What it Took (Part 6: Estimating Production Costs) – My Journey Launching a New Business and Becoming a New Father
Sorry for the delay in getting this next post up but we have been super busy expanding our business (a topic for another day once we have you up and running).
Okay, so you’ve come up with your crazy idea, built your first prototype to prove it works, searched high and low on the Internet for any patents that might stop you from moving forward, filed your own provisional patent application to put your stake in the ground, performed your initial market research and found that there are indeed people out there that will buy your product and… now what?
Now it’s time to get an idea of how much it will cost to produce your product. All we are looking for at this moment in time is a back-of-the-envelop estimate so that we can make a judgment as to the whether or not we can make this thing.
The first thing to do is break down your invention into the basic components that make up the whole. Then figure out how each of those parts is going to be made. And how you are going to put them together.
Most likely, some of the parts you need will already exist out there in the world and all you will need to do is buy them. For instance, the SurfShelf comes with two nylon straps that each has a snap-in buckle attached to it. I obviously did not produce the snap-in buckles myself, but instead bought them in bulk from another manufacturer.
There will also undoubtedly be other parts that do not exist in the world that you will need to produce yourself. Are these parts molded plastic, machined metal, electronic?
The SurfShelf back plate and tray are molded parts, so I needed to find an injection molding manufacturer to do the job.
Ultimately, for each part that you will need to produce, you will need to find the right manufacturer to produce it for you. But right now we just want to get an idea of the cost, so it’s time to get some quotes.
Get on the Internet and start doing localized searches for the types of manufacturers you need that are in your area. These are the people you are going to call and go visit.
For instance, I visited five different injection molding facilities in Los Angeles and got quotes from each one of them to make the SurfShelf. I also met with them each individually and learned a great deal about the injection molding process, what it took, the costs involved, how to improve the product design, etc. Don’t feel bad about asking them to spend some time with you and to prepare you a quote — this is what they do all the time. And who knows, you might even end up doing some business with them in the future.
It’s important to note that at this time I did not have the final design of the SurfShelf in hand. In fact, it wasn’t even close. All I had was a PowerPoint sketch of what I thought it might look like. And this was close enough to get me some quotes to give me some ballpark information. All I really wanted to know was is it going to cost me in the neighborhood of $10 to make or $50? At $10 I might be able to make a business, but at $50 no way. This is what you need to find out.
If you can’t find local manufacturers to do the jobs you need done, that’s no problem. It’s easy to have phone conferences while sending drawings and quotes to each other using email. People do it all the time. It’s just fun to actually visit a manufacturing plant if one is close by.
Get ballpark quotes for each of your components and add them together to get your final cost. I took the quotes from the five different manufacturers that I met with and entered the information into an Excel spreadsheet to order to compare them and get the average.
Now take the average cost and DOUBLE IT. Seriously. DOUBLE IT.
Then throw in another buck or so for packaging (depending of course what the packaging is going to be) and maybe a few more bucks for stuff you never would have imagined.
And that’s your number. At least for now…
You will most likely be able to trim it down when you actually move into production, but use it as it stands for now. If you can make things work with this number, then any money you trim off the top is just an added bonus (but don’t necessarily count on it, trust me).
So, can you now add a profit margin to this number and still have a price that you think people would pay for the product?
What’s profit margin? Profit margin is a way of representing how much you are actually going to make on each unit sold after you pay off all the costs to produce and get the product into the hands of your customers. So we’ll talk about that next…