Can your Product be Sold Quickly at Five Times the Manufacturing Costs?
Can you sell enough, in a short time, to payback all of your development and start up costs?
Your investors expected large returns. Your spouse expected NET, after taxes income to make it worth your time, effort and sacrifices. What do you need to make in NET personal PROFIT (after tax) to continue after the first year?
What research have you done to validate the needed demand at the needed retail price and costs?
You have many things going against you when you introduce a product, so you want to make sure that your product will work for you by meeting all the criteria we have listed in these seven articles. This last article deals with product pricing and the cost of manufacturing. The question is can you make money on your product when manufactured at an estimated price. To make money, your product’s retail price must be four to five times the manufacturing costs, but can the market handle that retail price? This article will help you answer this question.
Due to the costs of distribution, marketing, insurance, salaries and all your other expenses, you need to be able to sell the product retail at four to five times the manufacturing costs (or two to three times for wholesale) to make money on your idea. To determine this, you need to know two things: an estimated manufacturing price and a target retail price.
You will need to contact either industry professionals or manufacturers to give you an estimated manufacturing cost. Industry professionals can tell you what other similar products are manufactured at and manufacturers can give you an estimate on how much they will charge you. U.S. manufacturers will probably quote you a much higher price than industry professionals since many products are now made overseas and an industry professional is likely to use an overseas manufacturing cost as his or her standard.
Independently of your estimated manufacturing cost, you should determine your ideal retail price. This can be done in a variety of ways. Below is an excerpt from our Product Pricing Series.
Different customers will have a different value for your product. For instance, some people pay a large sum of money to buy a condominium or loft in a downtown district while other people prefer to have a large house in the suburbs. This is because they value the housing differently. Those who prefer downtown like the convenience, lifestyle and image of living downtown, while the people who prefer the suburbs might value privacy, having more space and not mind commuting. These are different value judgments and the people who prefer to live downtown might look at the prices for houses in the suburbs and think that they are much too high for the location and the people who live in the suburbs will look at the prices downtown and say that they are much too high for the space. It is important to understand how different customers will value your product if you want have the price that allows you to make the most money.
Before you can start determining your price, you need to find out who values your product the most, meaning, who will pay the most for your product. You need to base your product price based on this group of people. Your product design and manufacturing methods must then allow a company to make the product for 10-20% of the retail price, at a low volume.
For instance, using the above examples, if you were building new condominiums downtown, you would want to find the price that the people in your desired demographic who want to live downtown would willingly pay.
Once you have determined which group will pay the most money for your product, you will need to have focus groups with people from this customer population. Never ask anyone how much they think your product is worth. They will always list a price lower than they are actually willing to pay. You need to take a variety of products that are similar to yours that have a range of prices. Without listing the prices, have your focus group rank the products listed in order of value to them. They should rank the product they think has the most value first and so on down the line. Then look at where your product falls in the list. If your product falls below products that cost $50+ and above products that cost $40- then your price should be in the $45 range. It probably won’t be so simple, but you need to use the prices as existing products as a guide.
Once you have a pretty good guess from the focus group about what your price should be, you need to have some limited test runs. If your product lends itself to being sold at fairs or shows, you should try that. Or you can try limited retail runs or anything that gives your product a test with real buyers. Then you need to try different prices for your product. The goal is to see how well your product sells at different prices. At lower prices, of course, you will sell more products, but your goal isn’t to sell the most products, but rather to make the most money.
You will also find that after a certain price the number of people buying will sharply drop off, this is because your price is too high and the value for the benefits is too low.
Let’s look at an example to see how this works.
So in the above example, we see that $28.00 is the best price for that product, even though you sell 200 fewer products than when the price was $20.00, you made $2,400 more. There may be factors that make your trials less clear, like attending different types of shows or fairs or having a busy or slow retail location. You need to try to make your trials as equal as possible, but if this is not possible, you will need to adjust. For instance if you go to a big show one weekend and then a small show next weekend, you will need to adjust your results based on the difference in attendance. Again, this will help you determine what price best reflects the value of your product and what price will bring in the most money. It is highly unlikely that your results will be so easy to interpret, but by using test runs, you will have a much better chance of choosing the right price based on the market.
Now that you have determined your target retail price, look at your manufacturing costs. How much higher is the target retail price? If it is not four to five times higher, you either need to make adjustments or abandon the product.
There are a variety of adjustments you can make to try to get your costs in line. You have two main options: make your product have more value for little extra cost, or have your product keep value with less cost. Below is another excerpt from our Product Pricing Series.
For both options, you will need to go back to your focus groups. If your product wasn’t ranked as the top value, what was lacking that was present in other products? Can you add similar features for low cost? Often, adding an abstract appeal is the best way to add value with little extra cost. Can you make your product look fancier or more in-style? If so, that adds value. Another good way of adding value with little extra cost is to provide a more complete solution. If your product needs to be used in conjunction with another product, can you combine the two products to create a high value?
Also look at what product features are not important to customers. If you have a feature that customers aren’t interested in, eliminate it -- that will save you money in manufacturing, hopefully bringing your costs in line. Also, to lower your costs, you can look at sourcing your manufacturing overseas. You will want to still have a way of monitoring quality, but this can be a good option for lowering prices. Before you resort to that, you should find an engineer with experience in manufacturing to look at how you make your product. He or she might be able to suggest some new methods or materials for manufacturing that could dramatically lower your costs.
Another option is changing distribution. If you switch to a distribution system with fewer steps in between you and your end users, you may be able to make the market demands and cost demands line up.
One hidden cost in distribution is packaging. For instance, if you sell to retail stores, you will need high quality, professionally designed packaging. This is a big expense, but one that the distribution channel requires. But if you sell through catalogs, or directly to customers either through the internet or direct marketing, you will only need a package that can get the product safely to the customer. This can be a huge savings.
If you end up making changes to your product, either by adding value or cutting costs, go back to your focus group and see how they rate your product. You will want the rating to stay the same if you cut costs and you will want the value to go up if you tried to add value. Hopefully your value added will be a bigger proportion than your costs to add that value, but if not you will need to employ some other tactics mentioned in this article to bring your prices in line.
Article from DonDebelak OneStopInventorShop.net
Shared by David Bruce Savage 404 323-8686 dave@davesavage.com
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