Setting a price for a new product isn’t easy and has been an area where many hardware startups have struggled. You want to be able to get funded and cover your costs of getting the product manufactured and delivered to your backers without having to run into any hiccups. However, it is also important to make sure you have healthy margins between your cost of goods sold (COGS) and what the backer paid for it.
Estimating a manufacturing price can be difficult, even with lots of experience with any manner of hardware goods. But by following a few general rules you can form a good first estimate. Here are some tips to help you set an introductory price and to think about the goals for your project.
Looking At Competition to Determine Introductory Price
Unless you’re pioneering an entirely new category of hardware (in which case… good work!), chances are that other companies will have previously released products similar to yours. This is great news! This gives you some basis for comparison, and now you can look at how much those cost and work backwards to a target unit price.
The general markup from manufactured price to retail is 4-5x and it’s quite consistent. This should give you a rough idea of the manufacturing cost. As costs increase, margins can shrink, and manufacturing can account for more of the products’ final cost. So if the product costs $150, manufacturing can work up to around 1/3rd of that. This kind of top-down review of pricing allows you to effectively predict the affects of DFM and other efficiency measures that will eventually need to be put into your product…without having to do them yet yourself. Working from a bottom up pricing strategy at an early stage can give you some pretty wacky numbers and are generally less reliable as you will probably have some important design and manufacturing elements still to figure out to get the kind of pricing you need.
Be Conservative When Setting a Crowdfund Goal
Tip number two is to be conservative – both in your pricing and in your crowdfunding goal. This means setting higher introductory prices. It’s better to not get funded, than get funded on a thin margin. You can always redesign your product if you don’t have commitments to uphold, or focus on another business idea altogether, but making a model work that has no profit leftover for you can lead you down a dangerous path.
The unknowns will probably raise your costs as well. Some contributors to be aware of:
Packaging – Can contribute 5-15% of a product’s price
Shipping to Backers (especially internationally) – Can really skyrocket for heavy or bulky items
Duties – it’s worth checking the HTSUS (Harmonized Tariff Schedule for the United States) to see what your import duties will be if you’re manufacturing overseas
Note too that as a startup your model can’t be to compete on price. The bigger players will always have that advantage with their established supply chains and economies of scale. Your model must be to compete on value, quality, brand, timing, and other benefits. Make sure you are offering the value in these other areas to compete and then don’t sell yourself short by offering that value at too much of a discount.
Let us know your thoughts in the comments below. How did you price your first product? And of course, for more news and discussion be sure to join our mailing list!