Transcript Document
Product to Market: The Real World Realistic Cost and Price for your Product Bob Barton – Apr. 2014 Background: PowerSURE Corporation • Started with a couple of Patents Idea from the 80’s – not feasible then Technology to the Rescue • Long Road to [moderate] Success First Licensing deal = Royalty Income Search for more Licensees • Current: In License Talks (on-going) Today’s Discussion: The Journey From Idea to Product Market • Idea -> Product Concept stage (Concept Stage cost not so important) Idea: Does Anyone Want it or NEED it? • Why? Who (specifically!) Feasibility – Can you make it & does it work? • Cost more important Does product design make sense for target consumer? • IS IT PATENTABLE? Do a search: http://patft.uspto.gov/ or http://patents.google.com Is it NOVEL (apparatus or method) Is Your Idea a Product? Product Concept meets requirements of assignment But is it commercially feasible? • Know WHO wants it or needs it – how many do? And WHY (understand want vs. need) • HOW do they acquire it? Buy (wholesale/retail), lease, license, prescribed, bought for them, etc… • WHEN do they acquire it? How often? WHAT’s in it for them if they do? • (benefits – not features) • WHERE will they buy it (specialty shop, big retailer, distributor) How do you (or investors) make money? • Cost, Margin, Profit What’s your “Go to Market” plan? • Understand your product’s “path” to consumer • Manufacturer -> warehouse -> shipping/freight • Wholesale vs. Retail channels Product Market Viability • Market Analysis How big [$$] is the Market (initial vs. longer term) What Price will the Market Bear? Setting your Manufacturer’s Recommended Retail Price • Price Sensitivity Analysis (Van Westendorp method) Cheap, Inexpensive, Expensive, Too expensive Who is PAYING YOU vs. who is benefiting? • (wholesaler vs. retailer – value proposition) Determine your Cost vs. Selling Price • Which Channels (How product gets to consumers) Retail, Wholesale, Resellers (have their own channels) Different Distribution Structures • Pricing can depend on volumes bought Price “Tiers” or Volume Discounting breakpoints. Cost Reduction Projects (later?) • Sometimes done in final engineering before launch • Often done after product is launched to improve margins Pricing Analysis Point of Marginal Cheapness Point of Marginal Expensiveness Distribution Channels Distributors serve Wholesaler and Retailer Distributors buy at Factory Selling Price • Your Factory selling price includes your MARGIN Sales Reps: In-house or Independent • Commission on Sales to Distributors (4% - 8%) Trades/Service Resellers (i.e. bike repair) • Often Sell above MSRP • Buy at “Wholesale” from Distributors • Markup to what their Customers will bear (Gives them room for profit) Retail Channel Usually Can’t Sell Direct to Big Store • Through retail distributors (% commission) Retailers buy at “markdown” off selling price • Often calculated using target Retail price • Then sell at MSRP or “sale price” Examples: • Costco (clubs) require 18% - 20% profit • Home Depot closer to 50% profit [markdown] OEM Resellers: Different Ball Game • “Private label” your product to sell as one of their own. • Only pay 20%-40% of their selling price MARGINS Gross Margin = Selling Price – Cost • Ex: Sell for $10, cost to make = $6, GM = 40% • (your profit is in here, but based on “Variable Costs”…) • and you need a salary! (part of “Fixed Costs”) Fixed Costs: • Rent, Utilities, Salaries (recurring) • Startup costs (production molds, machinery, safety tests…) Contract Manufacturers Add their profit • BOM + profit (~25%-30%) = Your Cost to have made Distributor needs to eat… • Your factory Price can be tiered Silver, Gold, Platinum, etc. Based on volumes, loyalty, region, more… Bottom Line: Aim for 45% Margin at a minimum • • • • Pays for Marketing, Sales, Salaries (yours) Pays for future production/inventory TIP: Bigger margins are better… Cost reduction efforts improve margins Example Cost Structure BOM Cost (parts) Manufacturer (+25%) FOB Shipping to Warehouse (+5-6%) =$3.50 =$4.40 =$4.64 Warehouse (+5%)= Landed Cost =$4.85 • • (depends on how many fit in container/truck) and insurance YOUR MARGIN depends on your Factory Selling Price • (1-.45)*selling price = $4.85 • 4.85/(1-.45) = $8.82 = Minimum Factory Selling Price !! Can it SUSTAIN your Operations?! • Need Cash Flow to stay in business • Profit buys more production, pays salaries, etc. Retail target should be 4x – 5X your final landed cost • Example: $10 cost (in warehouse) = $40-$50 retail price Cost/Price Structure RETAILER Selling Price MARGIN 4X-5X COST DISTRIBUTOR Selling Price Wholesale MARGIN COST YOU Selling Price MARGIN Factory Selling Price COST (BOM + manufacturing + shipping + warehousing + fulfillment) END USERS (MSRP) Example Cost/Price Analysis Premise: You determined Market will pay $20 for your Product that costs you $5 in your warehouse. $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 Profitability Projections Break Even Analysis – usually simplistic • Typically shows total number of units sold • Usually omit: • • • Garage model: Build 1, 100, 1000? How many people to build 1, 100, 1000? How many days, nights, weekends, meals, trips • $0 /hr? 10/hr? $50? (you are college grads – right?) How much is your TIME worth? Fixed Costs: Any cost that does not change with sales • Rent/Salaries/phone/utilities/insurance • Ex: Fixed Costs = $50,000 annually Projections: Don’t omit your overhead and expenses! GM of $4/unit means 12,500 units just to cover FC REMEMBER: You can’t work for free for very long • Fixed Costs Drawings/Industrial Design/Testing/Tooling/Legal/Initial Inventory… Startup Cost, Fixed Costs Rate of production Startup Costs: • graph cost and profit/unit over time until positive cash flow crossover Not a sustainable business model Startup Cost (Investment) Standard Efforts: • • • • Ind. Design & Mech. Engineering Legal (contracts, business formation, etc) Models, Prototypes, Redesign, etc. Market Testing/pre-Selling Activities • • • • Travel, Trade Shows, meetings Manufacturing Drawing Package Manufacturing Tooling (Plastics, Metal) Safety Test approvals (if applicable) First production run transport/warehouse ALL BEFORE YOU SELL FIRST PRODUCTION UNITS Your Project Approach THIS Term Project = “Product Concept” • Feasibility, Best Mode, Get it to work in 6 weeks. • Use ‘Reel prices’ / Quantity 10,000 Estimate your BOM Cost Think “How do I make a living” • Or: How do Investors make a return on their investment • “Garage Model” Choose Your Operational Model • Buy parts at marked up prices, build then package Work at home - Sell through eBay, Makerfaire, Kickstarter, etc. Be an OEM (Surprising markup from resellers like DigiKey & Mouser) Get quantity quote from Atmel, Fairchild, etc. reps Contract Manufacturer makes it for you (higher startup costs) Include FOB and shipping costs when figuring Landed Cost Fulfill from Warehouse (fees apply) Raise Money? • • • Crowdfunding: Needs to be cool, needs a story, elevator pitch 10 Top Crowdfunding Websites http://www.entrepreneur.com/article/228534# Reward based, Debt (loans), Equity (sell Stock) Summary Selling Price covers all of your COSTS • Includes Manufacturing, packaging, shipping, returns, etc. Plus Salaries - Plus Expenses Need Profit to Sustain and Grow Cost is not simply: • Buying Parts from Reseller (Digikey), Building and Selling Product at 2x cost of parts - NO! • Your Time is Money so PAY yourself equitable wage! Profit Limit: How many can you make per day? Multiple Pricing Levels are OK Selling Direct = No Chain Stores Likely • Doesn’t Scale Easily (Lots of Mom & Pop Stores) • Big Store Chains = Large Volumes • Volume Requires Distribution Partners (Need to add in their commissions) ADVICE: • Technical Entrepreneurs need Business Partners • Find a Business Partner LIGHT READING Bringing Your Product to Market • Don Debelak Made to Stick [simple, unexpected, concrete, credible, emotional, stories] • Chip Heath & Dan Heath How to License Your Million Dollar Idea • Harvey Reese Poorly Made in China: • An Insider's Account of the Tactics Behind China's Production Game • Paul Midler The Origin of Brands: • Discover the Natural Laws of Product Innovation and Business Survival • Al Ries and Laura Ries The Tipping Point • Malcolm Gladwell Frank Demmler (Entrepreneurship – growing a company) • http://www.andrew.cmu.edu/user/fd0n/articles.htm • 1991 classic – still used in B Schools Crossing the Chasm - Geoffrey A. Moore Questions?