Real World ofReal World ofProduct DevelopmentProduct Development

Realistic Cost and Price Realistic Cost and Price for your Productfor your Product

Bob Barton – 12/08/2011Bob Barton – 12/08/2011

Background: Background:

PowerSURE CorporationPowerSURE Corporation• Started with a couple of PatentsStarted with a couple of Patents

Idea from the 80’s – not feasible thenIdea from the 80’s – not feasible then Technology to the RescueTechnology to the Rescue

• Long Road to [moderate] SuccessLong Road to [moderate] Success First Licensing deal = Royalty IncomeFirst Licensing deal = Royalty Income Search for more Licensees Search for more Licensees

• Looking for Manufacturing PartnerLooking for Manufacturing Partner• Looking for InvestorsLooking for Investors

Today’s Discussion:Today’s Discussion: Journey: From Idea to Product MarketJourney: From Idea to Product Market

• Idea -> Product Concept (cost < important)Idea -> Product Concept (cost < important) Idea: Does Anyone Want it or Idea: Does Anyone Want it or NEEDNEED it? it? Feasibility – Can you do it & does it work?Feasibility – Can you do it & does it work? Does product design make sense?Does product design make sense?

• IS IT PATENTABLE?IS IT PATENTABLE? Do a search: http://patft.uspto.gov/Do a search: http://patft.uspto.gov/

• Market AnalysisMarket Analysis What What PricePrice will the Market Bear? will the Market Bear?

• Price Sensitivity AnalysisPrice Sensitivity Analysis Determine your Determine your CostCost Target (depends) Target (depends)

• Which Channels (How product gets to consumers)Which Channels (How product gets to consumers) Retail, Wholesale, Resellers (own channels)Retail, Wholesale, Resellers (own channels) Different Distribution Structures Different Distribution Structures

• Pricing can depend on Volumes Pricing can depend on Volumes Price “Tiers” or Volume Discounting breakpoints.Price “Tiers” or Volume Discounting breakpoints.

Cost Reduction ProjectsCost Reduction Projects• Often done after product is launchedOften done after product is launched• Sometimes during last phase of developmentSometimes during last phase of development

Distribution ChannelsDistribution Channels

Distributors buy at Factory Selling PriceDistributors buy at Factory Selling Price• Your Factory selling price includes your MARGINYour Factory selling price includes your MARGIN

Independent Sales RepsIndependent Sales Reps• Commission on Sales to DistributorsCommission on Sales to Distributors

Trades/Service ResellersTrades/Service Resellers• Often Sell above MSRP Often Sell above MSRP • Buy at “Wholesale” from DistributorsBuy at “Wholesale” from Distributors• Markup to what their Customers will BearMarkup to what their Customers will Bear

(Gives them room for profit)(Gives them room for profit)

Retail Channel Retail Channel

Usually not Direct to the StoreUsually not Direct to the Store• Through retail distributors (%)Through retail distributors (%)

Retailers Retailers buybuy at “markdown” price at “markdown” price• Calculate from target Retail priceCalculate from target Retail price• Then sell at MSRP or “sale price”Then sell at MSRP or “sale price”

Examples:Examples:• Costco (clubs) require 18% - 20%Costco (clubs) require 18% - 20%• Home Depot closer to 50%Home Depot closer to 50%

OEM Resellers: 20%-40%OEM Resellers: 20%-40%• ““Private label” your productPrivate label” your product

MARGINSMARGINS Yours (Selling Price – Cost)Yours (Selling Price – Cost)

• (your profit is in here…)(your profit is in here…)• and you need a salary! (part of overhead)and you need a salary! (part of overhead)

Contract Manufacturers Add theirsContract Manufacturers Add theirs• BOM + profit (~25%-30%) = Your CostBOM + profit (~25%-30%) = Your Cost

Distributor needs to eat…Distributor needs to eat…• Your factory Price can be tieredYour factory Price can be tiered

Silver, Gold, Platinum, etc.Silver, Gold, Platinum, etc. Based on volumes, loyalty, region, more…Based on volumes, loyalty, region, more…

Bottom Line: Aim for 45% MarginBottom Line: Aim for 45% Margin• Pays for Marketing, Sales, Salaries (yours)Pays for Marketing, Sales, Salaries (yours)

Example Cost StructureExample Cost Structure BOM Cost (parts)BOM Cost (parts) =$3.50 =$3.50 Manufacturer (+25%) FOB Manufacturer (+25%) FOB =$4.40 =$4.40 Shipping to Warehouse (+6%) =$4.64Shipping to Warehouse (+6%) =$4.64

• (depends on how many fit in container/truck)(depends on how many fit in container/truck) Warehouse Warehouse (+5%)=(+5%)= Landed Cost =$4.85 Landed Cost =$4.85 YOUR MARGIN depends on Factory PriceYOUR MARGIN depends on Factory Price

• (1-.45)*selling price = $4.85(1-.45)*selling price = $4.85• 4.85/(1-.45) = 4.85/(1-.45) = $8.82$8.82 = Factory Selling Price = Factory Selling Price • Check: Profit=$3.97 / $8.82 = 45% marginCheck: Profit=$3.97 / $8.82 = 45% margin

!! Can it SUSTAIN your Operations?!!! Can it SUSTAIN your Operations?!• Need Cash Flow to stay in businessNeed Cash Flow to stay in business• Profit buys more production, pays salaries, etc.Profit buys more production, pays salaries, etc.

Retail should be 4x – 5X your costRetail should be 4x – 5X your cost

Example Cost/Price AnalysisExample Cost/Price Analysis

$20 Target work backwards At 25% Markdown, Contractor price must be $15 3 Different levels of Distributors sold to by Sales Reps

Sales Reps get 10% Your selling price plus Sales Mgr Comm. = Factory Invoice

You net $9.03, $10.32. $11.16 at 45%, 52% and 57% Margins

Calculate Average Margin by proportion of each to plat, gold, non-stock

Premise: You determined Market will pay $20 for your Product

Retail Contractor Wholesale

Rep Comm

Factory Price

Sales Mgr Comm

Net Margin

(25%) NoStok(10%) Gold(20%) Plat (30%) (10%) (10%) (4%) ($5 Cost)$10.50 $1.05 $9.45 $0.42 $9.03 45%

$1.20 $10.80 $0.48 $10.32 52%$1.35 $12.15 $0.54 $11.61 57%

Distributor

$20.00 $15.00$13.50

$12.00

Startup Cost (Investment)Startup Cost (Investment)

Standard Efforts:Standard Efforts:• Ind. Design & Mech. EngineeringInd. Design & Mech. Engineering• Models, Prototypes, Redesign, etc.Models, Prototypes, Redesign, etc.• Market Testing/pre-Selling ActivitiesMarket Testing/pre-Selling Activities

Travel, Trade Shows, meetingsTravel, Trade Shows, meetings

• Manufacturing Drawing PackageManufacturing Drawing Package• Manufacturing Tooling (Plastics, Metal) Manufacturing Tooling (Plastics, Metal) • Safety Tests (if applicable) Safety Tests (if applicable) • First production runsFirst production runs

Your Project ApproachYour Project Approach This Term Project = “Product Concept”This Term Project = “Product Concept”

• Feasibility, Best Mode, Get it to work.Feasibility, Best Mode, Get it to work. Estimate your BOM Cost Estimate your BOM Cost

• Use ‘Reel prices’ / Quantity 10,000Use ‘Reel prices’ / Quantity 10,000 (Surprising markup from resellers like DigiKey & Mouser)(Surprising markup from resellers like DigiKey & Mouser)

Think “How do I make a living”Think “How do I make a living”• Or: How do Investors make a return on their investmentOr: How do Investors make a return on their investment

Choose Your Operational ModelChoose Your Operational Model• ““Garage Model”Garage Model”

Buy parts at marked up prices, build then packageBuy parts at marked up prices, build then package Work at home - Sell through eBay, Makerfaire, kickstarter, etc.Work at home - Sell through eBay, Makerfaire, kickstarter, etc.

• Be an OEM Be an OEM Contract Manufacturer makes it for youContract Manufacturer makes it for you Include FOB and shipping costs when figuring Landed CostInclude FOB and shipping costs when figuring Landed Cost Fulfill from WarehouseFulfill from Warehouse

SummarySummary Selling Price covers all your costs Selling Price covers all your costs

• PlusPlus Salaries - Salaries - PlusPlus Expenses Expenses Need Profit to Sustain and GrowNeed Profit to Sustain and Grow Cost is not simply:Cost is not simply:

• Buying Parts from Reseller (digikey), Buying Parts from Reseller (digikey), Building and Selling Product at 2x cost of partsBuilding and Selling Product at 2x cost of parts

• Your Time is Money so PAY yourself equitable wage!Your Time is Money so PAY yourself equitable wage! How many can you make per day?How many can you make per day?

Multiple Pricing Levels are OKMultiple Pricing Levels are OK Selling Direct = No Chain Stores LikelySelling Direct = No Chain Stores Likely

• Doesn’t Scale Easily (Lots of Small Stores)Doesn’t Scale Easily (Lots of Small Stores)• Big Store Chains = Large VolumesBig Store Chains = Large Volumes• Volume Requires Distribution PartnersVolume Requires Distribution Partners

(Need to add in their commissions)(Need to add in their commissions)

LIGHT READINGLIGHT READING Bringing Your Product to MarketBringing Your Product to Market

• Don DebelakDon Debelak Made to StickMade to Stick

• Chip Heath & Dan HeathChip Heath & Dan Heath How to License Your Million Dollar IdeaHow to License Your Million Dollar Idea

• Harvey ReeseHarvey Reese Poorly Made in China: Poorly Made in China:

• An Insider's Account of the Tactics Behind China's Production Game An Insider's Account of the Tactics Behind China's Production Game

• Paul MidlerPaul Midler The Origin of Brands: The Origin of Brands:

• Discover the Natural Laws of Product Innovation and Business SurvivalDiscover the Natural Laws of Product Innovation and Business Survival• Al Ries and Laura RiesAl Ries and Laura Ries

The Tipping PointThe Tipping Point• Malcolm GladwellMalcolm Gladwell

Questions?Questions?