We have been quoting a lot of injection molding mass production lately, so we wanted to discuss the sort of investments and sale quantities people generally need to make in order to cover the development, tooling, and part costs. Although the particulars in this discussion revolve around the costs of injection molded manufacturing, the same principles apply to the development of products using different manufacturing techniques. Generally speaking though, the numbers are a lot higher than you might think.
In general costs fall into the following buckets:
- Cost of Design, Engineering, and Prototype Development
- Other Product Development Costs
- Tooling Cost
- Unit Cost During Manufacturing
- Marketing, Sales, Warehousing and Distribution Costs
The total costs are balanced against the per unit sales price to yield data related to the time and quantity of sales required to recover your investment and become profitable. Here’s a little more detail on each item:
Cost of Design, Engineering, and Prototype Development: Design, Engineering, and iteration towards a working prototype are the largest expenses when it comes to actual product development. This is essentially your bill with a firm like Creative Mechanisms to develop your mental construct (idea) into a real life working prototype.
Other Product Development Costs: Additional development costs typically include things like product or market research, consumer studies, regulatory approval processes, travel, patents, etc. These are basically one-time fees associated with bringing the product to life.
Tooling Costs: This is the amount of money it requires to have an injection molding tool made. Costs might include more than tooling alone. Other related expenses might include things like assembly fixtures, machinery purchases, etc. The good news is that tooling costs are not recurring. They are essentially one-time costs associated with getting ready to manufacture your product.
Unit Costs During Manufacturing: Typically injection mold manufacturers will quote jobs on a per unit basis. Unit costs are the total amount you pay for each unit produced. If you are manufacturing the product yourself, this is the amount it costs you to create it. Normally included in the price are production expenses like raw materials, energy, labor (assembly and production), equipment, packaging, shipping, etc. In general you can expect discounts for higher volume production but recognize that you need a plan to distribute the product once it is produced. Idle inventory also costs money.
Marketing, Sales, Warehousing and Distribution Costs: It costs a lot of money to let people know about your product and a good product can very easily fail due to a poor marketing campaign and/or overall sales strategy. Although perhaps not the most expensive aspect of the product development process, this is undoubtedly the detail that separates really successful products from those that never quite made it. If you are already making a significant investment in research, design, engineering, prototyping, testing, tooling, and manufacturing, marketing and sales is not the time to penny pinch.
Sales Price: What can you sell each unit for? This number might be different if you sell direct to the consumer (e.g. from an e-commerce website) or if you sell to a distributor (WalMart buys the units from you and then resells them in their stores). If you sell the product yourself expect to gain a larger profit per unit. The major problem with this strategy is that most entrepreneurs only have a limited reach (a limited number of units they can sell). Working with wholesalers and retailers is likely to vastly increase the number of units you can get out to the public. This is the “smaller slice of a much much larger pie” strategy. Both direct sales and piggybacking on an established network are fine distribution strategies and can likely to be used in conjunction with one another. Regardless, the important thing is to have a strategy and to anticipate its impact on production. If you are able to negotiate contracts with major resellers you’ll be able to manufacture more units at a higher margin per unit (which will offset the costs of using the reseller in the first place).
CALCULATING PROFIT AND LOSS:
Quantity Required To Recover Investment (“Break Even” Quantity): The most important number you can calculate is the number of units required to sell at your target sales price such that you recoup your initial investment. This number is the “break even” number and it’s important to recognize that you’re operating at a loss until you achieve it.
It is also important that the break even quantity be less than your total expected sales quantity. Otherwise, you will not be profitable. Once the break even quantity has been sold you should have covered the one-time costs related to product development and tooling.
Time Required To Recover Investment (“Payback Period”): It is also useful to consider the amount of time required to sell the break even quantity. Good payback periods are somewhat of a judgment call but most companies in my experience look for 5 years or even less. In the world of consumer product development and because of the pace with which products evolve, you probably want to look for much shorter than that (more in the range of 1-3 years if at all possible).
Estimated Sales Quantity: This is the number of units you actually expect to sell. If you wish to make a profit then this number MUST be greater than the break even quantity.
CLOSING THE LOOP:
Total Investment Needed to Break Even: First, add up the total fixed costs. Next, calculate the variable costs by multiplying the per unit cost by the break even quantity. Add this figure to the fixed costs and you will have the amount of money you must spend before you can start earning profits. You will need to spend this much money in order to make the above quantity of parts. Do you have this much money to spend? Can you obtain this amount of money from within your company, outside investors, crowdfunding, etc.?
For many people this figure is a surprising number. Generally it ends up being a lot higher than many individuals expect. This is particularly true in our experience for inventors planning to self-fund their projects.
Estimated Profit: Total profit can be calculated by multiplying the per unit profit (sales price - cost per unit) by the number of additional units sold after the break even quantity has been sold. If this number is negative, then you aren’t selling enough product and/or the difference between your Unit Cost and Sale Price is not high enough. Ask yourself if you can command a higher price or if you can drive down total costs in some way. If this number is positive, great. But, is it positive enough? Was it worth all of that investment in both time and money for this amount of profit? If the answer is yes, then and only then is it worth considering the risk of investment.
HOW ABOUT A FEW EXAMPLES?
Example 1: Let’s say an inventor has an idea they want to develop. They call up Creative Mechanisms and spend $10,000 on the design, engineering, and prototype development process. Then they decide to patent their idea. That costs another $10,000 (and likely takes 2-3 years before final approval). Next we get a few quotes on the tooling and the best one comes in at $45,000. On top of that there are some required assembly fixtures that will cost an additional $3,000. So tooling costs $48,000 total. Fixed costs for the product development and tooling combine to a grand total of $68,000. Now we have to manufacture the product in volume. Say the factory charges our inventor $1.02 to make and package each unit. That’s the unit cost of production. Say that our inventor plans to sell the product on their website for $6.99. Doing a little quick math we can see that a total of 11,390 units will need to be made and sold in order for this inventor to cover the costs associated with bringing the product to market.* In order to make that many units, the inventor would need to spend a total of $79,618. Now, let’s say this inventor expects to sell 25,000 units before the end this product’s lifespan. That means they expect to sell 13,610 units beyond their break even number. Multiplying 13,610 by the difference between the sale price and unit cost, we can see that the expected profit is $81,250. So an investor in this project is essentially risking about $80,000 in order to profit by approximately $80,000 (a 100% return on money if their expectations come to fruition).
* To determine the break even number, set up an equation as follows and solve for “a”: [68,000 + (1.02a) = 6.99a]
Example 2: Let’s say a company wants to develop a product that they know (based on their market expertise in this niche market) will only be able to sell 5,000 units at a price of $9.99. Creative Mechanisms quotes the development of this product at $12,000. An early estimation puts the tooling cost around $30,000 and the unit cost at $3.28. We can see that this company would actually have to make and then sell 6,259 units in order to recover their investment. They would actually lose $8,450 by moving forward with the project. In this case, the development and tooling costs are too high for the relatively low quantity of sales expected. At only 5,000 units, the product would need to sell at $11.68 in order for the company to break even. The product would need to sell at $13.68 in order to achieve $10,000 in profits, but that is 33% greater than what their market research says they can sell the product for.
Note that these examples do not account for things like bulk shipping charges, maintenance fees, business overhead, payment terms, etc. They are just a basic guide to determine whether or not a project is worth doing. That said, making this kind of calculation, and making an educated decision on whether or not a project is worth doing in the first place, is perhaps the most important step in the project development process. We hope this helps! Please contact us if we can be of further service.
To learn more about the manufacturing process click here