Jeremy runs an organic winery. As a small producer, he does everything. He grows the fruit, produces the wines using minimal intervention techniques, and even labels the bottles in his living room.
In turn, he works around the clock and, at the end of vintage, makes 3000 cases a year. Given he isn’t established in the industry, his bottles aren’t expensive. They retail for around $20-$30. His margins are reduced further given the wines pass through a few hands before reaching the customer.
The current supply chain hurts Jeremy
He sells them to his local wholesaler who slap a 30% margin on them. The local wholesaler sells the wine to the local retailer who bang a 50% margin on them or, in the case of a restaurant or bar, a 70% margin.
To sell a bottle at $25 retail, Jeremy has to sell the bottle to the wholesaler for $8 which means he makes $4 on each bottle. The business gets by but he’s certainly not doing well.
Moreover, given Jeremy’s bottle passes so many hands, the people who are selling the bottle are far removed from Jeremy’s story. The retailer or server are consumed with learning every bottle in the establishment’s inventory and often they don’t take the time to truly understand Jeremy’s wines.
So they don’t sell them very well to customers. Often his bottles sit in the wine shop or restaurant for over a year, which he finds disheartening.
Unfortunately, Jeremy isn’t the only small operation that is suffering at the hands of an industrial supply chain.
We designed the chain to streamline operations for big producers and big retailers. Like Yellowtail wines and the Dan Murphies retail chain who shift large volumes at small margins. We didn’t design the system to benefit small producers.
As the market becomes more flooded with small producers, how do we get around the system?
So if such a supply chain is part of the old model, what is the future?
1,000 true fans, by Kevin Kelly
A few years ago, founding executive editor of Wired magazine Kevin Kelly published an article that went viral among creators, freelancers, artists, and small businesses. The article was called 1,000 True Fans.
The number sounds surprisingly low, but he is quick to clarify what a true fan is: A true fan is someone who buys everything you produce, he writes. These are your diehard fans who will drive from the city to the country to pick grapes or come to your chef’s table every two months. If you have 1000 fans like this, you can make a living, as long as your content with not being like SUPER rich.
Here’s how the maths work. First, Kelly says, you have to create enough each year that you can earn, on average, $100 profit from each true fan. Profit is the keyword here.
That is easier to do in some arts and businesses than others, of course, but it is a good creative challenge in every area because it is always easier and better to give your existing customers more than it is to find new fans.
Second, you must have a direct relationship with your fans. That is, they must pay you directly.
You get to keep all of their support, unlike the small percent of fees you might get from a music label, publisher, studio, retailer, or other intermediate. If you keep the full $100 of each true fan, then you need only 1,000 of them to earn $100,000 per year. That’s a living for most folks.
The number, of course, is not absolute. If each fan equated to $200 in profit, you’d only need 500 fans. Also, not every fan will be a super fan. You might have 3 regular fans who equal one true fan. Think of a concentric circle where the true fan is in the middle and the regular fans sprout out from there.
Also, 1,000 true fans is not binary either. You can have your core audience which you sell directly to. You can also have an intermediary, like a wholesaler, that brings your product to the market as well
You might be thinking, what’s new here? As Kelly points out, a couple of things. While a direct relationship with your customer was a default in the old times, the industrial model of retailing in the last 100 years has meant produces, creators and artists did not have direct contact with the people who supported them.
In fact, the organizations who represented the creators often didn’t know the customers either. If Dan Murphies stocks your wine, say, they probably don’t know the people who buy your bottles. Given they reduced your margins too, these intermediaries were the reason you needed a lot of customers or fans.
Since the internet, though, we have had a means to directly connect with those we aim to serve. We have direct communication channels and direct payment systems. A creator in Perth, Western Australia, can connect with a potential customer (or fan) in country New South Wales, or even in India. In fact, he can connect even faster and more directly than a big organization selling on her behalf.
The new ability for a creator or producer to retain full price is revolutionary, says Kelly. But there’s a knock-on phenomenon that amplifies the power. When you have peer-to-peer communication online, the monoculture — where everyone buys, listens, and watches the same things — breaks down. We begin breaking out into little groups.
Here’s an analogy. In a small city, there is a Central Business District (CBD), the hub of the city. Everyone, even the folk on the fringes, travels into the CBD every day. But in a metropolis, you start to see independent hubs forming around the original CBD. So you will have an arts hub where the artists live, an Italian hub where Italians live, a business hub.
In the online world, we break away from all buying from Dan Murphies. Instead, we begin forming hubs—like the natural wine phenomenon—that independently operate outside the dominant system.
In other words, the market used to reward people who created products for the masses. Now, the market rewards the people who go to the unmet needs of niche groups on the fringes.
The good news is big companies aren’t structurally equipped to find these niche groups. But we are. We are small, nimble, and on the ground, listening to the problems of people who value what we value. We can create something unique and amazing just for them.
Applying 1,000 true fans to Jeremy
Jeremy likes Asian food. His wines pair perfectly with the cuisine too, so he began posting photos on Instagram of meals paired with glasses of wine. He did so regularly, for fun, but over time he amassed a small following.
The following inspired him to share more. He began a newsletter detailing knowledge, expertise, and the behind-the-scenes in the viticultural and wine-making process.
People began to take notice with each post, drip by drip. He wasn’t for everyone, but there were a select few who resonated with his philosophy, his approach, and, of course, his wine. They trusted him.
So when Jeremy announced he might do a wine club, hundred replied saying, “Yes, please.” Given he could talk to his true fans, he didn’t ruminate for days about what he’d include in the Wine Club packages and how much the membership would cost. He simply asked his fans what they already wanted.
How many cases a year?
Would you like a wine and food masterclass too?
Would you like help make the wine too and get your names on the bottles?
Eventually, Jeremy priced Wine Club at $100 a quarter and, for that, you got an exceptional deal. Moreover, you could make wine with the winemaker. Often, customers who went through the process said they had no idea how much skill and effort went into the process. They had a new appreciation for Jeremy’s wines and, in turn, became loyal advocates.
Over a few years, 500 people joined Wine Club. $400 x 500=$200,000. Also, his margins tripled. So he could keep his wine at affordable prices, provide exceptional value and turn a higher profit.
Sure, Wine Club was a lot of work in the beginning, but he streamlined the process and, now he had guaranteed buyers, he could afford people to help him. And the best part? The demand for his wine went up, so his allocations for his wholesaler (and in turn the wineries and bars) were scarce.
*Wine stores and venues love telling customers there was a small allocation and they got most of it.
Ultimately, Jeremy had shifted the power dynamic. Before, he was at the behest of a handful of intermediaries. They were the means by which Jeremy could reach the market. Now he had a relationship with those he aimed to serve, he could call the shots.
Now he could make wine he cares about, for people who appreciate him back, and make a pretty penny at the same time.