Are you developing a new product right now that you’re planning to launch on the market soon? If so, you will probably need answers to the following questions. This is part 2, where we cover questions 5 to 9. (Click here to read part 1).
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5. What is the product’s production cost?
For new, custom-made products, there is a distinction to be made between the one-off investment pre-production, and the production cost per unit in the factory.
There is usually an initial investment to get to market made up of quite a few NRE (non-recurring engineering) costs that you need to take into account as they all go into the ‘production cost,’ such as:
- Mechanical design
- Software design
- Industrial design
- Prototype testing
- Tooling fabrication
- Developing quality standards
- Selecting and qualifying component and assembly suppliers
- Designing the packaging
These activities and the investment to do them multiply depending on your production volumes, but they’re necessary in order to get to market with the best-expected quality and fewest risks. It follows that products that have had a larger investment during development, need to be sold at a higher profit margin to create ROI.
Aside from the initial investment, production costs include whatever is needed for production to be ongoing and are often calculated as unit costs. They include:
- BOM costs (components, materials, packaging, instruction manual, tools, etc) – can make up a large percentage of the cost out of the factory and this increases for more complex products (electronics maybe 80%+, cars 90%)
- Labor costs, assembly, checking, packaging
- The factory’s profit margin
- Rework and scrap from testing, mistakes, etc
All of these costs together make up the ‘cost of goods sold’ or ‘ex-factory cost.’ But then you also have to account for import duties, tariffs, etc, and the logistics costs to move the products from factory to destination, as well as storage, and distribution costs. These give you your ‘landed cost’ per unit.
Finally, you have the costs associated with customer support, warranties, return handling, etc.
Altogether, these equal your ‘total cost.’
Injection mold tooling, for example, is between the two categories. The cost must be amortized during its lifetime and included in the product unit cost, so it’s an investment, but also an ongoing cost depending on the volume of pieces you make, as more than one set of molds may be required.
You won’t be able to start calculating production costs if you only have a product concept. You at least need to have a list of the key and most costly components in the BOM to make a rough estimate during the feasibility study phase. Experienced buyers will do value engineering to try to assess how to reach the value in the eyes of the customer to sustain the price they want to produce and then sell the product for, while actually spending less on production by adjusting some of the above activities and inputs.
When buying off-the-shelf products from manufacturers you might also do a reverse calculation of the production cost by tearing down the products and examining how they’re made and with which components. The goal here will be to understand what the manufacturer’s costs are so you can negotiate a better cost which is realistic for all parties to still have a profitable relationship (as pushing manufacturers too hard on price can lead to them cutting corners on quality, skipping testing, using unauthorised cheaper components, and other unwelcome actions to improve their profit margin). (01:07)
6. What’s the pricing strategy for the product?
The pricing strategy stems from your business strategy. If you’re selling a very unique product which is revolutionary and nothing else exists that does what it does, then it will be possible to charge more if you have a pool of interested consumers. However, some businesses choose to simplify existing products and then sell them at a lower price point than their more complex competitors.
Before deciding how to price the product you need to analyze the market and find a suitable niche and/or features that the market seems to crave, these factors will then probably influence the product design and almost certainly your final pricing. It can’t be done by guesswork and gut feelings. The pricing strategy needs to be informed by the real-life market conditions you find during your research.
You may choose to launch a more generic off-the-shelf product, maybe with just a few small changes to cater to a niche, in order to test the market and get a feel for what is and what is not required and also the right sort of pricing. Profits can then be sunk into a more customized V2.0 or 3.0 product that has a more specific appeal to the niche and can, hopefully, be sold at a higher profit margin. (19:24)
7. What is the distribution strategy?
You should know who your target customers are as a part of your business strategy, and this includes where they are. Consider the channels required to reach your target demographics, for example, customers in their 20s will be comfortable with TickTok and Instagram. For many products, it’s possible to sell online and then deliver from a central distribution warehouse or use shopping platforms (especially if drop shipping). However, if customers are older and maybe in more rural areas, they’re going to need you to provide physical products in local stores. So your distribution strategy will be shaped by the market research you did at an early stage.
A warning, selling on platforms like Amazon needs caution. They take a decent margin which you need to take into account when considering your financials and Amazon customers will return products much more often than those that buy directly from you. They also punish vendors with poor reviews and you might end up having your store closed if your reviews drop below a certain level due to, say, a product that proves to be unreliable, poor quality, or unsafe, so for this reason, it’s better not to put all of your eggs in that one basket. It may be better to sell your first products through your own e-commerce website and, when you’re satisfied that any issues with the product have been fixed and there is a good demand, later set up an Amazon store. (28:59)
8. What will the timeline for developing and launching the product be?
A product concept is not enough to estimate a timeline. Start by creating a product requirement document, including a brief and what the product will look like. This will force the buyer to answer a lot of questions about the product, especially if the industrial design is done at the same time as it often is. Using this information, it’s possible to roughly estimate timelines all the way to the start of mass production. However, the new product introduction process is complex and there are many opportunities for your rough estimate to be delayed, so it can’t be set in stone at first with your retailers, for example. You need to plan for a lot of extra time, as the following can all cause delays.
All of these activities take time and may take longer than expected, so planning ahead is a must:
- Making a proof of concept prototype
- Designing key items like the PCB
- Iterations of prototypes to find and fix issues
- Product testing could result in long delays if a serious compliance or safety problem is found that then needs to be fixed in a redesign
- Design and fabrication of custom tooling
- Pilot runs
- Ordering the materials and components for assembly and waiting for their delivery
- Inspecting the products
- Packing and shipping the products
How to speed up the entire process and shorten the timeline of getting to market?
- Simplifying your product (by using pre-certified and/or standard off-the-shelf parts and modules or removing some features) can help a lot.
- Working with the right manufacturer with the experience and manpower who doesn’t overpromise and underdeliver, for example, is also critical.
- Being more hands-on and having the right people on your team to move the project on is also helpful.
However, it is risky to skip important steps to speed things up, such as reliability or compliance testing, because if they do come back with a fail it might add months to your timeline at a late stage as these issues will need to be fixed. (37:52)
9. What are the risks of launching this product?
There are many risks to take into account. Here are some examples:
- A key supplier shuts down
- The demand for your product doesn’t materialize as expected
- Your product is quickly counterfeited and sold in competition against you at a lower price
- Not planning well, such as selecting an unsuitable supplier
- Not signing the required legal agreements with suppliers who then take advantage of you, refuse to hand over deliverables like designs, keep your supply chain from you, etc
- Excessively relying on a chosen supplier without knowing who is in your supply chain, means that if things go wrong you’re left without the information to restart elsewhere (48:46)