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Product to Market: The Real World

Product to Market: The Real World. Realistic Cost and Price for your Product Bob Barton – 12/08/2012. 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

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Product to Market: The Real World

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  1. Product to Market:The Real World Realistic Cost and Price for your Product Bob Barton – 12/08/2012

  2. 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 • Looking for Manufacturing Partner • Looking for Investors

  3. Today’s Discussion: • Journey: From Idea to Product Market • Idea -> Product Concept stage (cost not so important) • Idea: Does Anyone Want it or NEED it? 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 • Market Analysis • How big is Market (initial vs. longer term) • What Price will the Market Bear? • Price Sensitivity Analysis (Van Westendorp method) • Who is paying YOU vs. who is benefiting (wholesale vs retail) • Determine your Cost Target • Which Channels (How product gets to consumers) • Retail, Wholesale, Resellers (have their own channels) • Different Distribution Structures • Pricing can depend on Volumes • Price “Tiers” or Volume Discounting breakpoints. • Cost Reduction Projects • Often done after product is launched to improve margins • Sometimes done in final engineering

  4. Distribution Channels • Distributors buy at Factory Selling Price • Your Factory selling price includes your MARGIN • Independent Sales Reps • 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)

  5. Retail Channel • Usually not Direct to the Store • Through retail distributors (%) • Retailers buy at “markup” from selling price • Often calculated using target Retail price • Then sell at MSRP or “sale price” • Examples: • Costco (clubs) require 18% - 20% • Home Depot closer to 50% • OEM Resellers: 20%-40% of their selling price • “Private label” your product to sell as one of their own.

  6. 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 (production molds, machinery, safety tests…) • Contract Manufacturers Add their profit • BOM + profit (~25%-30%) = Your Cost • 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 • Pays for Marketing, Sales, Salaries (yours) • TIP: Bigger margins are better…

  7. Example Cost Structure • BOM Cost (parts) =$3.50 • Manufacturer (+25%) FOB =$4.40 • Shipping to Warehouse (+6%) =$4.64 • (depends on how many fit in container/truck) • and insurance • Warehouse (+5%)= Landed Cost =$4.85 • YOUR MARGIN depends on your Factory Selling Price • (1-.45)*selling price = $4.85 • 4.85/(1-.45) = $8.82 = Minimum Factory Selling Price • Check: Profit=$3.97 / $8.82 = 45% margin • !! 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

  8. 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

  9. Profitability Projections • Break Even Analysis • Typically show total number of units sold vs. profit/unit • until positive cash flow • Usually omit: • Startup Cost, Fixed Costs • How long does it take to manufacture • Garage model: Build 1, 100, 1000? • How many people to build 1, 100, 1000? • How many days, nights, weekends, meals, trips • How much is your TIME worth? • $0 /hr? 10/hr? $50? (you are college grads – right?) • Don’t omit your overhead and expenses! • Ex: Fixed Costs = $50,000 annually • GM of $4/unit means 12,500 units just to cover FC • You can’t work for free for very long • Not a sustainable business model

  10. Startup Cost (Investment) • Standard Efforts: • Ind. Design & Mech. Engineering • Models, Prototypes, Redesign, etc. • Market Testing/pre-Selling Activities • Travel, Trade Shows, meetings • Manufacturing Drawing Package • Manufacturing Tooling (Plastics, Metal) • Safety Tests (if applicable) • First production runs

  11. Your Project Approach • This Term Project = “Product Concept” • Feasibility, Best Mode, Get it to work. • Estimate your BOM Cost • Use ‘Reel prices’ / Quantity 10,000 • (Surprising markup from resellers like DigiKey & Mouser) • Think “How do I make a living” • Or: How do Investors make a return on their investment • Choose Your Operational Model • “Garage Model” • Buy parts at marked up prices, build then package • Work at home - Sell through eBay, Makerfaire, Kickstarter, etc. • Be an OEM • Contract Manufacturer makes it for you (higher startup costs) • Include FOB and shipping costs when figuring Landed Cost • Fulfill from Warehouse (fees apply)

  12. Summary • Selling Price covers all your costs • 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 • Your Time is Money so PAY yourself equitable wage! • How many can you make per day? • Multiple Pricing Levels are OK • Selling Direct = No Chain Stores Likely • Doesn’t Scale Easily (Lots of Small 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

  13. LIGHT READING • Bringing Your Product to Market • Don Debelak • Made to Stick • 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

  14. Questions?

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