What is Product / Channel fit?

Author

Steve O'Dell
January 10, 2024

Happy Wednesday, everyone. I hope your CPAs are low, your velocities are high, and your cash position is strong. I was going to write about Stanley this week. But I feel like everyone is sick and tired of hearing about them. If you want me to write an analysis, please respond here, and I’ll whip it up. 

This week, I wanted to talk about a very important yet little-known aspect of building in CPG. Everyone knows the phrase “Product / Market Fit”. 

But did you know about it’s little cousin? Product / Channel fit. Essentially, how fit your product is for a specific channel - Retail, Foodservice, DTC (Shopify), Industrial, Amazon, etc… Let’s analyze. 

Rule 1: Does your product even make sense in a specific channel? 

My favorite example here is selling Ice Cream in DTC. This, obviously, makes no sense in hindsight. Here’s why:

Shipping takes time (3-5+ days) and frozen goods melt. Duh! Want to keep them (or try to) frozen? Then you need to add insulation and dry ice. Excellent, they’re still frozen upon delivery! But what happens? Your costs shipping costs rise, afterall ice is heavy and takes up space. Can't do this! Then people will try to expedite shipping. Alas, costs rise again. 

Your contributional margin erodes. Now you try to increase prices(common in DTC), but nobody wants to buy a single pint of Ice Cream for $48 dollars. CVR plummets.

You’re really regretting hiring those expensive agencies, and now your Ecom channel is dead. 

This happens mostly for new founders, who don’t understand how to strategize across channels and pick the ones with the most opportunity or best economics. 

Okay, now what about Coffee in DTC? Obvious yes. No need to explain further. 

Rule 2: Build Pack Sizes (i.e. 10 pack, 30 pack, 45 pack) Based on the Channel

This is mainly for food & bev, but it’s simple enough to understand. If you’re designing a product for Costco, you probably shouldn't sell that exact same SKU on your website (there are edge cases). The two channels have very different buyers and P/Ls. Costco buyers want value and large pack sizes. DTC buyers are more than fine paying a premium for high-quality products. To reap the full benefit, structure the sizes differently. 

You can also need to think about this within channels like Grocery. Another obvious example is that your Costco SKU should not be (or very rarely) the same as the SKU you sell to Whole Foods or Target. 

Rule 3: Build Price & Serving Size based on the channel

Very similar to rule 2, it’s critical to understand how to price based on channel. First and foremost, the margin profile varies a lot by channel. To succeed in Ecom nowadays, you need basically 70%+ margin (after landed cogs, shipping, and fulfillment). Grocery, you can get by with 50%. Foodservice ranges from 40-50% (sometimes lower for large deals). And Industrial sales are usually between 10-30%. 

In established channels, where there are many products like yours, its very important to slot into the pricing range. For example, in grocery, a regular box of cereal usually costs $1.99-4.99. If you come into the market with a new brand of cereal and you’re selling it for $19.99, you’re going to have an abysmal time. It’s not going to work out. You’ll go bankrupt. Do not try this. And don’t tell me “What about Magic Spoon”... The truth is we have no idea how that company is going to end up. They raised a lot of money and can buy a ton of revenue. 

It’s essential to extrapolate that example across all channels, understand the pricing range you can slot into, and then tinker within the range to optimize margins and revenue. This is why so many folks start with DTC, it’s a testing ground of future omnichannel strategies. 

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Okay, that’s it for this week. Next week, we’ll chat about how you can use this framework to build your company efficiently and/or plan growth. 

Here are the best things I read, watched, or listened to last week:

Lastly, I heard from a friend that January 12th is “Quitter’s Day” (see link for free Chipolte). If you set a resolution this year, don’t give up! You got this 👏

Peace out 👋

Founder @ Tenzo & Commerce Chronicles

PS: If you have any topic ideas, I’d love to hear them. Respond here to let me know!

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