I'm trying to understand best practices on how to price any end-user electronics hardware. One way to go would be to calculate the cost to manufacture it, and then add a markup on it. Another option that I've heard is to price your products to be 2.5X the cost of building it. Any thoughts?

 

I'm trying to understand best practices on how to price any end-user electronics hardware. One way to go would be to calculate the cost to manufacture it, and then add a markup on it. Another option that I've heard is to price your products to be 2.5X the cost of building it. Any thoughts?

You can price them any way you want when you put them on your website or set them in your shop window or send out a quote. The real question is, what value does your product give to a buyer and is the buyer willing to pay for that feature, service, simplification, ....

GT

 

Cost-plus methods as you’ve mentioned are the absolute worst despite being quite common. Doing pricing right is one of the toughest jobs in business. You need to know the market and the value to the customers. Ideally you’d be able to map out the demand curve for your product so you could calculate where on the curve is your optimal profit.

The market doesn’t give a rat’s pattoot what you’re costs are. It’s pretty much irrelevant.

 

I go by 3x manufacturing cost.

 

I go by 3x manufacturing cost.

Most companies need a gross margin of 50% over direct costs in order to cover all the overhead and still satisfy the owners. That means pricing at a minimum of 2X direct costs. This is for high volume products and this 2X rule-of thumb applies to a surprisingly large range of business. Not so much for commodities like oil or corn, but many other products. Lower volume products that have start-up costs need to get an even better margin, so your 3X rule-of-thumb makes sense.

In either case, these cost-plus pricing schemes sort of work in competitive markets because the market is efficient. Your competitor likely has similar costs and capabilities, so you "know" you're unlikely to get a lot more for your own product, because customers will shift to competitors. You're not leaving a lot on the table by under-pricing. And you know that if you can't get a 50% margin, you'd better start asking why.

When your product is unique, the situation is entirely different. Value-based pricing can be much more profitable and yet you'll still see people wanting to use cost-plus pricing. This can leave a lot on the table.

 

I manufacture (have manufactured for me) products and sell them online. I'm no expert, but here's my take on it. Consider that my products sell for under $50/ea.

Pricing requires thought. First do your best to determine your NET margin. Figure out what it will cost you to manufacture AND deliver the product, and compare that to what you think the retail customer will pay for it. Include your estimated cost for returns, warranty exchanges, yield from the factory, packaging, advertising, etc.. Also consider that if you sell on Amazon, Ebay, etc.. they all take a chunk, and not an insignificant chunk. Your payment processor will also take a chunk (PayPal, credit card processor, etc..). Use that to decide if there is any margin to work with.

If you are selling direct then the margin is relatively striat forward. But if you're going to sign up resellers then you have to consider that they also need to make enough profit to be worth their while to sell your products. I try to wholesale at a price that gives my resellers 40% margin to MSRP. I'm also careful not to price under my own MSRP so as not to under-cut my resellers. Also leave room if you want to offer volume discounts to your resellers. If you want to sell through a distributor, then there is one more level of profit to factor in.

Overhead gets expensive quick, and what initially looked like a really big margin can quickly shrink, so do your best to get good estimates for your overhead. To test the market, make a low-volume production run and try to sell them, even if you're not making much profit. That will give you valuable data about what the market will pay, and you can use that to decide if the product is worth more investment.

At the end of the day, just go for it. Charge as much as you can. If no one complains about the price, it's too low.

 

Are you trying to sell pencils or new & revolutionary nuclear missile guidance computers?
I think what's more important than your manufacturing costs is competition.
In the case of pencils, the market is flooded with competition. In order to make profit you need to sell bulk for cheap, while streamlining your processes for lowest possible overhead.
In the case of brand new revolutionary technology you have more freedom for markup sans competition, but you have to devote a lot of energy to convincing people they need your product. People already know they need pencils.

 

When I first started in electronics I was told that medical products had something like 10 times manufacturing cost as the selling price. Considering how much more expensive to do a medical product, it makes sense to me.

 

When I first started in electronics I was told that medical products had something like 10 times manufacturing cost as the selling price. Considering how much more expensive to do a medical product, it makes sense to me.

There are several dozen medical device manufacturers that I’ve met with at innovati9n conferences. I can assure you that today, even simple monitoring devices that beep next to your hospital bed sell for 30-100x final assembly costs. Assembly prices have gone down, number of suppliers have consolidated and liability costs have gone up.

There is one device made in Pittsburgh that is so unique that the manufacturer doesn’t sell it to the patient, they only rent it.

 

It is very simple of a product that has already been designed -charge as much as your customer thinks it is worth, taking the competitive offerings into account. Once you have and idea of what you can get for it determine whether the potential profit is worth the effort and risk. If there is a huge margin consider reducing price to capture market.