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Cost to Bring a Consumer Product to Market for a Start-up - Manufacturing

by Larry Kiliszewski

Spending my life in the business of product design, I often don’t get the time to talk about the steps that take place after the design is completed. Many of our clients, particularly the inventors, don’t want us focusing on that aspect of their projects. Unfortunately though, this is the place where most projects die due to lack of planning. Statistically, only 1 of 10 projects we work on makes it into production, despite the fact that clients leave our offices with a fully functional prototype. 

In more recent years we have begun counseling our clients on the risk of not preparing for and planning out the steps that need to take place after design. Many are shocked to see the real work (and costs) for them, begin after the design is complete. Product testing certifications, structuring the business for the product and market, and how to fund production are all crucial and necessary. Yet even between all those activities, somewhere and somehow someone must plan where to build the product. 

When people approach me about a product design and I ask them what their budget for the product is, they look at me as if I am an automotive dealership trying to negotiate on a vehicle. The truth is, design itself is only a small part of the budget when bringing a product to market. In fact, in our best estimates, considering all upfront costs, I would estimate the design costs to be somewhere in the vicinity of 8% of the total product cost. Of course, unlike production costs, which the client will begin to recoup more quickly during the first sales of the product - R&D, Intellectual Property (patents and legal protection) and capitol tooling costs all must be amortized into the long-term budget of the projects and may not be recouped for many years.

Here’s an example. Consider a product that is a small product assembly and costs $4.00 per unit to make. If you assume you can sell it and make a $1.60 net profit per unit. Then at volumes of 21k per year, in the table below you can see it takes about 5 years to earn back in profits what your initial startup costs were.

Development Process

Low Estimate

Relative Cost

Type

 

NRE: Non-recurring Engineering

Capital Costs (CC): Costs that retain value and are depreciated over time (usually 5 years)

Production Costs (PC): Cost to product recouped upon the sale of item

Research/Preparation

2%

$3500.00

NRE

 

Design

8%

$14,000.00

NRE

 

Prototyping

4%

$8750.00

NRE

 

 

 

Validation

5%

$7000.00

NRE

 

 

 

Intellectual Property

4%

$8750.00

CC

 

 

 

Production Tooling

25%

$43,750.00

CC

Units Produced

1yr RTI after NRE and capital costs

5yr RTI after NRE and capital costs

Production Costs

50%

$87,500.00

PC

21,875

-$145,000

>$1

Total Upfront Investment

100%

$175,000.00

Other factors apply, number are not exact and for example only.


That said, you can also see that even if you sell the same number every year for 5 years, you are only recouping the initial investment. Making it a bad deal for any investor. Any amount less than this sold per year will be a loss over 5 years, any amount more than this sold in 5 years will be potential for a profit. But high-risk investors want large returns of 30-40% per year. Therefore, we need to explore the way to increase profits that will attract the investors you ultimately need to get your product to market.  There are only two answers: 1. higher sales (client controls sales); 2. reducing cost (design & manufacturing process controls costs).

Because we can’t speak for the sales and marketing side of a business venture, I will focus on the second answer above, the reduction of cost to lead to increased profits. 

There are several factors that control costs, but they all come down to one main thing and that’s PEOPLE.

People are expensive. The people you need for your project are hopefully smart and innovative. But even the least educated among us (I, for one failed algebra two years in a row) have value above all else.  All people can solve problems without being programmed, we can repeat a task many times and make adaptations on the fly when a problem presents itself. We can calculate risk and identify problems. We can tell you when and why things aren’t working quickly and propose a solution just as fast – and if we can’t speak or hear, we can signal a solution just as quickly. We have motion ranges and abilities even now after hundreds of millions of dollars in technological advancements machines are just barely starting to achieve. For a machine to do just a few functions humans can do, companies must spend millions of dollars – so as it relates to a new product, at a start-up business, people are the solution. And the cost of people is the problem. 

There are two ways to reduce labor, move your production to a place where labor costs less; or eliminate labor from the equation through automation. As mentioned above, automation is very expensive and requires very high volumes to justify (typically 500k parts per year, minimum). Therefore, the easiest solution for a start-up business to reduce production cost is by moving production where labor cost are lower. For most Americans, this is a challenge. We want to keep jobs here, but we also want to keep our lifestyles, our 401k’s and our education for our children. Unfortunately, these are conflicting goals. And these goals have turned the United States into a place where aside from some services (medical, restaurants and car washes, etc.) as well as high volume, high technology or perishable products are generally all that we can produce effectively and competitively.

Food (especially perishable goods), technologically advanced products (such as medical equipment, aerospace, drilling and cars); premium products (such as accessories or luxury items) are products that can be produced well in the US. All these flourish in the United States because they are priced in a way where labor becomes a minimal cost through either automation or cost of materials, or bare necessity (such as food). But for low cost consumer products such as phones, staplers, furniture and games – overseas manufacturing is the place it all happens. Plain and simple what this means for new business startups in the consumer market, it is almost impossible to make your product in the United States and succeed, or be profitable quickly.

That doesn’t mean that it’s easy money to get your product made overseas, in Mexico or South America.  If you don’t have contacts, you must be willing to travel and meet the right people, speak the language, etc. Although most international companies have very strong ethics and working relationships, like anywhere, including the US, there are also those who only have their own best interests in mind. Once you are working with another country, your rights are greatly diminished and the risk of loss of control increases.

There another difficulty working with manufacturers in other countries. They specialize in high volume, labor intense production, not research and development. They have a limited interest in helping you develop a product. I discuss this further in the design article that accompanies this post. 

To regress a bit, in the US if you find the right partner you can get them to make some limited runs to help you – but for the most part these runs will be such low volume the cost will be generally a loss for the vendor and the client. US vendors will help with these processes in the right scenario if they believe they may get the business. But many are leery because of the experiences where an inventor uses the US vendor to qualify the design, then leaves the US vendor for an overseas manufacturer when they want to order volume. Leaving the US vendor with a loss. In addition, unless your product can be generally made at one source (which is uncommon), you will still have the hassle of dealing with where to assemble and how to package and transport.

When you read my thoughts on product design you will understand why you need to make the sufficient investment in time and money during development, so that you aren’t relying on a US manufacturer to take a loss for you or an overseas manufacturer to give you a hard time about the design not being complete. Both of these affect the quality of what you get from them and again increase the risk of problems occurring during the process of production.

With a complete design and a working prototype in place, you now have full control to get complete quotes from either domestic or international sources at various volumes. But how do you move forward from here? Are you prepared to call overseas manufacturers, travel and risk making the wrong partnerships?

At our business we rely on affiliate partners to help our customers. These businesses (such as ITI Manufacturing), often take a cut, adding a slight cost to the product. However, they quote your finished product from a reliable factory with which they have a relationship as well as manage the total project (production, testing, inspection, assembly, and packaging), while taking full responsibility for the quality of your item - including international logistics – until the shipment is delivered to the destination of your choice and you have inspected it.

Bringing a product to market and actually making money on it is not an easy task. Both design and manufacturing are extremely important. The more you understand the roles of both in the success of your product and how the costs for both impact the ultimate profitability of your product, the better off you’ll be.

If we can help in any way, please reach out. And if this article can help anyone you know in better understanding the steps they need to be aware of before investigating manufacturing partners, please share.