How much does it really take?
a simplified example
Imagine that you thought of a product which could retail for $20. You'd have to wholesale it for about $10 which means you'd have to manufacture it for no more that $5 of direct costs. Considering overhead, sales and marketing costs, you'd be lucky to get an average of ten percent profit on the sale of each $10 item -- or about $1 each.
Even the simplest of new products can cost tens of thousands of dollars to bring to production. Most cost much more. The tool to mass produce a simple plastic item, like a drinking cup, costs about $60,000 -- and that doesn't include the detailed drawings that you have provide to the tool maker or any of the development work. Let's suppose the development costs for your idea are unusually low, like $40,000. Then development plus the tool is $40,000 + $60,000 = $100,000.
So, if you'd like to break even, you'll have to produce and sell at least 100,000 of your product. (Remember, you make $1 profit on each one.) At your cost of $5 each that's a half million dollars. Add that to the $100,000 development and tooling cost and you're into this for $600,000 already -- and you haven't paid for advertising yet.
You may be thinking that you don't have to order all of your inventory at once. Well you don't, but small quantities cost more per item, raise your costs and lower your profits. Also, since we're talking about a molded plastic item, you should be aware that it doesn't take long to make 100,000 items. A small molding company could produce that much in less than five days using only one of their molding machines.
This scenario also requires that you pay for the storage space, staff, training, advertising, and everything else that you need before you can open your doors for business. And, this assumes that everything goes right -- no lawsuits, defective production, or governmental approvals and redtape.
An inventor who wants help from a supplier in return for a share of future profits needs to show how he's going to bring together all the other pieces of the puzzle. This is the same as asking the supplier to invest in his idea. No matter how much anyone believes in the product, it's not going anywhere until it gets off the ground. The company who's services contribute only $40,000 to the startup costs should want to know where the other hundreds of thousands of dollars will come from before investing time in the idea. Anyone who doesn't ask that question probably has no experience in new product development.
The trouble with million dollar ideas is that they cost $10 million dollars to produce. This isn't true of every new product and there are ways to start slowly and inexpensively. But that has to be part of an overall plan and it takes experience to devise plans that can work. (If any of these figures seem unrealistic, please review some of these case studies for some real life examples.)
"It costs a lot to look this cheap." - Dolly Parton
This is a good place to mention the value of a skilled product developer. Consider the $500,000 cost of your initial inventory and also the tooling cost. If you have the kind of funding needed to get into business, you need to be aware of the difference that product design can make. On one O'CTS project, the tooling to produce just one part for the product was $35,000. But by using design for manufacture techniques and our knowledge of molding operations we were able to reduce startup tooling costs for the entire project to only $10,000.
More importantly, the cost for each part or assembly is greatly affected by product design. Shaving only ten percent off of the $500,000 initial inventory cost in the above example could save enough to pay for all of the product development services. And the savings are much greater when your product is the success you hope it will be. The cost to refine a product are much greater once it is in production so you should get it right to begin with. My point is: Your investment in good product design during the startup phase of your business can be repaid in cost savings many times.
Ron O'Connor, P.E.
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