When you are developing a hardware product it’s easy to forget about pricing, but this is a key aspect of the creative process.
The price directly affects profits and thus the commercial success of the whole company. Pinpointing sales costs also helps position your product on the market and greatly influences how the device will be perceived.
Based on price, you can determine if you’re creating a luxury good that customers will save up to purchase, or if it will be a lower-end product, bought for instant gratification.
There are a few factors you should consider when you are setting the right price:
- Explore the market and look at the prices of competing products. If you’re crafting a wearable device and you know that devices with similar characteristics retail for $150, you probably shouldn’t sell yours for $20 — customers might think that something is wrong with your product.
- Imagine your potential customer. Does she uses a device to track her sport activity? Is she a professional athlete or an amateur? Will she look at the product online or in a shop? How much is she willing to spend?
- Keep in mind that most consumer electronics and household items can be divided into two major groups: items that people plan to buy in advance (appliances like washing machines), and items they buy spontaneously (like headphones and wearables). You should choose one of these categories before moving forward.
We’ll focus on pricing products that are considered to be impulse purchases, which fall below the $99 price point.
You might think that a retail cost of $99 will give you more than enough to cover production and distribution costs and still make a profit, but this isn’t always the case.
When the price on shelf is $99 (MSRP), you may spend $12–13 on the hardware itself, including all the materials, packaging, wires etc.
Here’s how to price your hardware product.
Start with the bill of materials (or BOM) that is needed to manufacture your product. To maintain a healthy margin, your BOM should be 12–15% of MSRP, so with a $99 price tag, it needs to be $12–13. When you increase BOM by even $1, you should either raise the price on the shelf accordingly or plan to have that $1 subtracted from your earnings.
When making a product, you also need to pay developers, spend money on pre-production, line set-up, logistics, warehouse costs and other expenses. All the money you need for BOM and other outlays adds up to the cost of goods sold (COGS). It’s important to optimize the COGS, but it’s not easy to figure out what it will be the first time the product is manufactured.
Remember that you have to spend money on product development, marketing, staff salaries, rent and taxes. It is impossible to retail the product at manufacturing price and make enough money for company growth. Your earnings should be equal to COGS or even greater (in the picture above it’s twice as large). The wholesale price of the product consists of manufacturing costs and your earnings.
Rule of thumb: COGS is the retail price divided by four
Distributors and retailers
Inevitably, you will have to pay distributors and retailers. To determine how much money you need to pay them, multiply the wholesale price by two.
Note that Apple Store and other large stores have higher distribution fees than regular big-box stores. However, selling your products at the Apple Store can also have a huge payoff. Selling your product in well-known stores increases its visibility.
If you launch your product on Kickstarter, it will be funded at a lower price and you initially avoid paying distributors. But it will be impossible to maintain a low price once you start mass producing your product. The circulation will increase, and you’ll have to sign-up with distributors.
It’s unlikely your product will bring in enough profits after the release of the first batch, so it’s a good idea to set the price higher and lower it after a few rounds of production. Customers will respect this if you’re building a company, not a one-day project.
You can always manufacture the same product at a lower cost (by using cheaper materials, for example), but it is better to create your product the way you planned with quality design and packaging. Reducing costs and optimizing the production process will be a constant battle in the years ahead, but not for the first launch.
To sum up, сalculating your costs is essential for the success of your product. It’s impossible to accurately plan and calculate everything in the beginning, but keep in mind that retail price is made up of four approximately equal parts: COGS + your earnings + distributor fee + retail fee.
RUKI is a hardware incubator, based in Shenzhen, Moscow and San Francisco.
To find out more: useruki.com