OT: Conventional Wisdom - Product Pricing

Our thinking is that, for niche-ey products that sell in the 10s or

100s per year, selling price has to be at least 3x direct cost, where DC is parts cost plus direct assembly/test cost. 6x is better, 2x is probably lethal.

Don't do that. Make customers, especially foreign customers, pay up front, or by irrevocable LC, unless they have established credit.

There is the classic Econ101 inverted parabola of profit versus selling price. Turns out that most small businesses price below the peak, out of ignorance of the actual curve, and fear of not getting sales.

3x minimum.

Right. Price it as such. If you quote people and they don't buy, that's a hint that your pricing may be high. Call them and ask.

John

Send me an RFQ: richgrise at yahoo etc. and I'll forward it to the boss; ask for both a piece part machined rate, and for die inserts. I'll forward it to our quote department.

Cheers! Rich

Protomold and others do their thing by using (a) 3-D printers in small to medium quantity, (b) use a plastic (instead of metal) injection mold for medium quantities (ie: before mold dies), or (c) a rubber mold for casting in small quantites.

Check; communication is your friend.

$80k is a lot of tooling. I get tools done in India or China and the cost is rarely more than $10k. There can be some back and forth sorting out niggles but the savings can make a project work.

Of course you need to find someone reliable.

Yes, I think that is generally true. Lots of people try to do for less, but the hidden costs tire them out over time and they end up abandoning the product. Buyers know this instinctively and will tend to avoid buying products like that if there is any commitment involved. Depends what you call your "production costs" include, and the business. If you can double your actual fully overheaded costs including development, ongoing process improvements, testing and QC, reserves for machinery replacement, meeting all the various regulatory and insurance requirements, waste and stock required etc. etc....

Payment in advance will turn off some customers (I have one that insists on 60 day terms, but they are stable and I don't much mind). Collecting money via CC or Paypal (so they have some protection in case you don't ship-- a big deal in many companies) will eat a few percent, but maybe less than the bad debts.

I don't see any reason not to test the concept by pricing as if you had proper tooling even though the real cost is likely much higher, OR pricing it as a niche product (provided you're not just going to end up educating a competitor with in house or offshore tooling capabilities), but your overheads WILL be much higher than you expect, and you want to be making enough that when customer or market-driven changes or improvements are required or new markets beckon you can aggressively take advantage, not worry about how many years it will take to get your money back. But either move to tooling or abandon the product (or raise prices by 2:1 to get reasonable profits) if it doesn't pan out.

One thing I would NOT do is base a business on cutting corners in any way on regulatory compliance or insurance. IOW, if the product needs approvals, budget on getting them. Sounds like you're not planning on doing that anyhow.

IMHO, it is a recipe for failure. I could be wrong... perhaps it leverages things you have already running, but EVERYTHING in business costs more money and takes more time than you expect (even when you take that rule into effect). Even just shipping stuff in varying quantities can burn a lot of man hours until you BUY various size boxes and packing materials ($$ tied up for).

That's an advantage, depending on the state of that setup. If it's running now, you could leverage off that (but would it lower the profit/revenue of that business?).

Could you consider the $10-15K as a development/market test? And then when you do have 150K/year sales, go buy the tooling? Or buy the CNC machines and continue machining the parts?

Well, only if you want to make money. Otherwise you can apply market gap analysis and find many other products that are very profitable AND niche, so the unprofitable niches get left alone. Sometimes the cost of sales is low (add-on item, perhaps) so you can do for a bit less. But a stand-alone item always is expensive to deal with.

I thought you said you had a really unique idea? Are there other ways of solving the problem at similar cost that you don't have control over? That would make me nervous to invest much time or money.

Also, be careful about offshore tooling, the prices may look attractive, but they typically end up effectively owning and possessing your tooling, regardless of what they may tell you that you're paying NRE for. Some will sell the stuff out the back door and most will show or offer the parts to every overseas buyer who walks through the door.

Best regards, Spehro Pefhany

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"it's the network..."                          "The Journey is the reward"
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You say niche, but from your projected profit it sounds like you expect reasonable volume.

How many units a year are you predicting?

Nial

I once worked for a fairly smart fellow who started up a small manufacturing company in a corner of someone else's shop and quickly grew it to around 100 employees before deciding it was big enough to stop growing, sticking to custom designs with no standard products and referring 90% of potential customers to other manufacturers where there existed a standard product which would do the job. His 51% share of the profits (other 49% owned by employees) was around a million a year in

1980 dollars for about 40 years (on top of his salary), by pricing all products for 10% profit after all costs including all overhead and financing costs. I don't see how you can price any product without considering *all* costs, not just production costs.

Glen

10% profit, fully burdened, is great. But for nichey electronics products, that works out to be 3x or so over direct manufacturing cost.

The dicey part is figuring how many units to amortize your engineering/accounting/equipmant costs over.

John

It's also possible to buy only mold inserts for "MUD" molds, which can reduce the costs since there's no die set to buy. It's a complex calculus though, as it affects your ability to choose who will run the mold. For only 50,000 pieces a year, unless there is some critical accuracy requirement, an SPI class 103 mold will suffice.

FINALLY, I can now reply to this thread. For some unknown reason, Google Groups was not showing many recent SED topics.

A big thanks to everyone who has offered their advice on this question. Thank you!! I'm still undecided about which way to go, but the extra input really helps.

The product in question has no regulatory approval or similar concern (that I know of). I decided to send a few samples to two very LARGE identified prospective customers, and as expected, the initial comments are very positive. The part really does solve a very complex, and otherwise-hard-to-solve problem.

The next question will be one of price sensitivity (which is code for initial order volume), and we're to take up that question next week. I can already say with some confidance that they will not like payment- up-front, nor will they like any of the alternatives. So, I guess this is going to boil down to a sales job and negotiation, and how badly they might want this solution.

I also sent samples to one of the larger distributors for that industry (initially, with the intent of perhaps seeing if they could market it at the higher price). Somewhat surprisingly, they've expressed a desire to buy the design. So, I guess that's Plan-B - but I'm sure it would end up being a lot less money. No hassle,... but less money.

But I have to say, my "gut" tells me this venture would work at 2x. There would be no (or very little room for) quantity discounts, and folks would have to pre-pay. But we're not talking very many customers. Maybe 25 to 40 tops, and they'd all be big players.

Rich, I'll send drawings along shortly -- I'm just not to the point of fine- tuning a mold cost just yet. Even if it were half the number I already have (from a local shop), it would not much change my options.... I just need to find out if pre-pay is a deal killer, and get initial order numbers from some of the big players. Either that, or just sell out. No point in letting the venture die on the vine...

Thanks again everyone, including some private email's received!!

-mpm

Which Rich? If you mean me, my real email is richgrise at yahoo dot com.

We're talking die inserts, right? Disappearing mandrels optional at extra cost. ;-)

I have no idea how to negotiate price, but I have a lot of experience at underbidding and starving. ;-)

If you've got a buyer with cash in hand, take it!

Have Fun! Rich

Throwing a slightly off the wall idea here. Haven't re-read the thread = so this may have been mentioned before; just the same, the prices are dropping like crazy. Have the cases 3-d printed. Plenty of (company) demos on youtube.

?-)

Sounds scary.

Product success can kill a company. Here's why. Everything costs money. If you do the work of 12 people, you need to expect to be paid

12 salaries. One mistake people make is to try to do everything and cut the margin to the bone. The product is successful and you need to hire another person. OOPS!!!! Can't afford that person. Price is established in the market, you're screwed. If the product can't succeed on "normal margins" OR BETTER for niche products, rethink it.

I attended meetings of a local entrepreneur's group here in PDX. Only one person ever made any money. The rest had war stories about how they almost succeeded. Reasons were varied, but poor planning and bad assumptions were recurrent themes.

The guy who made the money did it on an extruded pencil holder that clips on an auto sun visor. Was an advertising giveaway. He succeeded for several reasons. Few high volume customers. The person using the device was not the one paying the tab. Read that again, it's key... The person using the device was not the one paying the tab. That ranks right up there with, "I own the patent for catalytic converters and the government requires every car to have one."

It had value to the advertiser. Cost the user zero. Nobody had to sell ANYTHING to the user. He had them extruded by the zillion in China and drop shipped to the printer where they met the advertising copy. He raked in 2-cents per...times a gazillion.

I think that in most cases, patents are useless to the little guy. A patent is a license to go bankrupt trying to defend it. Assume that anything you do that's successful will be taken away by someone else. Of course, there are many exceptions. And we all think we're the exception. Rethink that.

Having a running business to share the overhead is a plus.

But, The clue is here:

The one-man-show numbers aren't "working", they're being ignored.

For eBay sales, we strongly recommend a 30:1 SBR.

Going below 29.998:1 or so is unthinkable.

< >

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Many thanks,

Don Lancaster                          voice phone: (928)428-4073
Synergetics   3860 West First Street   Box 809 Thatcher, AZ 85552
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Please visit my GURU's LAIR web site at http://www.tinaja.com

If that person does work (manufacturing, purchasing, testing, admin, handling sales, PCB layout, hacking C or VHDL) that frees you up to conceive and design more products, you can come out way ahead.

John

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Understood. Completely!! (Thanks.)

Here's how I envision it: Probably not more than 20 customers -- all big, near zero credit risk, but of course, not convinced the product can be priced other than cash up front. The jury is out on that one...

Me: Sales (not inconsequential, but the targeted likely buyers are known, pinpointed, and many of them I've already worked with on other projects). Order received. Payment received Call to local machine shop, they make parts, I pack and ship. Next order.

That's honestly about it. Now, an injection mold adds complexity, and maybe I just say "forget it"..., but I guess to answer that, I need to hear that jury verdict. If they're "OK" with payment-up-front, no quantity discount, and can schedule their own inventory needs, I think it will work. But as many point out, there are landmines everywhere, which, in part, explains my post here, and the reality that I'm not already having the parts fabbed. (Regardless of mnfg technology used.)

-mpm

It's easier to go one way than the other, and some folks won't bite if they think it's a come-on price.

Start high (but fair in terms of value to the customer) and go lower or abandon the project- that would be my advice.

Just the act of buying and selling a product made by someone else can eat up 40, 50, even 70% of the selling price (cheap stuff with multiple levels). Here's a price sheet from a gauge company:

So a $40 part yields the manufacturer $18. This is not unusual.

Best regards, Spehro Pefhany

--
"it's the network..."                          "The Journey is the reward"
speff@interlog.com             Info for manufacturers: http://www.trexon.com
Embedded software/hardware/analog  Info for designers:  http://www.speff.com

• Not if handled correctly; initial ad should clearly state "introductory price" which is meaningless but allows one to adjust the price up or down..