So, Shark Tank is back, everyone’s favorite show where young entrepreneurs show up to get berated for their terrible business sense while some diamonds in the rough get talked into giving up half their company for peanuts to some rich jerk (ok, maybe Kevin is the only one who’s a jerk :).
I was watching last week’s episode and something stuck me. For almost every product, the sharks ask “What does it cost to make and what does it sell for?” And they’ll get some response of “It costs us XYZ to make and it retails/wholesales for ABC”. Cue the cries of woe from the sharks, which either shows up as “Aggh, how can your margins be so low!?(only 50%!)” or “Noooo, that price point is way too high for this market (where you’ve already done half a million in sales)”. Sure, sometimes they’re impressed with a high margin or low price, but one of the above complains seems to sink a lot of the deals.
My question is: why don’t the sharks just make an offer with the contingency of “and we’re going to change your retail price to something I think is better for the company”? They’ll be a part owner, if they think that would make the business take-off / be profitable, why not suggest it?
I can’t remember any examples, but I’m pretty sure that some of the sharks did exactly that. If someone was selling, for example, a baby blanket for $50 that the entrepreneur was making in her garage for $20, the shark might suggest producing them in China for $8 and selling them for $25.
Can’t remember exactly where, but I heard that Mark Cuban was asked in an interview how he knew to ask such smart, incisive questions about the inventors’ business plans on the show. He basically replied that each 10-15 minute segment with the inventor is edited down from an entire 8 hour day, so he asked plenty of dumb questions, they just didn’t make the cut. So there’s a lot of back and forth discussion that gets cut out, and the margin/sell price discussion may not make the cut unless it’s particularly confrontational (and therefore entertaining :)).
Also, the offer the sharks make is contingent on the numbers adding up. So if the entrepreneur claims a certain amount of revenues, after the taping the sharks and their accountants will go over the numbers in detail to see if the deal is still worthwhile. Some of the deals collapse after the taping because the numbers weren’t what was claimed.
I think we’re talking about different things. I’ve seen plenty of times where the shark says “I think your retail price is too high, and for that reason, I’m out”. What I’m asking about is why we never see “If you’ll agree to change your retail price to $X, then we have a deal”.
Yep, I’ve heard that’s the reason you see the “shot clock” on an offer from a shark sometimes - the entrepreneur has been droning on for two hours and the sharks are trying to get it over with. So it’s entirely possible those conversations happen and just get cut.
I think mostly if someone’s valuation numbers are screwy or they’ve got terrible manufacturing costs, it just means the person pitching it is clueless and even if the product itself is successful, it won’t get anywhere. The Sharks are just investors - they’re not going to take over the business or even send someone to help run the business. It’s much easier and lucrative to have someone with everything in place and all that needs to be done is a little cash infusion.
Whatever “perks” the sharks can bring is a) at their discretion and b) is probably marginal compared to the overall.
Also, I’m sure they’re just tired of fighting to convince someone to send the manufacturing overseas because you get a lot of “American JOBS!” rhetoric that flies in the face of comparative advantage, manufacturing costs, etc.
It’s funny you mention this because this season’s intro includes a blurb about how many thousands of American jobs have been created on the Tank… despite the number of sharks that want to ship everything to China as soon as possible.
Funny haha? Moving manufacturing to China does not mean that Americans are out of jobs - a concept that many ST contestants don’t understand or want to understand.
That’s interesting. I haven’t seen Shark Tank yet, but I had presumed it was a clone of a UK show called Dragon’s Den. In Dragon’s Den if they come across a good product/entrepreneur there will occasionally be multiple ‘Dragons’ bidding to be the investor for the business, and then one of the selling points in which offer the business-people choose to accept, is the ‘Dragons’ area of expertise. I saw one follow -up episode where the ‘Dragon’ attended a meeting with a commercial scale manufacturer for a food product and actually wrangled better terms out of them than the business owner was able to alone.
Canada has its own Dragon’s Den, with Canadian investors, and yeah, it’s Shark Tank. Same show.
We watched it tonight - it is one of the few shows we’ll watch - and I could not help but notice that, as the OP noted, the price of the product was NEVER challenged, if it was brought up at all.
While part of it is editing, I think a more relevant point is that the current price the product is being sold for is irrelevant, or barely relevant. Most of the business ideas are obviously, catastrophically flawed, and will fail no matter the price. Today on Dragon’s Den a guy came in with an idea for an umbrella that attaches to your hard hat. I am not saying it was the most incredibly stupid idea for a business venture I’ve ever seen, but it was in the top ten. It was absolutely ridiculous. What does it matter what the hell it costs? On other hand, these other dudes came in having - over years of experimentation - come up with a brand of coffee that tastes like good coffee but has no caffeine at all and in fact helps you go to sleep (they used valerian root, I believe, but were cagey on the details of the recipe, for obvious reasons.) It’s a terrific idea and the investors all wanted them to take their money. Does it matter if a bad of ground Sleepy Coffee, or whatever it was called, costs $8 or $11? Not really. Professional venture capitalists aren’t going to get hung up on whether the product is currently priced at $X if it should be $Y. The price would almost certainly change in many circumstances anyway; a lot of the people who come on the show are looking for a distributor as much as they are an investor, and mass production will reduce prices.
If the idea is otherwise sound and the pitchman/woman seems like an otherwise good risk, they’ll iron out that detail later. Prices are easily changed.
They’ve got a unit price and a unit cost. The difference between them is their gross margin. Both the price and cost are only slightly malleable.
It’s certainly true that the you can offer your product for as high a price as you want, but when the shark has a problem with it, it’s because they believe the market won’t actually bear such a high price.
Costs are even more rigid. Cost reduction is critical, but there’s only so much that can be done.
I would interpret “I think your retail price is too high, and for that reason, I’m out”, as “I don’t believe there’s enough margin at a price I believe the market will bear after considering how much cost reduction I believe is possible.”
From what I understand these shows somewhat exaggerate how much personal aid and guidance the dragons/sharks will give afterwards. They’re mostly offering money and possibly access to their connections, and afterwards the entrepreneur might not even meet the investor anymore. If the entrepreneur is clueless about his prices, then he’s probably not a good investment.