Product to Market:Product to Market:The Real WorldThe Real World

Realistic Cost and Price Realistic Cost and Price for your Productfor your Product

Bob Barton – Apr. 2014Bob Barton – Apr. 2014

Background: Background:

PowerSURE CorporationPowerSURE Corporation• Started with a couple of PatentsStarted with a couple of Patents

Idea from the 80’s – not feasible thenIdea from the 80’s – not feasible then Technology to the RescueTechnology to the Rescue

• Long Road to [moderate] SuccessLong Road to [moderate] Success First Licensing deal = Royalty IncomeFirst Licensing deal = Royalty Income Search for more Licensees Search for more Licensees

• Current:Current: In License Talks (on-going)In License Talks (on-going)

Today’s Discussion:Today’s Discussion: The Journey From Idea to Product MarketThe Journey From Idea to Product Market

• Idea -> Product Concept stage Idea -> Product Concept stage (Concept Stage cost not so important)(Concept Stage cost not so important) Idea: Does Anyone Want it or Idea: Does Anyone Want it or NEEDNEED it? it?

• Why? Who (specifically!)Why? Who (specifically!) Feasibility – Can you make it & does it work?Feasibility – Can you make it & does it work?

• Cost more importantCost more important Does product design make sense for target Does product design make sense for target

consumer?consumer?

• IS IT PATENTABLE?IS IT PATENTABLE? Do a search: Do a search: http://patft.uspto.gov/http://patft.uspto.gov/ or or

http://patents.google.comhttp://patents.google.com Is it NOVEL (apparatus or method)Is it NOVEL (apparatus or method)

Is Your Idea a Product?Is Your Idea a Product? Product Concept meets requirements of assignmentProduct Concept meets requirements of assignment

But is it commercially feasible?But is it commercially feasible?• Know Know WHOWHO wants it or needs it – how many do? wants it or needs it – how many do?

And And WHYWHY (understand want vs. need) (understand want vs. need)• HOWHOW do they acquire it? do they acquire it?

Buy (wholesale/retail), lease, license, prescribed, bought for them, etc…Buy (wholesale/retail), lease, license, prescribed, bought for them, etc…• WHENWHEN do they acquire it? How often? do they acquire it? How often?

WHAT’s in it for them if they do?WHAT’s in it for them if they do?• (benefits – not features)(benefits – not features)

• WHEREWHERE will they buy it (specialty shop, big retailer, distributor) will they buy it (specialty shop, big retailer, distributor)

How do you (or investors) make money?How do you (or investors) make money?• Cost, Margin, ProfitCost, Margin, Profit

What’s your “Go to Market” plan?What’s your “Go to Market” plan?• Understand your product’s “path” to consumerUnderstand your product’s “path” to consumer• Manufacturer -> warehouse -> shipping/freightManufacturer -> warehouse -> shipping/freight• Wholesale vs. Retail channelsWholesale vs. Retail channels

Product Market ViabilityProduct Market Viability• Market AnalysisMarket Analysis

How big [$$] is the Market (initial vs. longer term)How big [$$] is the Market (initial vs. longer term) What What PricePrice will the Market Bear? will the Market Bear? Setting your Manufacturer’s Recommended Retail PriceSetting your Manufacturer’s Recommended Retail Price

• Price Sensitivity Analysis (Van Westendorp method)Price Sensitivity Analysis (Van Westendorp method) Cheap, Inexpensive, Expensive, Too expensiveCheap, Inexpensive, Expensive, Too expensive

Who is PAYING YOU vs. who is benefiting? Who is PAYING YOU vs. who is benefiting? • (wholesaler vs. retailer – value proposition)(wholesaler vs. retailer – value proposition)

Determine your Determine your Cost vs. Selling PriceCost vs. Selling Price• Which Channels (How product gets to consumers)Which Channels (How product gets to consumers)

Retail, Wholesale, Resellers (have their own channels)Retail, Wholesale, Resellers (have their own channels) Different Distribution Structures Different Distribution Structures

• Pricing can depend on volumes bought Pricing can depend on volumes bought Price “Tiers” or Volume Discounting breakpoints.Price “Tiers” or Volume Discounting breakpoints.

Cost Reduction Projects (later?)Cost Reduction Projects (later?)• Sometimes done in final engineering before launchSometimes done in final engineering before launch• Often done after product is launched to improve marginsOften done after product is launched to improve margins

Pricing AnalysisPricing Analysis

Point ofMarginalCheapness

Point ofMarginalExpensiveness

Distribution ChannelsDistribution Channels

Distributors serve Wholesaler Distributors serve Wholesaler and Retailerand Retailer Distributors buy at Factory Selling PriceDistributors buy at Factory Selling Price

• Your Factory selling price includes your MARGINYour Factory selling price includes your MARGIN Sales Reps: In-house or IndependentSales Reps: In-house or Independent

• Commission on Sales to Distributors (4% - 8%)Commission on Sales to Distributors (4% - 8%) Trades/Service Resellers (i.e. bike repair)Trades/Service Resellers (i.e. bike repair)

• Often Sell above MSRP Often Sell above MSRP • Buy at “Wholesale” from DistributorsBuy at “Wholesale” from Distributors• Markup to what their Customers will bearMarkup to what their Customers will bear

(Gives them room for profit)(Gives them room for profit)

Retail Channel Retail Channel Usually Can’t Sell Direct to Big StoreUsually Can’t Sell Direct to Big Store

• Through retail distributors (% commission)Through retail distributors (% commission) Retailers Retailers buybuy at “markdown” off selling price at “markdown” off selling price

• Often calculated using target Retail priceOften calculated using target Retail price• Then sell at MSRP or “sale price”Then sell at MSRP or “sale price”

Examples:Examples:• Costco (clubs) require 18% - 20% profitCostco (clubs) require 18% - 20% profit• Home Depot closer to 50% profit [markdown]Home Depot closer to 50% profit [markdown]

OEM Resellers: Different Ball GameOEM Resellers: Different Ball Game• ““Private label” your product to sell as one of their own.Private label” your product to sell as one of their own.• Only pay 20%-40% of their selling priceOnly pay 20%-40% of their selling price

MARGINSMARGINS Gross Margin = Selling Price – CostGross Margin = Selling Price – Cost

• Ex: Sell for $10, cost to make = $6, GM = 40%Ex: Sell for $10, cost to make = $6, GM = 40%• (your profit is in here, but based on “Variable Costs”…)(your profit is in here, but based on “Variable Costs”…)• and you need a salary! (part of “Fixed Costs”)and you need a salary! (part of “Fixed Costs”)

Fixed Costs:Fixed Costs:• Rent, Utilities, Salaries (recurring)Rent, Utilities, Salaries (recurring)• Startup costs (production molds, machinery, safety tests…)Startup costs (production molds, machinery, safety tests…)

Contract Manufacturers Add their profitContract Manufacturers Add their profit• BOM + profit (~25%-30%) = Your BOM + profit (~25%-30%) = Your CostCost to have made to have made

Distributor needs to eat…Distributor needs to eat…• Your factory Price can be tieredYour factory Price can be tiered

Silver, Gold, Platinum, etc.Silver, Gold, Platinum, etc. Based on volumes, loyalty, region, more…Based on volumes, loyalty, region, more…

Bottom Line: Aim for 45% Margin at a minimumBottom Line: Aim for 45% Margin at a minimum• Pays for Marketing, Sales, Salaries (yours)Pays for Marketing, Sales, Salaries (yours)• Pays for future production/inventoryPays for future production/inventory• TIP: Bigger margins are better…TIP: Bigger margins are better…• Cost reduction efforts improve marginsCost reduction efforts improve margins

Example Cost StructureExample Cost Structure BOM Cost (parts)BOM Cost (parts) =$3.50 =$3.50 Manufacturer (+25%) FOB Manufacturer (+25%) FOB =$4.40 =$4.40 Shipping to Warehouse (+5-6%) =$4.64Shipping to Warehouse (+5-6%) =$4.64

• (depends on how many fit in container/truck)(depends on how many fit in container/truck)• and insuranceand insurance

Warehouse Warehouse (+5%)=(+5%)= Landed Cost =$4.85 Landed Cost =$4.85 YOUR MARGIN depends on your Factory Selling PriceYOUR MARGIN depends on your Factory Selling Price

• (1-.45)*selling price = $4.85(1-.45)*selling price = $4.85• 4.85/(1-.45) = 4.85/(1-.45) = $8.82$8.82 = Minimum Factory Selling Price = Minimum Factory Selling Price

!! Can it SUSTAIN your Operations?!!! Can it SUSTAIN your Operations?!• Need Cash Flow to stay in businessNeed Cash Flow to stay in business• Profit buys more production, pays salaries, etc.Profit buys more production, pays salaries, etc.

Retail target should be 4x – 5X your final landed costRetail target should be 4x – 5X your final landed cost• Example: $10 cost (in warehouse) = $40-$50 retail priceExample: $10 cost (in warehouse) = $40-$50 retail price

Cost/Price StructureCost/Price Structure

MARGINCOST

SellingPrice

MARGINCOST

SellingPrice

MARGINCOST

SellingPrice

YOU

DISTRIBUTOR

RETAILER

ENDUSERS(MSRP)

Factory Selling Price

Wholesale

(BOM + manufacturing + shipping + warehousing + fulfillment)

4X-5X

Example Cost/Price AnalysisExample Cost/Price Analysis

$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

Premise: You determined Market will pay $20 for your Product that costs you $5 in your warehouse.

Retail Contractor Wholesale

Rep Comm

Factory Price

Sales Mgr Comm

Net Margin

(25%) NoStok(10%) Gold(20%) Plat (30%) (10%) (10%) (4%) ($5 Cost)$10.50 $1.05 $9.45 $0.42 $9.03 45%

$1.20 $10.80 $0.48 $10.32 52%$1.35 $12.15 $0.54 $11.61 57%

Distributor

$20.00 $15.00$13.50

$12.00

Profitability ProjectionsProfitability Projections Break Even Analysis – usually simplisticBreak Even Analysis – usually simplistic

• Typically shows total number of units sold Typically shows total number of units sold graph cost and profit/unit over timegraph cost and profit/unit over time until positive cash flow crossoveruntil positive cash flow crossover

• Usually omit:Usually omit: Startup Cost, Fixed CostsStartup Cost, Fixed Costs Rate of productionRate of production

• Garage model: Build 1, 100, 1000?Garage model: Build 1, 100, 1000?• How many people to build 1, 100, 1000?How many people to build 1, 100, 1000?• How many days, nights, weekends, meals, tripsHow many days, nights, weekends, meals, trips

How much is your TIME worth?How much is your TIME worth?• $0 /hr? 10/hr? $50? (you are college grads – right?)$0 /hr? 10/hr? $50? (you are college grads – right?)

Startup Costs:Startup Costs:• Drawings/Industrial Design/Testing/Tooling/Legal/Initial Inventory…Drawings/Industrial Design/Testing/Tooling/Legal/Initial Inventory…

Fixed Costs: Any cost that does not change with salesFixed Costs: Any cost that does not change with sales• Rent/Salaries/phone/utilities/insuranceRent/Salaries/phone/utilities/insurance

Projections: Don’t omit your overhead and expenses!Projections: Don’t omit your overhead and expenses!• Ex: Fixed Costs = $50,000 annuallyEx: Fixed Costs = $50,000 annually

GM of $4/unit means 12,500 units just to cover FCGM of $4/unit means 12,500 units just to cover FC REMEMBER: You can’t work for free for very longREMEMBER: You can’t work for free for very long

• Not a sustainable business modelNot a sustainable business model

Fixed Costs

Startup Cost (Investment)Startup Cost (Investment) Standard Efforts:Standard Efforts:

• Ind. Design & Mech. EngineeringInd. Design & Mech. Engineering• Legal (contracts, business formation, etc)Legal (contracts, business formation, etc)• Models, Prototypes, Redesign, etc.Models, Prototypes, Redesign, etc.• Market Testing/pre-Selling ActivitiesMarket Testing/pre-Selling Activities

Travel, Trade Shows, meetingsTravel, Trade Shows, meetings• Manufacturing Drawing PackageManufacturing Drawing Package• Manufacturing Tooling (Plastics, Metal) Manufacturing Tooling (Plastics, Metal) • Safety Test approvals (if applicable) Safety Test approvals (if applicable) • First production run transport/warehouseFirst production run transport/warehouse

ALL BEFORE YOU SELL FIRST PRODUCTION ALL BEFORE YOU SELL FIRST PRODUCTION UNITSUNITS

Your Project ApproachYour Project Approach THIS Term Project = “Product Concept”THIS Term Project = “Product Concept”

• Feasibility, Best Mode, Get it to work in 6 weeks.Feasibility, Best Mode, Get it to work in 6 weeks. Estimate your BOM Cost Estimate your BOM Cost

• Use ‘Reel prices’ / Quantity 10,000Use ‘Reel prices’ / Quantity 10,000 (Surprising markup from resellers like DigiKey & Mouser)(Surprising markup from resellers like DigiKey & Mouser) Get quantity quote from Atmel, Fairchild, etc. repsGet quantity quote from Atmel, Fairchild, etc. reps

Think “How do I make a living”Think “How do I make a living”• Or: How do Investors make a return on their investmentOr: How do Investors make a return on their investment

Choose Your Operational ModelChoose Your Operational Model• ““Garage Model”Garage Model”

Buy parts at marked up prices, build then packageBuy parts at marked up prices, build then package Work at home - Sell through eBay, Makerfaire, Kickstarter, etc.Work at home - Sell through eBay, Makerfaire, Kickstarter, etc.

• Be an OEM Be an OEM Contract Manufacturer makes it for you (higher startup costs)Contract Manufacturer makes it for you (higher startup costs) Include FOB and shipping costs when figuring Landed CostInclude FOB and shipping costs when figuring Landed Cost Fulfill from Warehouse (fees apply)Fulfill from Warehouse (fees apply)

Raise Money?Raise Money?• Crowdfunding: Needs to be cool, needs a story, elevator pitchCrowdfunding: Needs to be cool, needs a story, elevator pitch• 10 Top Crowdfunding Websites 10 Top Crowdfunding Websites http://www.entrepreneur.com/article/228534#http://www.entrepreneur.com/article/228534#• Reward based, Debt (loans), Equity (sell Stock) Reward based, Debt (loans), Equity (sell Stock)

SummarySummary Selling Price covers all of your COSTS Selling Price covers all of your COSTS

• Includes Manufacturing, packaging, shipping, returns, etc. Includes Manufacturing, packaging, shipping, returns, etc. PlusPlus Salaries - Salaries - PlusPlus Expenses Expenses

Need Profit to Sustain and GrowNeed Profit to Sustain and Grow Cost is not simply:Cost is not simply:

• Buying Parts from Reseller (Digikey), Buying Parts from Reseller (Digikey), Building and Selling Product at 2x cost of parts - NO!Building and Selling Product at 2x cost of parts - NO!

• Your Time is Money so PAY yourself equitable wage!Your Time is Money so PAY yourself equitable wage! Profit Limit: How many can you make per day?Profit Limit: How many can you make per day?

Multiple Pricing Levels are OKMultiple Pricing Levels are OK Selling Direct = No Chain Stores LikelySelling Direct = No Chain Stores Likely

• Doesn’t Scale Easily (Lots of Mom & Pop Stores)Doesn’t Scale Easily (Lots of Mom & Pop Stores)• Big Store Chains = Large VolumesBig Store Chains = Large Volumes• Volume Requires Distribution PartnersVolume Requires Distribution Partners

(Need to add in their commissions)(Need to add in their commissions)

ADVICE:ADVICE:• Technical Entrepreneurs need Business PartnersTechnical Entrepreneurs need Business Partners• Find a Business PartnerFind a Business Partner

LIGHT READINGLIGHT READING Bringing Your Product to MarketBringing Your Product to Market

• Don DebelakDon Debelak Made to Stick Made to Stick [simple, unexpected, concrete, credible, emotional, stories][simple, unexpected, concrete, credible, emotional, stories]

• Chip Heath & Dan HeathChip Heath & Dan Heath How to License Your Million Dollar IdeaHow to License Your Million Dollar Idea

• Harvey ReeseHarvey Reese Poorly Made in China: Poorly Made in China:

• An Insider's Account of the Tactics Behind China's Production Game An Insider's Account of the Tactics Behind China's Production Game

• Paul MidlerPaul Midler The Origin of Brands: The Origin of Brands:

• Discover the Natural Laws of Product Innovation and Business SurvivalDiscover the Natural Laws of Product Innovation and Business Survival

• Al Ries and Laura RiesAl Ries and Laura Ries The Tipping PointThe Tipping Point

• Malcolm GladwellMalcolm Gladwell Frank Demmler (Entrepreneurship – growing a company) Frank Demmler (Entrepreneurship – growing a company)

• http://www.andrew.cmu.edu/user/fd0n/articles.htmhttp://www.andrew.cmu.edu/user/fd0n/articles.htm Crossing the Chasm - Geoffrey A. MooreCrossing the Chasm - Geoffrey A. Moore

• 1991 classic – still used in B Schools1991 classic – still used in B Schools

Questions?Questions?