Almost nobody puts a number on what their product costs to build until the design is already done.
They assume that's the only way it works, because the number comes from the design and the design isn't finished yet.
The other version of this is the dev kit estimate.
You wire up a few development boards to prove the concept, add up what you paid, and treat that as your cost.
Dev kit prices aren't production prices, and a handful of units isn't production volume. Neither number tells you what your product actually costs to build.
Both groups end up in the same place, making decisions on a number that isn't real.
You can get a much better number early, and you don't need a schematic to do it.
What you need is a block diagram and a component list. Pick the main chip for each function in your product, then add the support parts that have to sit around each one.
That gets you a parts cost that's close enough to make decisions with. I call this pre-designing the product, meaning you design it just far enough to put a price on it.
Your parts cost is only the beginning of the estimate, though. Everything below gets added on top of it.
Start with the bare circuit board itself, which is priced by size, layer count, and quantity.
Then add board assembly, which is what the factory charges to place and solder every part onto it.
Next comes the enclosure and anything else that goes inside, plus the factory labor to put the finished unit together.
Then there's testing, because every unit gets tested in production and that time costs money.
Some of those units fail, and that's your scrap rate. You pay for those parts and that labor even though you never sell them.
Packaging goes on top of all that, and then freight and duties to get everything from the factory to your warehouse.
None of that requires a finished design. You can get quotes on most of it from a block diagram, a rough board size, and an enclosure concept.
The other half of the estimate is volume, and this is where the dev kit math really falls apart.
Pricing at a handful of units tells you nothing about production. For most products you need to get to around 1,000 units before economies of scale start doing anything for you.
I'd run your estimate at 10,000 units. That's a good order size for a Chinese factory, and it's big enough to start getting real discounts.
Then run the same estimate at other volumes to see where your margin goes.
In my experience, every 10x jump in volume takes roughly 20 to 30 percent off the total product cost.
So going from 1,000 to 10,000 units cuts your cost about 25 percent, and going from 10,000 to 100,000 cuts it about that much again.
That's rough, but it's close enough to plan with. What you're looking for is your margin climbing as your volume climbs.
You may miss your margin target at 1,000 units and hit it at 10,000, and that's fine as long as you know it going in.
Now work backward from the retail range you're targeting.
If the feature set you want can't be built at a price that leaves you a margin at any volume you can realistically reach, that's something you want to find out now.
I ran into a version of this with my own product. My first design worked great, but it relied on glue and was a nightmare to assemble at volume.
It couldn't be built at a cost that left me any profit, and my manufacturer was the one who had to tell me. The redesign cost me months.
Once you have a cost for each version of your product, the next thing to figure out is which version people will actually pay for.
A survey won't tell you. People say yes to every feature on a list, because saying yes costs them nothing.
A reservation funnel gets you closer. You put up a page, ask for a dollar to hold a spot, and run different feature sets and different prices against each other.
A dollar is real money, and that makes the answer mean something. Short of crowdfunding or actually selling the product, it's the earliest honest feedback you can get.
You can start the cost estimate this week with a block diagram and current part prices.
Inside the Hardware Academy, I have a course that walks you through this whole estimate step by step.
The engineers, product experts, and I also help members put a cost on their product before the design is finished, while changing it is still cheap.
Talk soon,
John Teel
Predictable Designs
|
|
|
|
|
|
|
