Marc, first of all thank you for the great article! I'm in the process of starting a company that will be offering a hardware/software (electronics) solution via the web only initially. Like you I have limited experience with hardware products...my technical experience is in software....This article was both very helpful and timely for me. A couple of questions for you:
- Are there any other sources (e.g., articles/books/websites) that you found particularly usefully in starting and managing your business. I'm looking for the "cheat sheet"/Guideline type of information that you provided in your articles. Any books planned in the immediate future?
- (A specific question) I'm trying to roughly estimate the cost of packaging for my product. I know it is a "it depends" answer but are there any guidelines that you can offer for a electronics type of product for on the web sale (not Retail)....Or any sources I could use to get estimates/quotes...(BTW... I also read you article "The Real Cost to Bring Your Hardware Product to Retail").
- Did you tap into any organizations (Entrepreneurial organizations) that gave you good guidance or assistance for your startup? Any suggestions?
Thanks in advance,
Calculating Defective Cost in the section "Know Your Costs," the value $1.50 doesn't include the cost to repair the defective unit. If you don't repair to resell defective units, you'd have to add an additional $8.49 to your Defective Costs. How do you estimate your cost to repair?
The way I calculated the $8.49:
($50 per unit + $5 shipping + $1.60 support services) * 1000 units manufactured * 15% defective units / actual units sold hopefully 1000 units = $8.49
Thank you for this great article. I am prototyping sensors+arduino that will talk to iOS devices over BlueTooth LE. Getting the prototype parts are easy.
I would like to learn how to best design the hw to minimize cost and what suppliers I should use to obtain best prices at low quantities (say 1,000 a month). While I might outsource this, I have done similar outsourcing for software (mostly design and packaging) and found without some "hands on knowledge" on what steps are involved. what the skill set is and what components are involved I have used poor picks for companies and ultimately been overcharged.
It is like getting my car fixed. If I know more about how the car works and what is involved, I can find the best mechanics at the best price.
I'd like to make a run of 1,000 myself just to "see how it is done" then see how "experts" would improve.
Thank you very much.
Great post! In my experience we always start with a rough 4-5x landed cost when looking at bringing a product to market. Sometimes, prior to too much development, you can determine early on that your market/pricing research will be impossible to meet with manufacturing costs.
Here's a question... why the 50% profit margin? Why not 100%, or 25%? My personal conclusion was always that it was a rule of thumb, based on the historical record of what successful business have done. Obviously if your volume goes through the roof, you can cut profit margin, drive costs down, and still be in business (or you could not cut costs and just make more $$$ :-)). What's your take on that? I've never heard a good explanation of any math or logic for why it's 50%.
@maladeeb Cost to repair depends on how you repair them. Your supplier may just provide replacement units (my assumption in this model), charge you a repair fee if the defect isn't their fault, or work with you to hire a local company that can repair them. The goal was to provide some numbers and ranges to make sure you are thinking about defective units when you price your product. It's easy to miss and can get expensive.
@sketchy I agree with your assertion that the more you know the better a job of outsourcing you can do. The thing in hardware is that (unlike in software outsourcing) the best (most skilled, reputable, high quality, etc) don't typically want to do small batch because the business model for manufacturing (again unlike in software) is based on the quantity of the thing sold. More recently there are outfits that are geared towards small(er) batch production of consumer electronics. Seeed Studio who we've written about before is one such, and I've heard of firms in the states that do that as well. The answer is "it depends". Depending on what you're making there might be fixed costs. Another thing to know is that designs you make in a prototyping kit would need to be redesigned for manufacturability..so there's some cost in that engineering work.
@justinknowles totally. You usually find the price you want to start with takes a long time to get to, especially before you reach volume.
@AwkwardEngineer It did originate from keystone, but also if you study companies with physical products, 50% gross margin is a number that works to make sure the company is profitable. As the cost comes down to reach new customers (ie your sales/marketing costs) and as organizations get more efficient (ie you need less people), companies will be able to live on less margin.
But rule of thumb, 50% gross margins leaves enough room to make mistakes and not tank the company.
Also, keep in mind companies will vary what expenses they put in gross margin to improve or alter the number. I prefer to put all costs to reach a customer and make your product.
@AwkwardEngineer This originates from the keystone pricing strategy (double cost is your selling price) that has been commonplace in retail for a very long time. I'm not sure where keystone pricing originated so perhaps I'm not even answering the question!
@marcbarros Thanks for the response. Do you have another article or insight about how you got the parts to make a prototype?