Dear Daughter (V)

Dear Daughter,

June, there are countless things you can excel at. You will never be the best at giving advice, but here is a skill I think you can realistically be the best at in Norway. You should aim to be the best in Norway at receiving advice. It will not be super hard since most are terrible at receiving advice. Here´s how to become number one – it is the fourth step that will set you apart:

1. Identify interesting people you want to learn from. You'll be surprised at how many will be honored by your request for advice.

2. Ask specific questions and actively listen. Engage fully in the conversation.

3. During the discussion, summarize the advice you receive. This ensures clarity and shows your attentiveness.

4. Follow up a week later. Send a message showing how you've applied their advice over the past week. This step will set you apart, build your skills, and create lifelong connections.

“June, to practice this skill, you should now get back to me in a week on how you have internalized this advice to try to become the best advice receiver in Norway – that would impress me 😃”

Last piece of advice before getting back to business. If you ever want to impress a guy (they should impress you instead, but if for some reason...) Then you should cook a steak to perfection, of course! Here’s how your dad does it:

Choose the Right Cut: Go for entrecote if you want a flavor explosion, but tenderloin is your safest bet, since it is less visible fat. Aim for steaks around 300 grams with plenty of marbling (the white fat in the steak. Don´t worry most of it melts away when you cook it and gives the meat more flavor). A tender steak should yield to your finger like a good memory foam mattress.

Prep Time: Remove the steak from the fridge 4 hours before showtime to allow it to reach room temperature. Unwrap and pat it dry with a paper towel. Quickly turn it in olive oil right before cooking. 

Heat Things Up: If you have an iron pan, use it. Iron holds heat better than aluminum, which cools down faster than a guy at a jewelry store. Crank up the heat to maximum and let the pan heat for a few minutes. Then, add the steaks and cook them for 2 minutes on each side.

Cook to Perfection: Turn the heat down to about medium (let's say level 5) and keep turning the steak every minute. Season with salt and pepper. Add a generous amount of butter and some herbs after 2 minutes (when your pan has adjusted to a lower temperature). Spoon the butter over the steak for a few minutes—think of it as a buttery shower.

The Knuckle Test: Touch the steak with your knuckles. The more it gives, the less cooked it is. You can use a thermometer – but I never do.

Resting Phase: Remove the steaks from the heat and place them on a plate, laying on two spoons. This keeps them from drowning in their own juices. Let them rest for 5 minutes - this helps even out the cooking as the internal temperature rises.

Enjoy: Serve with a rich béarnaise sauce for a tangy, fatty delight and some salty fries to keep those taste buds craving more.

Bon appétit and get ready to impress! Now, let’s get into business. 

The Business Case (Back of the Envelope)

I have to start making a rough plan this week, and I will take you through my process. When you need to make a business case, it usually consists of three to four types of budgets, all relevant to the Night Booster. In this letter, the focus is on the unit-calculation. Before we can go into that, we need to think through our business and distribution model. When you are selling a physical product, you have these alternatives:

Direct to the Consumer (D2C): This means you are selling the product directly to the end consumer. You can do it through your online store, online stores on social platforms like TikTok or Facebook, Amazon marketplace, pop-up stores, or your own physical stores. The advantage of a D2C approach is that there are no middlemen you need to pay, giving you complete control and all the margin. “Too good to be true,” you are probably thinking. In a way, you are correct. The challenge with this model is that although you have the product, you don’t have the customers, and you have to fight for every single one with sales, marketing, PR, and other tactics. If you manage to get your product into Walmart, you have to give them a huge discount (their margin), but they have the customers (millions of them), and you don’t have to do marketing spend for every sale. I definitely plan to sell the Night Booster through a webstore and eventually at the Amazon marketplace. I’m considering some of the social media marketplaces, but I don’t know too much about them, so I need to do more research first.

Selling to Retailers: Instead of selling directly to consumers, you can sell products to retailers or webstores that distribute the product for you. They are not doing this out of the goodness of their hearts. They are doing it to make money and please their customers. When you are selling products to retailers, they, of course, hope to make as much money as possible and will try to negotiate the lowest price from you. When it comes to their margin expectations and requirements, it very much depends on their industry and business model. A specialty store generally has a much higher margin than a supermarket selling groceries. To be able to sell to retailers, the product needs to have enough margin to give away for it to be interesting for them. Since the Night Booster is a new category and product, we should be able to set the prices high enough to make it attractive for retailers and still affordable for customers. The retail store I owned made, on average, 55% margin on products. With revenues of about 6 MNOK per store, it meant that when we had paid for the products, 3.3 million was left to cover all other expenses. Then you subtract rent of 0.5 million, 1.8 million for the staff working in the store, giving a 1 MNOK contribution per store. This should cover all the marketing and headquarter costs (managers, accounting, office rent, procurement, etc). Then, when everyone had been paid, you, as the owner, might earn a little profit (if you are good).

Selling to Distributors: Selling to retailers outside your home market can be complicated, and you might not have the setup they require. Ready for a new business model? Here come the so-called “middlemen.” A distributor either gets the rights or the exclusive rights to sell a product in a market or to selected customers. They are the local experts with good connections to customers, and they order the products from you, arrange for transport to their warehouse and store the products, sell to customers and try to get orders, do marketing, and finally invoice the customer. All this work is done for a margin of between 20-40% depending on the product. I have often used distributors to get distribution outside the Nordics (in the Nordics, I sold to retailers myself). There are two disadvantages of distributors. First, they require a significant margin, making either the product more expensive or your margin much smaller. Secondly, it might make you slower since you first need to “sell” the distributor, and then the distributor has to sell the “retailers.” I hope we can use distributors outside the Nordics for the Memory Booster, but we have to see if it is possible from the unit-calculation later in this letter.

Agents: Selling through agents is the last model and is in less use. An agent is responsible for a certain geographical area or customer groups and visits retailers and other resellers to sell your products. They do the introduction, possibly the early negotiation, and some follow-up, then leave the rest to you. An agent does no warehousing, logistics, or marketing, and they take no credit risk, so you have to invoice the customer directly. They are paid a small commission for their efforts, often between 4-10%, depending on the product and market. I have only used the agent model a few times, and it is difficult to find the right person to do it. I don’t see us doing it for the Night Booster.

Now on to the Unit-Calculation, the most fundamental analysis you need to do to see if you can get the so-called unit economics to work. It is quite simply the revenues you get from a transaction subtracted from the direct costs of making the transaction happen. Did you see that I used the word direct cost? Direct cost is all costs you can say belong to a transaction; it includes the product cost, the cost of sales (marketing), the cost of transport, etc. It does not include indirect costs, which can be R&D, IT, accounting, management, office rent, HR, etc.

This is probably very abstract to you now. So, let’s go through my thinking for the Night Booster and we will start with the B2C case:

• 1.995 NOK Revenues – Revenues is what the customer pays when buying the product online or from a store. The price may obviously change later in this process, but I need to put something into the model to see how it plays out. Based on my experience, this price makes sense. It’s expensive enough to send a signal of quality and affordable enough for the customer personas.

• 399 NOK Value Added Tax – Countries raise taxes in different ways. They have tax on income, tax on company profits, tax on transactions, etc. One of the largest sources of tax is the value-added tax that end-consumers pay. In Norway, this is 25%. It is something you have to pay back to the State every second month, and remember, the State is the number 1 creditor to bankrupt companies, so you cannot skip this.

• 40 NOK Transaction Cost – You usually pay a couple of percentages in transaction fees to the credit card companies. I have included about 2% here.

• 400 NOK Product Cost – This is, of course, very difficult to estimate now, but I imagine a device with 7 chambers and 7 scents. Maybe the scents cost 50 NOK in total. The device, I imagine, will have to include some electronics and may cost 300 NOK. Then you have 50 NOK in packaging and transport costs to have the product land in a warehouse in the Nordics.

• 100 NOK Shipping Cost – You always include the shipping cost from the factory to your warehouse in the product cost, but the shipment from your warehouse to the customer is separate. In this calculation, I have included the cost here but not revenues from customers paying for shipping. 

• 600 NOK Marketing Cost – Most products need sales and marketing. The exact amount of cost depends on how the product is distributed. If it is only sold online, the marketing cost is higher. If the product gets into retail, the marketing cost is less, but you have to transfer some of your margin to the margin of the retailers. 500 NOK is a pretty high marketing cost, 31% of the sales revenues, but since it is a new product, I am going with that.

• 456 NOK Product Margin – Finally, we are done. To see the product margin in relative terms, you have to take the product margin divided by revenues subtracted value added tax 456/1596= 29%. Is this good – No, not really, but there are a few upsides here that I’m saving. Most likely, we will sell the seven scents to the customers separately after the first ones are done. This could very well be a subscription model with high margins. I don’t know if you know the Gillette business model, but they have been famous for selling razors at a very low or no margin to make all their profit on selling the blades. In addition, some of the costs may go down as the product scales in volume.

Let’s quickly consider the model of selling the product to retailers. We then don´t have the transaction cost (we are invoicing them large volume, and there is no fee per transaction), remove the marketing cost, and reduce the shipment cost by 90% since we are shipping pallets and not single units. With a shipping cost of 10 and a product cost of 400, we get a total cost of 410 NOK. I am assuming the retailers will be satisfied with a margin of 50% and with a price to end consumers of 1.596 NOK (excluding VAT) it means they will pay 798 NOK when they are buying the Night Booster from us. We are then making 798-410 per unit = 388 NOK. It's not the same margin as for B2C, but still reasonable.

Now, on to the most interesting case: can we afford to have distributors outside the Nordics? Let’s start with what we know. We know the retailers will pay 798 NOK for the product. A distributor wants between 20-40% margin. Let’s say we agree on 30%. They would then like to purchase the product for 559 NOK from us. Since our cost is 410, we make 149 NOK per product we sell. This is a low margin, and it is almost 4 times better to sell a product B2C, but if a distributor can give us access to, for example, the Japanese market, it may be worth it.

So, June, what do you think? "Should we only sell directly, or should we also include retailers and distributors for our distribution?"

With all my love and support, 

Dad

P.S Leonard Cohen is a fantastic musical artist you have listened to very little. He wrote the song “Hallelujah,” that I am sure you have heard. He has so many good songs, and the text writing is amazing. Listening to him for one hour and following the lyrics on his 10 most popular songs, and I believe your life will be enriched.

P.P.S There is an interesting question popularized by Peter Thiel that you should think deeply about – “What do you believe to be true that almost all others disagree with you on?” It is a hard question to ponder, and most cannot come up with a good answer, can you?