Pricing and perceived value versus manufacturing costs can help determine if you make money
As a general rule, a product needs to be manufactured for 25 percent of its expected price to consumers to make money.
BY DON DEBELAK
A key evaluation step—one overlooked surprisingly often by inventors—is to answer the question: “Can the product make money?”
Pricing and perceived value versus manufacturing costs is a key issue.
Inventors often have at least some idea of what customers will pay for a product, based upon what competitive products cost. But they typically don’t know how to estimate manufacturing costs.
Manufacturing cost formula
As a general rule, a product needs to be manufactured for 25 percent of its expected price to consumers to make money. This is due to distribution and selling costs. That means that your manufacturing costs must be less than 50 cents if your product’s retail price is $2.
What makes this process difficult is that the 50-cent cost is for large-scale production.
Because inventors are always starting small—sometimes,
they only have a prototype—their costs will be high or even very high because they don’t have the volume to generate a lower price and their costs will almost never meet the 25 percent threshold.
Inventors should have a variety of ways to estimate what a full-volume cost will be. Because a product cost includes both manufacturing costs and packaging costs, you need to estimate both.
Steps and considerations
The easiest way to estimate costs is to find products with very
similar construction and packaging to yours. You might have to use two different products or even in different industries—one for construction and one for packaging.
So if your product is made of high-impact plastic and holds garden tools and is 24 inches high by 24 inches wide by 18 inches deep with 12 slots for garden tools, you would look for another product made of high-impact plastic parts with similar complexity.
Then get costs on that product, as well as yours, for small-volume production. You can use the percentage difference in those prices to determine your expected costs.
Other considerations:
Establish your product’s cost in large runs. Use the retail price of the product and multiply it by 25 percent (0.25). That price should be close to the manufacturing price, because most products in retail sell for four to six times their manufacturing cost.
Your price will not be the same as the comparable product. Get quotes from manufacturers for both your product and for the comparable product.
Figure out how the comparable product is made. If you
don’t know, you can contact SCORE, which will meet with you at no cost. You can find the closest SCORE office at score.org.
Once you know the process your product will follow, you need to locate manufacturers that can bid on producing 1,000 and 5,000 units. You can find these manufacturers by asking industry contacts; checking the Yellow Pages or in a business-to-business phone book; looking in industrial directories, available in larger libraries; or the Thomas Register of American Manufacturers (thomasnet.com), which has a fairly complete list of manufacturers listed by categories and state.
When you have a quote for both your product and the comparable product, you can see what the difference is.
Let’s say the quote for your product is 25 percent higher than the comparable product. Then your product’s cost for high-volume production will be the cost of the comparable product you obtained earlier, multiplied by 1.25, or 125 percent.