How to Price Your HW Product (5/5)

Part 5 – Profit.

If you’re building a HW product, you’ve inevitably wondered:

  1. How much can I sell it for?
  2. 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!)

Profit

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:

  1. How much your product costs to manufacture, minus margin / mark up.
  2. 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:

  1. How much competing, similar or alternative products are selling for.
  2. 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:

  1. 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
  2. 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.

How to Price your HW Product (4/5)

Part 4 – NRE’s: The Sneaky Costs.

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If you’re building a HW product, you’ve inevitably wondered:

  1. How much can I sell it for?
  2. How much money can I make?

In Part 4 of this series, Alan Povall from Product Nimbus breaks down NRE costs.  These are often overlooked and can be surprising.  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!)

NRE Amortization:

Here’s one I love because so many people overlook it. NREs (Non-Recurring Engineering / Expense) usually come from four main places:

Design & development costs:

Electronics, software, industrial design, mechanical tests, IP, prototypes, user research, the works. Everything it cost you (or will cost you) to get a fully manufacturable design, but isn’t part of the physical per-unit cost itself.


Manufacturing set up:

Essentially the cost to get everything up and running for manufacturing, which is typically a flat fee from the manufacturer (depending on how well organized you are). It includes reviewing design files (if you have a good CM), setting up pick & place machines, getting stencils made and more. Typically put this value at $3,000 – $5,000 for a Western manufacturer, although it depends on the agreed upon conditions (e.g. it could be rolled it into the per-unit cost and tied to order volumes). There is often also a smaller per-batch set up fee (to get SMT reels loaded, stencils ready, AOI files loaded, etc).

Certifications:

FCC, UL, CE, FDA, Ex, etc all add up and vary depending on your product as well as the category it falls under, whether it is designated as a medical device, has RF transmitting capabilities and more. Standard certifications are in the $10k – 20k range if you do them right the first time. If you use pre-approved parts (or go through some of the Asian labs), that cost can be as low as $1,000. Failing the tests and having to resubmit can drive up cost, depending on the certification being pursued.  It’s a good idea to start discussions with a certification lab once you have a prototype so you can catch early problems.

Enclosure production cost:

If you are using 3D printing for small volume runs, then one-off costs are less of an issue. However if you are using injection moulding for instance, then the cost of having the mould created can be significant and needs to be taken into account. Depending on the actual mould complexity and where you get them made, these can range anywhere from $3,000 to $12,000 (or more).

Test Fixtures:

You may need some sort of test fixture in order to carry out functional tests to ensure that the electronics (and mechanical bits) of your product are working before putting everything into a box to ship. These can range from simple manually operated fixtures which take a few hundred dollars (or less) to create, through to complex ATEs (Automated Test Equipment) which are essentially a full product in their own right. ATEs can range anywhere from $15,000 – $50,000 (yes, really), depending, yet again on product complexity. The more complex a product is the longer manual testing will take, which means that as volume increases there will be a crossover point where manual labour becomes more expensive than creating and using an ATE.

The Key to Remember:

These costs need to be recouped throughout production (preferably sooner rather than later), and so need to be split across the anticipated production volumes. If your total development, manufacturing, enclosure and test fixture NREs are $250,000 (hypothetically) and your anticipated annual volume is 10,000 units, the amortized NRE cost as a per unit cost would be $25 per unit ($250,000 ÷ 10,000) on top of the other per unit manufacturing costs we’ve mentioned already. Naturally you could spread this over 2 or even 3 years (although that would be pushing it a bit), which would reduce the per unit cost to $12.5 and $8.33 respectively, depending on the accuracy of your sales projections (pro tip: they don’t climb exponentially).

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.

How to Price your HW Product (3/5)

Part 3 – Packaging & Shipping

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If you’re building a HW product, you’ve inevitably wondered:

  1. How much can I sell it for?
  2. How much money can I make?

In Part 3 of this series, Alan Povall from Product Nimbus explains why hardware startups shouldn’t worry about having packaging that’s as sexy as the iPhone.

How important are packaging and shipping?

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!)

Packaging:

Packaging costs also vary widely depending on the quality of packing you want to wrap your shiny product in. It’s all the rage these days to go for ultra high quality packing design and materials to create a luxurious ‘unboxing’ experience. It’s my personal opinion that as a start up, your money should be spent on:

  1. Validating the living heck out of your market
  2. Creating a product experience so sublime that melts your customers brains into goo
  3. Finding the perfect manufacturing partner
  4. Promoting your product until you’re blue in the face

As you can tell from the above list, designing a 15 piece interlocking, shiny double bonded UV resistant cardboard portmanteau is not on the list. I’m not saying shouldn’t package your product beautifully (if you can do it for the right price), but I think you need to think very carefully about where your money goes. High end packaging can be anywhere from $5 – $20 per unit. Basic but respectable packing can start at $0.30 – 1.00 per unit.

Shipping:

Shipping costs are another fun variable, which change considerably based on where you are shipping from, your manufacturer’s MoQ and how Just-In-Time your sales model is. In most cases it’s not feasible to use air freight (unless your volumes are still relatively low), which means you’re stuck with a combination of sea and land transport. It’s an aspect that’s often overlooked with the Asian manufacturers, as they have large MoQs (up to 3,000 – 5,000), which need to be shipped to USA / Europe in most cases (not to mention port clearance fees), weeks if not months ahead of when you think you’ll actually need the stock.

If you know the weight, dimensions and MoQ your product to be made, you can phone around and get some shipping / clearance fee estimates from shipping companies.


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.

How to Price your HW Product (2/5)

Part 2 – Manufacturing, Testing, & Yield! Oh My!

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If you’re building a HW product, you’ve inevitably wondered:

  1. How much can I sell it for?
  2. How much money can I make?

In part-2 of this 5-part series, Alan Povall from Product Nimbus guides us through the sometimes daunting question:

How do manufacturing and testing affect my cost?

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!)

Assembly & Functional Testing:

Assembly and functional testing cost is largely dependent on the assembly complexity of the product, how well DFM (design for manufacturing) principles have been applied.  The type of testing is impactful as well: automated testing equipment (ATE, more on this below) or manual labour testing. If you haven’t had a chance to talk to a CM yet and got a quote, a rough rule of thumb of 4 – 8% of hardware cost can be used to estimate this,

Pre-programming:

Does your product have a flash memory, EEPROM, or some other programmable device that needs to be pre-programmed?  Be sure to include the costs of this.  Major parts distributors offer programming services and can take care of this for you and the part can just be soldered onto the PCB during assembly.  Otherwise your CM will have to program the part (either before or after assembly) and you’ll have to help with the details.

Highly Accelerated Stress Screening (HASS):

HASS is essentially a post assembly stress testing method designed to incite infant mortality failure of components, through all-axis vibration and rapid thermal cycling. HASS testing is carried out so that failures happen in the manufacturing environment (where they can be fixed), instead of in the field where either a recall, replacement, or in-field repair would be necessary.

The investment to implement HASS testing varies from product to product, but is generally a function of complexity (and therefore cost), so it’s best to check with your CM (also to make sure they offer it – if they don’t, you can also do it yourself, but you’ll have to put a test regime in place). A useful rule of thumb is to allocate 2 – 4% of your total hardware costs.

Manufacturing Yield:

Manufacturing is not a perfect process and you’ll always get a small number of product which don’t work when coming off of the production line. Tombstoning, insufficient wetting, bridging (especially if doing reflow soldering), poor manufacturing practices and more can cause issues. Sometimes the heat profiles of automated soldering equipment induce infant mortality in components, even prior to HASS tests.

In reality yield failure can run anywhere from 0.5% through to 5% (even up to 10% in extreme cases), and depends on a variety of factors such as:

  • Quality of components
  • Number of components placed
  • Footprint complexity of components placed (BGA vs. SOIC8 vs. 0802 resistors)
  • Solder quality and type (lead vs lead free)
  • Quality of manufacturing processes & systems in place

A good manufacturing process should provide a high yield rate (e.g. a low failure rate), but this can vary significantly from CM to CM. As a rule of thumb, I’ve found 2 – 3% of hardware cost to be a reasonable estimate. As your own processes mature, this number should drop to ≤1%.

Reliability / In-Field Failure Rates:

No product will be without failures, regardless of how well-designed or test process. Strong reliability engineering practices during design phases and HASS during production can greatly decrease the probability of in-field failures, but never completely eliminate them.

As such it’s important to factor the probability of failure into the pricing model, but it can be difficult to do so as, again, there are a great number of variables affecting reliability. As a general rule of thumb a failure rate of 2 – 5% for electronics would be doing fairly well and therefore 2 – 5% of HW costs is a good range to allocate to your final unit pricing until you have empirical data to make a more informed decision.

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.

How to Price your HW Product (1/5)

Part 1The Physical Product

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If you’re building a HW product, you’ve inevitably wondered:

  1. How much can I sell it for?
  2. How much money can I make?

In part-1 of this 5-part series, Alan Povall from Product Nimbus guides us through the sometimes daunting question:

How do manufacturing and testing affect my cost?

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!)

Electronics & PCB:

Once you’ve designed your PCB you should have a fairly good idea of what is going into your product, especially at low volume through buying components from distributors like RS, Element14, and Digikey. These low volume costs form the basis of this pricing model.

There are two main points worth noting here:

  1. 70 – 90% of your product cost will come from 20 – 40% of components. This means that if you haven’t fully finalized your design yet, don’t lose sleep over trying to find a source for every single component (at least not yet), especially for sundry items like resistors and capacitors (that don’t have any special requirements). You will have a handful of core, critical components which need to be carefully chosen to keep cost low and ensure long term supply (e.g. don’t choose something that you know is going to go end of life in a year or two).
  2. The mark ups that suppliers (such as RS, Element14, Digikey, etc) apply to components is similar to that of contract manufacturers (CM), so the price breaks (discounts at volume) that you receive from both (up until around the 10,000 mark at least) are roughly equivalent.

Pricing:

From my experience the price breaks you can expect relative to one-off pricing for electronic components are:

  • 100 off (15 – 25% discount from one-off pricing)
  • 1,000 off (30 – 50% discount from one-off pricing)

Once you get to 10,000 units or more of a specific component, you get into quote territory. The actual price breaks over one-off volume vary considerably dependent on the component type and are really dependent on how well integrated a contract manufacturer’s supply chain is with its own suppliers.

Whether you are able to use a contract manufacturer’s preferred parts also makes a considerable difference to your final BOM price (hence why it’s important to get talking to your CM as soon as you’ve settled on a first pass design, as they’ll make some recommendations for changes which will need to be reflected in your design).

Enclosure:

The next item to consider is the per-unit cost of the enclosure. Enclosure costs vary significantly based on a number of factors, such as:

  • Whether it is an off-the-shelf or custom designed enclosure
  • Manufacturing technique (3D printing, injection moulding, rotational moulding, etc)
  • Base material (aluminium, ABS plastic, etc)
  • Material additives (UV stabilisers, pigments, anodising, etc)
  • Enclosure complexity (physical design as well as number of parts to be assembled)
  • Production volume

Given the large number of variables it is difficult to point to exact price breaks, except saying that they can be significant (e.g. a small, 10 off ABS injection moulded cases could be $3 – $5 each, whereas at volumes of 40,000 could be as cheap as 17c each).

Check out Part 2 where we dive into Manufacturing, Testing, and Yields!

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.

7 Tips to Make Your PCB Quoting Experience Smoother

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I recently designed the hardware for a really cool wearable device being developed by another startup. I contacted several local manufacturers to get quotes on costs. During the process, I ran into several challenges that I’m definitely going to remember for next time. Here are 7 tips from my recent adventures that will make your next collaboration with a manufacturer go smoother!

  1. Clarify ahead of time if they’ll find orderable generic parts for you. Passive components, like resistors and caps usually comprise the majority of your BOM. It often doesn’t matter which manufacturer part number is used during assembly as long as your specs for each component are met. We all know how painful it is to find an orderable manufacturer part number for a 0.1uF X7R 0402 10V ceramic cap and then repeat this search for the 100 other passives on the BOM! Thankfully, many manufacturers will do this search for you, saving you a lot of time. But make sure to clarify ahead of time so that you’re not surprised.One of Upverter’s superpowers is the Generics feature. It lets you put down generic parts (mostly passives) on your schematic without having to create a specific part in the library or worry about the manufacturer part number in that moment. You simply specify the value and specs you care about and move forward with designing.
  2. Make it clear whether or not you are okay with the manufacturer “upgrading” generic passives. For example, in my schematic, I specified that several caps should be rated for at least 6V since they were decoupling a 3.3V rail. But there were other caps in the design that had all of the same specs with the exception of being rated for at least 10V. It might be cheaper for the manufacturer to order only 10V caps so let them know they can make “upgrades” like this. This sort of thing often happens with capacitor temperature coefficients and resistor/cap tolerances.
  3. Make sure all your passive component values are real! Resistor and capacitor values are mostly standardized but sometimes, you have to calculate exact values for your particular application. For example, you may have to calculate resistor values to set the output voltage of an LDO. Or a capacitor value to set the soft-start on a switching power supply. Just remember to choose the closest orderable value at the end so the manufacturer isn’t confused. Manufacturers don’t like to make assumptions on your behalf. The less back-and-forth you have with them, the faster you can have your board built.For caps, in addition to making sure your chosen value is a standard one, there are other attributes (like voltage rating, tolerance, temperature coefficient, dielectric, etc.) that you should confirm are orderable from your distributor.
  4. Consolidate identical parts onto the same line in the BOM. This makes both yours and the manufacturer’s life easier since the BOM is shorter and more organized.
  5. Get their PCB fab capabilities, specifications, and DFM constraints up front. You need to know this stuff before starting the layout. It will be a huge pain to fix your board if you use a trace width or hole size that the manufacturer doesn’t support. I know that sounds obvious but you’d be surprised how often this gets overlooked. But what if you haven’t chosen a specific manufacturer by the time your layout starts? Here’s a list of conservative guidelines I averaged between 6 different manufacturers. If you follow these specs, you can be assured that the majority of manufacturers will have no problem making your board:
    • Trace width/spacing = 8 / 8 mils
    • Minimum annular ring = 6 mils
    • Minimum hole size = 12 mils (10 mils is usually fine)
    • Copper to board edge clearance = 40 mils (20 mils is usually fine)
    • Component to board edge clearance = 100 mils
    • SMT component to SMT component clearance = 20 mils
  6. If you want to get a rough idea of cost before your layout starts, you can directly ask your manufacturer(s) for it. You’ll just need to supply the following information (They will update the quote when they have your finalized gerbers but it shouldn’t change much):
    • PCB dimensions (LxW)
    • PCB thickness (0.62 inches is standard)
    • Number of layers
    • Copper weight (1 oz is common)
    • Soldermask colour (default is usually green)
    • Controlled impedence traces? Yes or no
    • Double-sided SMT? Yes or no
    • Number of through hole components
    • Number of fine-pitched SMT components (pitch < 0.5mm)
    • Number of BGA/QFN/Leadless SMT components
    • Number of remaining SMT components
    • Number of unique manufacturer part numbers on the BOM
    • Completed BOM

    Remember, Upverter’s Design Report feature gives you much of this information from the design’s Project page!

  7. Clarify with the manufacturer if they will take care of panelizing and adding guide rails. Their assembly equipment needs to grab onto the sides of the PCB. So if you have components within 250 mils of the board edge, they usually add extra strips of PCB material (called rails). This may make your PCB more expensive since potentially, fewer boards can be added to a panel. So just be aware of this.

Manufacturing with Upverter

Manufacturing with Upverter

Building the greatest EDA tool on the planet doesn’t just stop at our schematic capture and PCB layout editor. We know the importance of bridging the gap between an electrical design and that same idea in the physical world. There’s also a whole other phase of bringing up a design–probing, testing, debugging–that can only be done once you go past that daunting line of manufacturing.

To help you do this, Upverter comes well-equipped with a number of exporting options that will make the transition easy and error-free. You’ll find all of the downloadable file formats on your project’s page under the last tab, “Download Associated Files”:

Download Associated Files

Often times, all that your manufacturer needs are gerber files. Simply click on the download icon and get a neatly zipped up folder with all the appropriate gerber files corresponding to the PCB’s layer.

If you’re looking to have your PCB assembled, we provide pick-and-place files for just that! The Bill of Materials, generated as a CSV file, is also just a click away. If your manufacturer also wants the project’s schematic, you can either download a PNG or simply send them a link to the project–one of the many perks of being a tool that can be accessed through your browser!

In a recent IEEE Spectrum article on cloud-based EDA tools, Upverter was put to the test, from design to finished PCB: “As a test, I designed a small board for an overlay display system for a first-person video project I’m working on. I exported the manufacturing files and had it fabricated through OSH Park. And I was delighted to see that the three boards I received 12 days later for US $7 each came out just fine.” Needless to say, we passed the test!

So the next time you’re ready to make the jump, take a look at our exporting options and see how easy it is to get your idea from screen to life.