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- Опубликовано: 5 авг 2024
- In this Fundamental Friday Dave discusses the economics of selling your own hardware. Both directly and through a distributor/reseller.
Everything you need to know about pricing your product for your hardware startup. Cost Multiplier, Gross Margin Percentage, Markup, and Cost Of Goods Sold are all explained.
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Hi Dave, well done. You've explained in roughly 26 minutes what has taken me about 24 years to learn. I'm in the finance industry now and your numbers are spot on (as a minimum!). It's wonderful to see a tech savvy person who is also finance savvy. Keep up the great work.
Thanks for the confirmation.
This guide is completely wrong. Here are the true economics of selling hardware:
1. Think about something you want in your life
2. Now invent impossible but believable promises and an impossible but believable price
3. Put it up on Indiegogo and Kickstarter
4. Keep posting some promising updates every few weeks until you have all the money you'll ever need in your life
Or that, yeah!
But I read one involving "instant solar water" just went tits up...
Well yeah promising a vaporware is another way... but fraudulent... no thanks!
Exactly! Sadly there are many who choose that path!
Thanks for the video Dave. This will be a good reference point for those who argue a phone that costs $50 to make should be sold for $51.
$50? Sometimes it could be $100-$200. It depends on greed of an owners.
I've been a small scale electronics manufacturer for 10 years and this video is very accurate and appropriate, nicely done Dave.
Thanks.
+DrScientistSounds Wow, great to see that you are an EEVblog fan! Guitarist and pedalboard nerd here.
Been watching Dave for years, big fan!
DrScientistSounds, thumbs up here from Thomas from Dwarfcraft Devices. Awesome that you're an EEVblog fan, as I have been for years too!
Hey Thomas, small world!
The 'profit' comparison between direct sales and reseller use would seem more useful if you were to take into account the opportunity cost of doing your own distribution: You may make 47K a years more by doing your own distribution, but if the additional work of doing all the shipping and handling means that you have to spend an extra 1000 hours working on this project, while you could be earning (just to pick a number) $ 60 an hour doing other work, you are actually losing 13K by doing all the work yourself.
Very true - the price is what it is! The realities of production.... It is always a challenge to sell a product that is not built down to a cost, and the higher the quality build, the more labor cost in production, and the volume of production is always reflected in the end price.
I founded and ran a electronic company in the past (sold it now). IMHO a distributor is worth the mark up. Although in the first moment 60% (sometimes more) does not sound "fair" (=easy money you think you can have yourself), but the most important issues are: Reach far in the market to have huge volumes and do the work that you as an engineer probably dont enjoy: Dealing with stupid, time consuming customer and doing paper work, like single shipping, customs and national regulations in foreign countries etc. I did both, started selling the product myself and afterwards having an exclusive worldwide distributor (to whom I now sold my company). Also keep in mind: You might want to have time to develop further new projects in the future.
Ein Gast You could hire a person to do the customer service. But yeah if the distributor gives you 3 times or more sales and more time to work on improving/inventing new products it is a good deal.
These are exactly my thoughts at this moment. Why spend time slaving with all of that when you could enjoy a better quality of life and even design more products to sell.
any new video or blog about applying for quality certificate like FCC or UL or CE. this information is badly needed
i feel like that's one hell of a pandora's box
An electronics manufacturer in China showed me one of there products a yellow water proof AM / FM radio. It was well built and I was tempted. The cost was US $ 1.72 each with a minimum order of ten thousand units.
A year latter I see this unit in Dick Smith for A$ $39.95.
Dick Smith went bust but if you look at the prices at other electronics shops they are what the market will bear not cost plus margin.
My pet hate is things are 5 cents less than the next dollar value $29.95 $ 49.95 etc.
The 5 cents less is a physiological impact, would you buy something that is 99 cents or 1 dollar?
@@joshcook8586 That's why we hate it
11:04 "Don't pay for marketing"
Best advice I've heard in a long time.
Marketeers are frauds.
don't pay for marketing, pay for adveritsing you know will get customers
Saw the blog post a while back... This is great info for hardware guys and could save many from shooting themselves in the foot.
Dave, I’m using the same 2.5x rule in the construction business. Usually for stuff I am not sure what to charge for, i mostly work on restoring old houses. Love your vids, keep it up :)
Fundamentals!!!! YES! Thanks Dave. Fundamentals Friday are my favorite type of videos.
Great overview and 100% accurate in my experience. It's really best to go for 3x to be comfortable but that 2.5x number is the common minimum. In some small markets such as Pro Audio distributors will get down to 30% markeup, and selling direct to dealers you can even get to 20-25% depending on what the product is. It does stink to think the distributor can make more money than your company - but you have to have massive respect that they are buying/investing in your product at at least 2x cost of what you are!
Another reason to go for 3x and above profit percentage is that you want to reinvest into your company - you don't want to rely solely on investors and credit accounts!
This is awesome. Gonna watch this a few times. I've seen this in my feed several times, finally getting to the point where I might be trying to start a business myself.
I love this video. Always come back to it whenever I need a refresher on the calculations :)
Dave, this is such a great video, even today! Thank you for sharing your expert knowledge and experience with the world! YOU ARE A LEGEND! 🙏
Well done Dave! This will help a lot of people understand this part of product development!
Excellently useful - covered a bunch of stuff I happened to be thinking about this very week. Plain "electronics design" videos come ten a penny these days, but Dave has the industry experience to back up a much broader range of subjects, such as this.
This video was insanely helpful. I had my COGS planned out but had no clue what to charge for the product. Now I know. Thanks for another informative video Dave!
Great info - thank you for sharing your knowledge.
I have wanted to know this for a long time and you presented in a very concise way - excellent!
Dave a very nice and educational video! Thanks! Its so good to listen to a domain professional talking about selling specific industry products than some Economic / Finalcial weaboo that does not even know what the product is about and how it is made, Thumbs up for the Libreoffice....
Hello Dave, I have a plan to start such a business as a side work and had some rough numbers. You gave the basics of a realistic start in a clear way. Thanks
Awesome video Dave.
I would add that Economy of Scale is another important factor to consider when calculating the cost/profit of your widget. I've personally seen a >25% cost reduction on a single component/module when manufactured in 5k qty rather than 1k qty. When you get to 10k or 100k quantities things get interesting. In some cases, producing a product in less than 1k qty is not even worth the effort involved. You either get to a product price point that is more than most people would want to pay, or watch your profit margin vanish. Neither scenario ends well...
Thanks Dave!!, I was just researching all this information and it just magically appeared on my feed.
This video was really informative for a young guy like me. Thank you for this very nice video, Dave!!
Really good info Dave. Thanks! I needed to learn this just now.
This was a really nice video mate, I wonder how many kickstarters could have succeeded had they known this stuff
Many have failed by not even talking to a factory before running the Kickstarter, or they picked the one offer that was 50% below all other offers only to flake at them once the production was supposed to start.
SUPER! A masterclass in taking a hobby and industrialising it. Cheers mate!
Spot on, this holds true for most businesses that manufacturer things. The multipliers might be slightly different but the basic idea is the same everywhere.
Great video!! I am working on starting an electronics business. Would love to see more of this! Best of all, I would love to see a video about compliance and certification requirements, and the risks of selling those first few (built at home), perhaps mains powered, electronic device, which you haven't thrown down the $100k for UL certification for (as a sole proprietor).
I love Fundamental Friday. Good work!
One thing to keep in mind is that the reseller DOES add a tangible value besides pure profit - he frees up your time so that you can start doing the NEXT profit making enterprise. This is significant IMO. Unless you plan to skate on the same old products for years, as soon as you've got things worked out on one product and it's a proven product with cost reductions done and defects reduced, you should start putting your time into making the next thing instead of wasting your time on fulfillment.
I agree, the effort in boxing customers orders up, and handling queries shouldn't be underestimated. Get someone else to do it, unless your dealing with high value, low volume goods. It's not just the time. You need space to do it, and stock of packaging materials for every eventually.
This guide is priceless. You sir are a legend.
Thanks for the info! could you possibly make another on getting a product certified and listed? like how much it could cost ect
Thank you! I needed this video two years ago. Very usefull!
Very usefull and eye-opening material. Thanks Dave.
Awesome video! You really cut through the BS. It's great that you mentioned shipping costs from the manufacturer. I've read horror stories about hidden costs, especially if your shipment happens to be pulled for inspection.
Great information!!! I'm looking into this process at the moment.
thank you EEVBlog for existing
Wow, what a fantastic video, thanks Dave.
Thanks for the video Dave, very well done.
Very interesting subject, glad to hear more info.
Brilliant video Dave thank you. Really outstanding to have it all so clearly summarised. ps my turbo encabulator is for sale if you're interested, still in its packing crates.
As a marketing student this is very correct, a little simplified, but the relevant parts are there.
Very good, simple and good understanding! implement it in my development. Greetings from Argentina
Thanks Dave. After learning something useful, I had a good laugh at the Turbo Encavulator video.
I was just considering doing this very thing and living in NorCal, made in California means something to the world. Thanks for the vid.
Dave,
Fantastic video. You made a complicated subject much easier to understand. Were you an instructor in a previous life? :-)
So how do I become a reseller. : o D
Raise money and buy tons of products from different manufacturers. way to go!
Pete Ellacott Where's my 60%, thank you!
The first step is to have inherited a lot of wealth and/or connections
I think there's a misuse in terminology a little bit. Dave said "reseller's profit", but of course that doesn't take into account all of their costs. I wouldn't know what their real profit margins are, but it's certainly less than the markup.
Hey mam,
Just came across your blogs....
found them useful...
gr8
Very helpful video, thanks!
Awesome vid Dave... never thought about this subject..😉
Great video Dave!
When comparing the benefit of using a reseller should you not price in the cost difference of your time in handling sales, rather than just the possible volumes of either method?
Hi Dave! This was a GREAT video!
i used to be a contractor for many years. your "rule of thumb" was very close to mine. any non-standard job that came in that you didnt know from experience how much labor costs it would take, you would just charge 2x the materials cost (or, COGS x 3, as you would put it)
Turbo encabulator's have come down in price!!
Not much demand these days, most newer systems use solid-state nano-encabulators.
Thank you so much, Dave. This has indeed encouraged me to continue on the path of starting my own hardware production company. I used a set of rough calculations based on Limor Fried's (Lady Ada @ Adafruit) suggestions. She says wholesale price = 1.7 x BOM (not GOG, just BOM). Take that x 1.7 again for retail : = wholesale x 1.7. Interestingly that comes out only slightly higher than your thumbnail of 2.5 x COG. And your explainer has practical, real-world details that confirm I'm on the right track. Also, FYI, I do a ton of electronic related research online - EEVBlog is high up on my top 10 of important places to check out frequently. Looking forward to future videos from that land down under :)) - H
Never use just the BOM cost, that's a huge trap.
The 2.5 figure (give or take) is a very common one in the DIY OSHW industry. No surprise Adafruit gave the same figure.
Thanks, understood! When I get ready to put the money down, I'll make sure I use more sophisticated estimates :))
So helpfull! thank you. also, I heard you say on amp hour today 6/3/2016 that you're not thanked for fundamental Fridays. I have to disagree. I thanked you and saw many other thanks. You are a GREAT teacher. and like you said, there is an endless amount of fundamentals. You said that as if it were a bad thing... But that gives you an endless supply of subjects. I think it would get you more subscribers FOR SURE. anyway, thanks for this video. so helpful!
Very interesting, thank you, excellent information!
Great video! Clear and concise. Love it. Quick question though...I have a product I'd like to sell, and running the numbers of my BOM, it will be ~850 dollars (~$2125 with the 2.5 multiplier). My question is: Is the 2.5X multiplier a constant e.g. does NOT change no matter the COGS? Or is there a tapering off at higher COGS?
Hi Dave, could you comment on certification requirements? I'm somewhat confused on whether or not electronic devices require electrical certification before they can be sold (FCC, CE, ROHS, etc.).
Hi Dave,
A smal things in your COGS, somethings expensive in time is the Documentations and /or users manual.
Depend of the way to ditributed : files of paper prints.
:)
Regards Phil VR (BE)
This and Fran's (from frantone) video on entrepreneurship is all you basically need to start a business. Great video Dave!
Well, you do need passion and hustle, but you got that, right? Right?
Thanks a lot, Dave
Nice Overview. Here is something to think about. I made a widget that would fit into a standard cast aluminum 4- 1/2" square outdoor electrical box you could buy at any big box hardware store. Pretty slick, I thought, until I found the supplier changed the internal design of the box.
Would you like to do a video on regulations and such ? What sort of stuff has to have to be CE branded (in Europe) for example
Economics, Thats what I know about! I don't come here for that.......
Love it!
Great video, thanks a lot!
Great video, thank you.
Super useful video!
This was a great video!
The only caveat that I would add to going through a distributor would be if they can dramatically increase the number of units sold. In the example of $28 profit through a distributor vs $75 sold direct, if you can only sell 1000 per year but the distributor can sell 10,000 per year, you'd make $75K direct vs $280k. All this is dependent on the distributor and market size. but it is another factor that wasn't discussed.
Awesome FF video topic Dave!
Thanks.
+EEVblog Thank you for this video, it is invaluable. It's just what I've been trying to find, thank you!!!
Good video for start up, cost of warranty needs to be added up too in COGS.
Hey there, you mentioned that there are companies that will take designs and handle the rest and you end up with what amounts to a royalties cheque.
Would you be able to elaborate on such companies ie: examples of them, how to find them, what sort of criteria they look for, etc?
Interesting video, Thanks!
Got a lot out of it. Thanks!
I aleays enjoy your tutorials !
although not for me, I think this stuff really is helpfull for starters..
love your work, keep it up.
When is an update coming about your massive new office?
Ardafruit lol, Love your pronunciations. Great video, very informative.
Where did you find those cheap assemblers? I had looked into selling a board once, and the assembly would have cost more than everything else combined.
If selling directly don't forget payment processing fees and any other costs associated with selling online.
Plus a shady Chinese manufacturer blatantly copying (read: stealing your idea), and flooding the market with a cheap clone, essentially driving you out of business. Nowadays, the scales of economics have put the small time tinkerer at a huge disadvantage, to a point where it's almost not worth it. Just my 2cents.
8:50 - Dave starts experiencing a bizarre increase in the number of uCurrents "lost in the post"
Great video. That distributor might be able to sell 10k units instead of the 1k you can sell so even though you only make $28 each now you earn $280k instead of 75k. That number might get even higher because of economies of scale. Or you can use that time you are not packing/shipping products to develop another product and then you have multiple products earning you 28k a year. It all depends on your plans and the benefits the distribution agreement brings.
Thank you so much, very appropriate.
thanks for the video you did a great job
I like videos like this! No one talks about this on Engineering courses. In your opinion, how to give discount? Like, if you buy 100 or 1000 of one product, how to calculate those discount?
You generally don't give much, because your COGS will usually be based on that many units anyway.
Thank you for the detailed video ! Very interesting. You didn't talked about certifications (CE, CEM compliance or whatever), is there nothing to say about it? Can I just sell an electronic product without any certification? Even in Europe where you see the CE marking everywhere?
thanks dave!
Thanks for the lesson! Any recommendations on books or sites that can help pursue a hardware startup?
A lot to consider, and it's rather interesting.
With a reseller, you'll only make $28 per unit (from your example). But, you should take in mind that you'll probably sell a lot more units.
Another thing to consider is also, is there really a market for these things (and is it still at your price you'll have to ask).
Thank you!
As for the "lost in shipping" part, I would like to say that you can add shipping insurance, so that if there's a problem, you get your money back, or at least that's what they promise. I'm not sure about the effectivity of this, but it could be interesting.
I have yet to watch the entire video but this is exactly what I've been thinking about doing! I'm just not aware about all the FCC regulations and legal stuff I have to jump through to legally sell my "smart" electronic devices. It is exciting to build something and sell it to someone who will use it! Even more awesome if I can make a small fortune off selling my products I have uniquely developed or in the process of developing!
What do you charge for software? So if you make a circuit sim, how would you figure out what to charge for it?
How do you do when pricing a product for your client that you developed?, How would you price the work on software, desing etc and then add it to the product? or maybe price it separated from the product itself?... Thanks for all you work, grettings from Chile.
+EEVblog
Hey Dave have you got a video or explained anywhere about the electrical safety, standards, regulations and testing (by test labs) .etc. that is required for a product before it's sold? And where kits fit into the picture and AC vs DC devices and so on.. For those of us who don't know anything about this?
That's very interesting, I would probably model the situation as a Linear Program and let a computer optimize if I had to work it out for myself.