Simple form-value ratio for scalable business

👋 Hola! Welcome to Out of Singapore. This is Shan and I write every Sunday on business and marketing. Thank you for all the positive feedback for last week’s post. I will continue to write more about my struggles, learnings and share background information.

Today I will tackle an aspect of product selection for online commerce - the form to value ratio. This differs based on the sale channel and its associated cost structure. I will cover online commerce and the sale channels will be our own website (DTC) and marketplaces (TikTok, Shopee, Amazon, Lazada).

Today’s structure will be -

1. Spill the beans: Perfect form-value ratio

2. Why is this the perfect form-value ratio?

3. Why do I care about this?

Let’s go.

#1 The perfect form-value ratio

Before I divulge the perfect ratio, let’s understand what is form-value ratio.

Form - Shape, volume and weight of the product. Reference metric is per unit shipping cost. This should include storage, packing, packaging and shipping cost. This excludes ingredient and production cost.

Value - Final price customers are willing to pay for the product. Reference metric is avg order value, AOV. This should be the final price paid by consumers after all promotions.

The form-value ratio is form metric : order value metric.

For example, if it costs SGD 10 to ship one unit within Singapore and customers are willing to pay SGD 50, then the form-value ratio is 1:5. Alternatively, it is 20%. The lower this value, the better.

What is perfect ratio?

The perfect ratio is 1:10, i.e., the form-value ratio should be under 10%. In other words, if you are selling online and shipping goods to consumer’s home, then your total cost of the form should not not exceed 10% of your order value.

Why why why why why?

Cost leh! The costs force you to need this ratio to survive and scale successfully. The goal of each online sale is to give you enough cash to run your current operations and have some money left for next month operation. The more cash you have left at your disposal, the better. There is a reason why Facebook and Apple have become so big!

Cash flow is one thing, cash left is another thing. Cash left is used to purchase new inventory, prepare buffer stocks, invest on technology and automation, hire right resources and improve customer experience. Low margin business cannot scale because they have no cash left to do these things.

But hold on, it cannot be just about costs. It’s also about how much value you can deliver in the form factor. Jewellery is a great form factor but it has its own problems

1. Gold jewellery has low margins for everyone. High value but low margin. So bad business. Absolutely not for online sale.

2. Fashion jewellery (non-gold/silver/platinum) are good alternatives. They have low form-value ratio, meaning they are great online business.

Let’s look at specific costs that leads to this perfect ratio.

#2 The costs behind the perfect form-value ratio

You get a good form-value ratio if it is easy to push down your form cost and push up the avg order value. If it is difficult to reduce shipping costs, you are in tricky spot. If it is difficult to raise prices, man save yourself and run.

Here is why our current 120 cc bottles (shown in the picture above) is a great form factor.

1. AOV - Consumers are ready to buy at high price and stock up often. They buy for themselves and the family for the entire year. Our avg AOV on the website is SGD 150+ and on the marketplaces, it is 50-80 SGD. If you raise prices, consumers will complain but will slowly adapt to it (assuming you provide value and competition is manageable in your category). So, our AOV is approximately SGD 100.

2. Shipping -  Shipping costs under 10 SGD for a bottle of that dimension (fits into your palm). It does not need special temperature controlled shipping. It can be packaged into bubble wrap and shipped in normal brown box or padded envelope.

3. Acquisition cost - This cost is extremely important, since it will eat into your gross margin. The category we deal in, health, has high consumer awareness and concern. Consumers decide to invest on health by themselves. If you provide the right solution (quality and price), they will buy every month, reducing your acquisition cost. This lowers our CAC. While other brands invest 80-150 SGD per acquisition, our CAC is under SGD 50. (Did you expect me to give you the exact number? 🙄)

4. Ingredient and production cost and time - Two considerations, first is the cost of raw materials and second is the production time. For apparel, the procurement and production timeline is at least 4-6 months. For health supplements, this can be as low as 3-5 weeks. So our cash is not stuck in production and purchasing for long time unlike other common online categories. We rotate our cash fast by keeping tight stocks (1-2 months stock cover).

5. Willingness to pay - When we introduced our products at low price, customers did not trust us. They would ask too many questions before making a purchase. Simply put, psychologically they could not believe that high quality can be provided at low cost. This is like selling a art piece. If it is cheap, affluent consumers won’t pay. For health, everyone has single focus - quality. In their minds - “quality comes at higher price”. The willingness to pay for health is way too high. You can launch a novel product at SGD 1000 or 10000, and consumers will buy. People care about their health and price is not a barrier.

6. Shelf life - The shelf life of health supplements is long, almost 2 years. Unlike lifestyle products, Vitamin B or NMN does not go out of fashion. Same products will be bought by everyone repeatedly. You don’t need to innovate and find new styles every month. Product is stable and has scientific backing. The older the product (in terms of brand presence), the more is the trust from customers.

7. Repeat behaviour - Once you acquire a consumer, they will keep buying from you. Not everyone, but almost 50-60% will come back. This further brings down the acquisition cost. These consumers become advocate. They spread word of mouth. They speak wonders about the products to their friends and family. Again, same product, repeat buying resulting in costs going down every month.

Now, if you are planning to sell a product online, look at these metrics and see how it will work for you. You can arrive at a low form to value ratio if

1. Shipping and storage costs can be low.

2. Customers are willing to pay more

By the way, would you like to know my form to value ratio? Let me know.

#3 Why do I care about form to value ratio?

Because beyond gross margin and cash flow, there is another important business metric - CM3 (Contribution margin 3). You can read about contribution margin here. CM3 determines how much cash is left to sustain and invest into the business. Here is a quick summary -

1. CM1 : Gross revenue - cogs

2. CM2 : Gross revenue - cogs - commission - affiliate fees - other fees - fulfilment

3. CM3 : Gross revenue - cogs - commission - affiliate fees - other fees - fulfilment - marketing

CM3 helps you pay salaries, agency fees, new stock purchase, rent and utilities and taxes.

If the form-value ratio is high, the CM3 will automatically be too low to sustain the business. What’s the right CM3? You tell me.

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Thank you so much for reading today. Please like and share the share if it added some value in your day.

I realised that when I wrote about health, I wrote too carefully. I didn’t want the definitions and claims to be wrong or in my own words. I was worried about readers complaining. I forgot that the blog belongs to me and I am not aiming to provide a scientific or medical advice. This is my perspective and it can be wrong sometimes. So, next time I write on health, I will put my own perspective on it, instead of trying to be correct. What do you think?

I also want to write about - What does it mean to be a CEO of consumer brand startup? Some thoughts are there and I should on this soon. Maybe I will make this a video series on Instagram or TikTok. The story of how I actually became a “CEO” should be interesting as well. Because all of this a lot of luck. Let me know your thoughts.

Jisoo - I will do what you command 🙈

Surprisingly today’s write up was light and done quicker than expected. I hope it was an easy read for you guys. On that note, hope you have an easy week ahead!

Cheers! 🥛🥛🥛🥛🥛🥛🥛🥛