Real World of Product Development Realistic Cost and Price for your Product Bob Barton – 12/08/2011

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 (cost Product Concept (cost < important) Idea: Does Anyone Want it or NEED it? Idea: Does Anyone Want it or NEED it? Feasibility – Can you do it & does it work? Feasibility – Can you do it & does it work? Does product design make sense? Does product design make sense? IS IT PATENTABLE?IS IT PATENTABLE? Do a search: Do a search: Market AnalysisMarket Analysis What Price will the Market Bear? What Price will the Market Bear? Price Sensitivity AnalysisPrice Sensitivity Analysis Determine your Cost Target (depends) Determine your Cost Target (depends) Which Channels (How product gets to consumers)Which Channels (How product gets to consumers) Retail, Wholesale, Resellers (own channels) Retail, Wholesale, Resellers (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 launchedOften done after product is launched Sometimes during last phase of developmentSometimes during last phase of development

Distribution Channels 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 Independent Sales Reps Independent Sales Reps Commission on Sales to DistributorsCommission on Sales to Distributors Trades/Service Resellers Trades/Service Resellers Often Sell above MSRPOften Sell 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” price Retailers buy at “markdown” price Calculate from target Retail priceCalculate from 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% OEM Resellers: 20%-40% “Private label” your product“Private label” your product

MARGINS Yours (Selling Price – Cost) Yours (Selling Price – Cost) (your profit is in here…)(your profit is in here…) and you need a salary! (part of overhead)and you need a salary! (part of overhead) Contract Manufacturers Add theirs Contract Manufacturers Add theirs 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 Bottom Line: Aim for 45% Margin Pays for Marketing, Sales, Salaries (yours)Pays for Marketing, Sales, Salaries (yours)

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) Warehouse (+5%)= Landed Cost =$4.85 Warehouse (+5%)= Landed Cost =$4.85 YOUR MARGIN depends on Factory Price YOUR MARGIN depends on Factory Price (1-.45)*selling price = $4.85(1-.45)*selling price = $ /(1-.45) = $8.82 = Factory Selling Price4.85/(1-.45) = $8.82 = 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 should be 4x – 5X your cost Retail should be 4x – 5X your cost

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

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 Tests (if applicable)Safety Tests (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) 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 Contract Manufacturer makes it for you Include FOB and shipping costs when figuring Landed Cost Include FOB and shipping costs when figuring Landed Cost Fulfill from Warehouse Fulfill from Warehouse

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! How many can you make per day? 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)

LIGHT READING Bringing Your Product to Market Bringing Your Product to Market Don DebelakDon Debelak Made to Stick Made to Stick 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

Questions?