Invention Pricing to Make Money

{Don Debelak’s new book, Turning Your Invention into Cash is now available on Amazon for $3.49. Go to Amazon.com and enter inventions Don Debelak to purchase. From the author of Entrepreneur Magazine’s Bringing Your Product to Market.}

Can You Make the Product for 20 to 25% of the Expected Retail Price?

Last newsletter we mentioned the importance of having your manufacturing cost be 20 to 25% of your projected price. This newsletter covers how to determine what your projected manufacturing cost will be.   In reality most inventors have no idea how to estimate what their product will cost in large production.  Often they only have quotes for prototypes and small production runs which can be very high.  Inventors often don’t know the impact of tooling cost either and how those costs should be incorporated into their final product cost.  To get a better understanding of their manufacturing, I recommend inventors can follow these six steps .

1. Contact your local branch of SCORE, Service Corps of Retired Executives , which you can find at score.org/.  I have found that most branches have several people with manufacturing experience, or at least know people with manufacturing experience that can help guide you while you figure out the costs of you product.
2. Find two to three products that are, in your eyes, very similar to your product. If you look at the price of that product, and divide it by five, you will probably be somewhat close to its manufacturing costs.  That is a starting point then for the cost of your product.
3. Take the products next to the SCORE advisor you have hopefully been able to locate. Have him or her explain if there are any major differences between your product and the ones you have chosen that could result in a higher or lower price for your product.
4. If you can’t find a SCORE advisor, you should take the products, along with your idea, to two to three manufacturers and ask them if they feel the cost of your product will be similar to the ones than your product. Again ask for differences that would make the product more of less expensive than yours.
5. Estimated the impact of tooling cost. One component of the product costs that can throw you off is that tooling costs are amortized over time and put in the product costs. So if tooling costs for a product is $50,000 and it will make 1 million units, the manufacturer will add about 20 cents to the product.  The larger the tooling costs, typically the lower the price of the product.  That’s because tooling cost is related to the number of cavities in the mold.  A large manufacturer might make a six cavity mold for $100,000, while you can only afford a two cavity mold for $35,000.  The production piece price of a six cavity mold will be 20 to 30 percent less than the per piece price of a two cavity mold. So you need input from manufacturers and your SCORE contact about what the most cost-effective mold size will be.  If it is possible to make additional parts in one mold with an expensive tool you need to raise your production cost 25%.

For example

 

Similar product’s retail price                        $20.00

Estimated production costs                          $  4.00

Adjusting for impact of a six cavity             $  1.00

versus a two cavity mold

Your expected price                                         $  5.00

 

6. Multiply your predicted production cost by five and then compare it to the perceived value of your product you determined in our last newsletter.  If your perceived value is about the same as production costs by five, or if it is higher, you are in great shape to make money on your invention.

I know this seems like a torturous step to go through.  But far too often inventors, with strong salable products, continue on the invention path, spending money at every step, only to end up with a product they can never make money on because product production costs are too high for the product’s perceived value.  Early on is the time to discover this. Then you have time to correct, either by adding features or redesigning your product to cut costs.

Note:  This article highlights why I feel it is important for inventors to have two helpers, one a manufacturing advisor, which you might find at SCORE, your local inventors club, www.inventorsdigest.com/resources/inventor-organizations or a Small Business Development Center www.sba.gov › Counseling & Training › Local Counseling & Training.  For marketing advisors you can also use the Small Business Development Centers, but I find the best contacts are manufactures sales representatives.  One Stop Invention Shop has lists of reps available for many industries at a cost of $24.95 per list at onestopinventionshop.net/books/sales–reps/.