Estimating your product costs early on can be a daunting task, even if you have prior experience to fall back on. There are so many variables that can affect unit and tooling prices and your design isn’t even done yet! It’s a classic chicken and egg scenario. You need investors to finish the design, but you need the design to tell investors how much the product will cost. So what do you do?
Get Multiple Data Points
At this point in your product development, you need to be educating yourself on the possible manufacturing options. That means working with multiple manufacturers to get budgetary manufacturing quotes. However, it can be difficult to get manufacturers to take you seriously as a first time inventor, so pairing with a product development firm that has several connections can be invaluable. Each manufacturer will have different pricing, depending on where they are located and what annual volumes they are best equipped to handle. By engaging with several of them, you can learn what price structure will best fit your product in the short term and long term.
What Do I Give Them to Quote?
Your design should be far enough along at this point that you know what all of the major components are, and some of the minor ones. You will have to make changes later on, but this experience will help give you the information needed to estimate how those changes will affect your unit and tooling price.
Create a “RFQ” or “Request for Quote” package, which consists of each individual part as a 3D CAD model that closely reflects the final version of the part. Some manufacturers may also ask for 2D dimensioned drawings, but I would only make them if manufacturers start asking for them. We’re still trying to “fail fast, fail cheap” here.
When you submit this package, be sure to specify the annual volume you want to produce, so that they can provide you with the appropriate unit price and tooling strategy. Keep in mind that the annual volume you choose may determine the manufacturing strategy they use. Many entrepreneurs aren’t sure how many they will need, so we recommend consulting with your product development team to help you determine what to ask for. This will give you an idea of what is considered low and high for annual volumes:
- 1,000 (Low Volume)
- 10,000 (Medium Volume)
- 50,000 (High Volume)
If you request quotes at a variety of volumes, you’ll be able to estimate your costs when you launch your product and understand how your costs will change over time as you increase your order volume. This should help you build a more informed business plan.
The Manufacturer Says My Part Isn't Quotable.
Since your design still hasn’t been optimized for mass production, it’s possible that your part designs aren’t quotable. Some manufacturers may tell you that, others may offer feedback on making it quotable, and a few might even make up a quote for it and then change it later.
This is why it is important to work with a design team that has manufacturing experience and has been considering how to manufacture your product from day one.
They can help you avoid this situation and make sure you get the most accurate budgetary manufacturing quotes possible.
There are plenty of hidden costs that people commonly forget to include. These can add up and eat up your profit margins if you aren’t careful.
Shipping - If you’re shipping your parts from overseas, expect to pay more for shipping than domestically. Shipping prices change with the global economy and can fluctuate regularly. You also may have to pay for shipping again when you send the product to your customer.
Import Tariffs - This is a charge to import your product or parts into the country. Tariffs change based on government relations. Different types of imports have different tariff classifications and tax rates, which you can look up online.
Packaging - Packaging is often forgotten and put together at the end of the development process. But getting your packaging done right can make all the difference to getting your customers’ attention and even add a couple dollars to your product cost.
Assembly - Someone is going to have to put your product together and in the box before it can get shipped to your customer. When you’re first getting started, you might do that in your garage, but eventually you may have it done by the manufacturer.
"Free" Design or Engineering Services - be weary of manufacturers offering to do design and engineering work for 'free', this may mean relinquishing control and/or ownership of your design and/or tooling down the road.
Summarize the Data
Your goal in this effort isn’t to be able to say exactly how much the product will cost. Your goal is to get a range of prices from a variety of manufacturers. By reaching out to several manufacturers, you can collect multiple data points to help validate your assumptions. This will give you an idea of whether or not you have a viable business model. You can also identify how much you need to focus on driving costs down as you optimize for production. This isn't really the time to shop around or to try and negotiate for lower prices, there are still too many unknown details to worry about which manufacturer is the least expensive.
By now, you’ve built your Proof of Concept Model, created Photo-Realistic Renderings, and are in the process of acquiring budgetary manufacturing quotes. These three things will enable you to build a business plan and validate that you’ve got a market for your product. They’ll also show potential investors how the product works, how it will look, and how much it will cost, which will help encourage them to fund the rest of the development process. In our next article, we’ll talk about types of fundraising and how to do it.