Product to Market: The Real World Realistic Cost and Price for your Product Bob Barton

Background: PowerSURE Corporation PowerSURE Corporation Started with a couple of PatentsStarted with a couple of Patents Idea from the 80’s – not feasible then Idea from the 80’s – not feasible then Technology to the Rescue Technology to the Rescue Long Road to [moderate] SuccessLong Road to [moderate] Success First Licensing deal = Royalty Income First Licensing deal = Royalty Income Search for more Licensees Search for more Licensees Looking for Manufacturing PartnerLooking for Manufacturing Partner Looking for InvestorsLooking for Investors

Today’s Discussion: Journey: From Idea to Product Market Journey: From Idea to Product Market Idea -> Product Concept stage (cost not so important)Idea -> Product Concept stage (cost not so important) Idea: Does Anyone Want it or NEED it? Who (specifically!) Idea: Does Anyone Want it or NEED it? 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 consumer? Does product design make sense for target consumer? IS IT PATENTABLE?IS IT PATENTABLE? Do a search: or Do a search: or Market AnalysisMarket Analysis How big [$$] is the Market (initial vs. longer term) How big [$$] is the Market (initial vs. longer term) What Price will the Market Bear? What Price will the Market Bear? Price Sensitivity Analysis (Van Westendorp method)Price Sensitivity Analysis (Van Westendorp method) Too Cheap, Inexpensive, Expensive, Too expensive Too Cheap, Inexpensive, Expensive, Too expensive Who is paying YOU vs. who is benefiting (wholesale vs retail)Who is paying YOU vs. who is benefiting (wholesale vs retail) Determine your Cost Target Determine your Cost Target 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 VolumesPricing can depend on Volumes Price “Tiers” or Volume Discounting breakpoints. Price “Tiers” or Volume Discounting breakpoints. Cost Reduction Projects Cost Reduction Projects Often done after product is launched to improve marginsOften done after product is launched to improve margins Sometimes done in final engineeringSometimes done in final engineering

Van Westendorp Analysis Example

Your Idea -> Product -> Sales Concept meets requirements of assignment Concept meets requirements of assignment But is it commercially feasible?But is it commercially feasible? Know who wants it or needs it Know who wants it or needs it (understand want vs. need)(understand want vs. need) How do they acquire it? How do they acquire it? Buy (wholesale/retail), lease, license, prescribed, bought for them…)Buy (wholesale/retail), lease, license, prescribed, bought for them…) When do they acquire it? How often? When 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) 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” path to consumerUnderstand your “product” path to consumer Wholesale vs Retail channelsWholesale vs Retail channels

Distribution Channels Distributors serve Wholesale and Retail Distributors serve Wholesale and Retail Distributors buy at Factory Selling Price Distributors buy at Factory Selling Price Your Factory selling price includes your MARGINYour Factory selling price includes your MARGIN In-house or Independent Sales Reps In-house or Independent Sales Reps 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 products above MSRPOften Sell products 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 Usually not Direct to the Store Usually not Direct to the Store Through retail distributors (%)Through retail distributors (%) Retailers buy at “markdown” from selling price Retailers buy at “markdown” from 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%Costco (clubs) require 18% - 20% Home Depot closer to 50%Home Depot closer to 50% OEM Resellers: 20%-40% of their selling price OEM Resellers: 20%-40% of their selling price “Private label” your product to sell as one of their own.“Private label” your product to sell as one of their own.

MARGINS Gross Margin = Selling Price – Cost Gross 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 profit Contract Manufacturers Add their profit BOM + profit (~25%-30%) = Your CostBOM + profit (~25%-30%) = Your Cost 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 minimum Bottom Line: Aim for 45% Margin at a minimum Pays for Marketing, Sales, Salaries (yours)Pays for Marketing, Sales, Salaries (yours) TIP: Bigger margins are better…TIP: Bigger margins are better…

Example Cost Structure BOM Cost (parts) =$3.50 BOM Cost (parts) =$3.50 Manufacturer (+25%) FOB =$4.40 Manufacturer (+25%) FOB =$4.40 Shipping to Warehouse (+6%) =$4.64 Shipping to Warehouse (+6%) =$4.64 (depends on how many fit in container/truck)(depends on how many fit in container/truck) and insuranceand insurance Warehouse (+5%)= Landed Cost =$4.85 Warehouse (+5%)= Landed Cost =$4.85 YOUR MARGIN depends on your Factory Selling Price YOUR MARGIN depends on your Factory Selling Price (1-.45)*selling price = $4.85(1-.45)*selling price = $ /(1-.45) = $8.82 = Minimum Factory Selling Price4.85/(1-.45) = $8.82 = Minimum Factory Selling Price Check: Profit=$3.97 / $8.82 = 45% marginCheck: Profit=$3.97 / $8.82 = 45% margin !! 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 cost Retail 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

Example 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, $ $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.

Profitability Projections Break Even Analysis Break Even Analysis Typically show total number of units sold * profit/unit vs. timeTypically show total number of units sold * profit/unit vs. time until positive cash flow until positive cash flow Usually omit:Usually omit: Startup Cost, Fixed Costs Startup Cost, Fixed Costs How long does it take to manufacture How long does it take to manufacture 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?) Don’t omit your overhead and expenses! 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 FC GM of $4/unit means 12,500 units just to cover FC You can’t work for free for very long You can’t work for free for very long Not a sustainable business modelNot a sustainable business model

Startup Cost (Investment) Standard Efforts: Standard Efforts: Ind. Design & Mech. EngineeringInd. Design & Mech. Engineering Models, Prototypes, Redesign, etc.Models, Prototypes, Redesign, etc. Market Testing/pre-Selling ActivitiesMarket Testing/pre-Selling Activities Travel, Trade Shows, meetings Travel, 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 runsFirst production runs

Your Project Approach This Term Project = “Product Concept” This Term Project = “Product Concept” Feasibility, Best Mode, Get it to work.Feasibility, Best Mode, Get it to work. 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. reps Get 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 Model Choose Your Operational Model “Garage Model”“Garage Model” Buy parts at marked up prices, build then package Buy 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 OEMBe 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 Cost Include FOB and shipping costs when figuring Landed Cost Fulfill from Warehouse (fees apply) Fulfill from Warehouse (fees apply)

Summary Selling Price covers all your costs Selling Price covers all your costs Plus Salaries - Plus ExpensesPlus Salaries - Plus Expenses Need Profit to Sustain and Grow Need 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 Building and Selling Product at 2x cost of parts 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 OK Multiple Pricing Levels are OK Selling Direct = No Chain Stores Likely Selling Direct = No Chain Stores Likely Doesn’t Scale Easily (Lots of Small Stores)Doesn’t Scale Easily (Lots of Small 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 READING Bringing Your Product to Market Bringing Your Product to Market Don DebelakDon Debelak Made to Stick [simple, unexpected, concrete, credible, emotional, stories] Made to Stick [simple, unexpected, concrete, credible, emotional, stories] Chip Heath & Dan HeathChip Heath & Dan Heath How to License Your Million Dollar Idea How 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 GameAn 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 Point The Tipping Point Malcolm GladwellMalcolm Gladwell Frank Demmler (Entrepreneurship – growing a company) Frank Demmler (Entrepreneurship – growing a company) Crossing the Chasm - Geoffrey A. Moore Crossing the Chasm - Geoffrey A. Moore 1991 classic – still used in B Schools1991 classic – still used in B Schools

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