Express Open Forum recently launched a video series interviewing successful business owners called “Inside Successful Small Business”. As part of this series they talked with Neil Blumenthal and David Gilboa, founders of Warby Parker. Specifically they talked with the founders about the cost of goods and how important it is to business owners.
Key: When an entrepreneur starts out they often create a financial model that looks great and they’re proud of. However, things are always left out.
Warby Parker founders Neil Blumenthal and David Gilboa launched their eyewear business while they were full-time students at Wharton Business School. They used e-commerce distribution to cut out a lot of the costs and sell a product for far less than it was usually sold for.
The founders say entrepreneurs are inherent optimists and underestimate key costs. They originally wanted to sell glasses for $45 but a professor told them it would not be possible. He turned out to be right.
Whatever you think you’re cost of goods are they are going to be higher and they will eat into your margins. This will leave you with no money for marketing and you will lose out to your competitors.
They realized they were not about selling cheap glasses but wanted a great product at a fair price. The strive to create this great product kept driving the costs up which would have left them with no margins at $45. By pricing higher at $95 it allowed them to create the product they envisioned and left margins to grow and build a successful business around it.
The founders admit that they would not be here today if they had launched at the original price of $45.
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This interview was sponsored by and originally published on American Express Open Forum.