China! Or Adventures in Unit Economics
Hello, I’d like to talk to you about Unit Economics. It’s super fun!
That’s not actually true — but it is crucial to surviving as a hardware founder in Start-up Land, which is where I live.
I had this crazy idea to make toy race cars for kids that help them master design and engineering. RaceYa’s cars are awesome little toys that combine the fun of the old fashioned RC cars you might have played with as a kid, with the ability to hack it into the raceable dragon robot you always wanted.
From a manufacturing standpoint — It’s mostly plastic. With some very fancy electronics thrown in.
From a product standpoint it’s a toy.
Those two things combine to make the MSRP — the Manufacturer’s Suggested Retail Price. In this case, it is I, your humble hardware founder, who am the manufacturer. And here’s what I suggest.
That price needs to cover the costs of: the plastics, the fancy electronics, the packaging, the testing, the shipping from the factory to me, the shipping from me to you, and the marketing. There are actually other things too like salaries, office space, legal fees etc that are too dull to list, but you, as a founder will have to find money for.
From a manufacturing standpoint, I suggest we sell each toy car for $8000. We’ll be rich! Sadly, from a product standpoint it’s still a toy. How many $8000, mostly plastic, toys could I realistically sell? I’m going to go with zero here.
(I see you Free Market Capitalism. Your Demand Side is showing.)
So, if it’s a toy I need to sell it at a toy price, which can vary from $1 to $8.5million. (Seriously, click that link because it’s the most bonkers doll house in the world.) But remember that my selling price needs to cover my costs while still being attractive to potential buyers. (It is here you may utter a collective — Duh!)
On the whole, well-made plastic toys cost between $50-$150. So your target manufacturing price, your cost of goods + cost of stuff you need to make the goods really good (like a pretty box), need to be well under one-third of the MSRP.
Bear with me while we go through a few harsh realities of being a hardware founder.
- When you are small you will likely make less than 1000 units as your first run.
- Most big factories want minimum order quantities (MOQ’s) in the 10,000–25,000 range.
- You don’t have enough money.
- Even if you have the money, you don’t yet have the demand needed to sell 10,000 units.
- If you say ‘Hardware Is Hard’, I am contractually obligated to punch you in the nose*
*This statement has not actually been reviewed by my attorney but I’m sure he’s totes cool with it.
So — how do you make 1000 units? 3D printing!
No. No you cannot. Ordinary 3D printing, defined here as FDM printing (think MakerBot), has many many fine qualities but product quality isn’t always one of them. 3D printing is great for making 1 thing. It is great for making prototypes or nifty small giveaway items. It is really great for making jet engine parts when you are Boeing and can spend $500,000+ on a machine to make a $20,000 part. It is not great for making 100 or 500 or 1000 good-looking, strong, quality plastic things at a reasonable price.
- The cost for us to 3D print our cars = $177 per car
Better quality 3D printing, namely a process called SLS, which makes really pretty, really strong parts is also really expensive.
- The cost for us to 3D print our cars using SLS = $569 per car
Definitely not an option. This means we need to explore injection molding. All your favorite things made out of plastic are injection molded. All your least favorite things made out of plastic are also injection molded. Injection molded parts cost pennies each, they are exceptionally strong, and good looking. Problem solved.
But — Injection molded parts require a mold into which said plastics can be injected. These are also called Tools. Think of it like Jell-o mold situation, where the Jell-o is the plastic and your grandmother’s bundt cake pan is the tool.
Tools can be silicone, aluminium or steel. Silicone molds are about as useful as 3D printed parts for quantities over 10 and the quality is crummy, so we’ll skip those.
Steel tools are the gold standard. The part quality is excellent and the tools themselves last for over 100,000 units. This is where you want to be. But first you have to make the tool.
- The cost for us to make a Steel Tool for our cars = $275,000
- At 1000 units the cost of JUST the tool = $275 per car
That’s what brings us to aluminium tools. These are sometimes called “soft” tools because aluminium is literally softer than steel, and it is a less expensive metal than steel. As a result, it’s easier and cheaper to turn into a mold. The downside is that part quality can suffer a bit, and the tool itself only lasts for up to 1000 units. That means that to produce 3000 units you would need to re-make the tool 3 times. But, hey, since we’re only going to make 1000 units, aluminium tools are it.
In the US there are a few soft tooling houses that are popular with the folks in Start-up Land. They have great websites where you can get a quote in minutes to validate the costs of your products. They are friendly and responsive and generally well respected. They are, however, expensive.
- Cost of an aluminium tool with US supplier #1 = $162,000
- Cost of an aluminium tool with US supplier #2 = $144,000
- At 1000 units the cost of JUST the tool = $144 per car
And so we arrive at China. Let me start by saying that I didn’t want to go to China. I wanted to make toys in the US. I wanted to be able to have a direct conversation with my suppliers, more or less in my time zone, a car ride or a plane ride away and be able to support US jobs, US businesses and the US economy. I didn’t want to ship products from the other side of the world at great environmental expense. I wanted to manufacture in the US.
I also know nothing about China. When people would say to me “You’ll have to go to China.” I’d laugh because, in case you were unaware, China is kind of a big place. You don’t just get on a plane to “China” and get off in “The Place With all the Plastics Factories.” You need a guide. You need a person who is truly knowledgeable about, and has relationships with, specific factories in specific places in China. You need a middle-man.
I dislike middle-men. Unless you have a very good relationship with your middle-man you may always be suspicious of their motives. You may never be sure they aren’t negotiating a price for you that also involves a nice little something for them. Or you may fear that they aren’t going to the best factories for your product and instead are going to the one owned by their cousin who, while largely incompetent, really needs the work. But to “go to China” you will need a middle man. Or in our case a Middle-Woman. I found her through another hardware founder who said she was a miracle worker. She has extensive experience running supply chain operations for companies large and small. She speaks fluent Chinese. She lives in Long Island. She is a magical unicorn. She got us quotes for aluminium tools.
- Cost of an aluminium tool with Chinese supplier = $25,000
- At 1000 units the cost of JUST the tool = $25 per car
Twenty Five Dollars! Twenty five dollars is a cost I can work with. Twenty five dollars leaves me room to add the fancy electronics ($30 per car) and leaves a little room for shipping and packaging and all the rest and still come in at an MSRP of under $150.
And that, dear readers is how I stopped worrying and learned to love China. It is because $25,000 is significantly less than $144,000. It is because parents are price sensitive when it comes to toys and $100 is still a stretch for most people. It is because, despite my best intentions, my ability to share my vision with you comes down to my ability to deliver that vision for a price we can both afford.
So, come see my beautiful toy over on Kickstarter. Come see my glorious reward tiers. Come support my vision. But please don’t ask me for a discount on MSRP.
- Author’s note: To begin to get truly knowledgeable about manufacturing, subscribe to The Prepared’s newsletter and prepare to be thoroughly confused and enlightened, in equal measure, weekly.
