Part 5 – Profit.
If you’re building a HW product, you’ve inevitably wondered:
- How much can I sell it for?
- How much money can I make?
In the final part of this 5 Part series, Alan Povall from Product Nimbus breaks down the exciting topic of Profit. Take a read and leave your comments below!
Part 1 – The physical product (the stuff you hold in your hands)
Part 2 – Manufacturing and testing (making the stuff)
Part 3 – Packaging and Shipping (sending the stuff)
Part 4 – NREs (hidden costs that can sneak up on you)
Part 5 – Profit (everyone’s favourite!)
The last factor you need to consider in this model is profit, or more specifically how much profit you can make.
As you know, profit is ultimately determined by:
- How much your product costs to manufacture, minus margin / mark up.
- What the final retail price will be.
The final retail price (e.g. what your end customers actually pay) is in turn is tied to the customer / user research you should have carried out already. By now you should know:
- How much competing, similar or alternative products are selling for.
- How much your customers are willing to pay based on what they’ve told you (through discussions, pre-sales, faux-presales, cost-of-issue analysis, etc).
If you can’t answer the above two questions, drop everything and go find some customers to talk to. Yes, really. I’ll wait. It’s that important.
If you know what your end retail price should be (even as a range), then you can consider the sales model you’ll be using:
- Direct Sales – you manufacture and sell directly to your customers. There are no real middle men. You are responsible for your sales channels / efforts, but can take much higher margins. Often a natural progression of this model is to sell directly to retailers, in order to reach a larger market.
- Indirect Sales – you manufacture then ship product to distributors, who in turn ship to retailers (or depending on how niche your product is, you may ship straight to retailers). Both wholesalers & retailers add mark ups to your product (cutting into your profit margin), but take responsibility for promotion of your product and are often able to reach a wider audience.
If using indirect sales, there’s just one other major thing to remember: Margins.
- Wholesalers typically have profit margins in the range of 20 – 50%.
- Retailers typically have profit margins in the range of 10 – 40%. These vary wildly depending on whether they are online retailers (e.g. Amazon), boutique physical stores or large brick-and-mortar stores (e.g. Walmart). Large retailers are a completely different ball game, so be careful.
Both of these models have their own advantages and disadvantages, so I highly recommend spending some time getting to know the nuances so you know which one is right for you. Don’t skimp out on this. It can make or break your business, so invest some serious time here understanding which is best for your specific situation.
Margin from intermediaries need to be added on top of the profit you wish to make from your product. You need to be careful though that once everyone has taken their slice of the pie, you don’t end up with a retail price far beyond your customers’ expectations.
As a quick final note, beware the difference between profit margin and markup. Some people like to use them interchangeably, but they are two very different things. The crux of the difference is this:
- Profit margin is how much of your selling price (revenue) is actually profit, after to your costs (CoGS, Cost of Goods Sold) have been taken into account. Essentially, Profit Margin = (Revenue – CoGS) / Revenue
- Mark up is what percentage of your costs (CoGS) your profit is. Here’s some more maths: Mark Up = (Revenue – CoGS) / CoGS
- For example: if you sell your product directly to customers for $100, and costs $35 to manufacture and distribute, then:
- Your profit margin is: ($100 – $35) / $100 = 65%
- Your markup is: ($100 – $35) / $35 = 185% (sounds like a lot, but it’s so-so)
So there you have it, a breakdown of where your money actually goes during manufacturing and how it affects your final retail price!
Alan Povall is the Founder of Product Nimbus, which provides business resources for hardware tech start ups. Alan’s been involved with heavily in product development for over 7 years as part of an international HW design consultancy. He now works with aspiring entrepreneurs, start ups and even the odd charity to get their product ideas off paper and into the wild.