One of the most frequent questions I get in my initial meetings with potential clients is “How much will that cost to manufacture?” While we understand the importance of this question, it is a very difficult question to answer before an actual design exists. But all is not lost since there are some rules of thumb, hints, and considerations that can be used to come up with a rough budget of the product cost.
1. Consider the product manufacturing volume and location. Two of the more important considerations when determining the total product cost are the total production volume and location. If you are only going to make 1000 products, the product cost will be much higher than somebody producing 1,000,000 products. Also, the product cost is dependent on the county of manufacture due to the effects of labor costs and shipping costs. Know how many you expect to produce and where you want to manufacture before estimating product costs.
2. Perform a sanity check using the product retail price. Product companies are usually very familiar with the retail price that the customer is will to pay for their product. With this being the case, you can use a rule-of-thumb relationship between retail price and product cost to estimate the product costs. For a consumer product, divide the retail price by 4, 5, or 6 to come up with the product cost budget goal. Share this goal with manufacturers and engineers to see if this is in the right ballpark.
3. Estimate mechanical part costs based on size. If you have a relatively simple mechanical product and know the general size of your product, you can work with a manufacturer to estimate the part cost. These estimates require that the manufacturer assumes the material type, material cost, and rough manufacturing labor cost for a product of that size. Again, this will be a budgetary cost but will point you in the right direction.
4. Electrical components take up most of the product cost. If you product requires electronics, you can expect that the electrical cost of your product will be the highest proportion of the product cost. Memory, control electronics, motors, and communication chip prices also fluctuate so it is important to get an expert to estimate the electrical cost. This requires a brief analysis of the product requirements, a rough electrical architecture, and evaluation of the current pricing for many of the more expensive components in the architecture. These estimates take a significant amount of time from an engineering team who understands both engineering design and manufacturing.
Remember that the product costs generated using these exercises will be budgetary estimates and should be treated as such. Allow for a margin of error in your financial calculations in case the actual prices are higher than estimated.
Here is a related link at Entrepreneur.com with some mathematical examples and further explanation regarding product cost.
Need more information? Please contact us with any questions or contact me directly at joseph.donoghue ( at ) leardon.com