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The Mystical Art of Cost Estimation

Good article from Zach over on the HAXLR8R blog about the hidden gotchas of hardware cost estimation:

If you’re a hardware company, you are in the business of selling things. In order to make money, you need to sell your things for more than they cost you to make. This is basic economics, but the application of this principle is anything but simple.

In this day and age of hardware startups launching on Kickstarter, or offering presales on their website, it is even more important. If you price your product too low, you run the risk of cutting your margins down so low that you don’t make enough money to survive. This death-by-success is worse than the alternative which is to over-price your product and not generate enough sales or interest to run a viable business.

When pricing your product you are walking on a knifes edge: too high and you can’t launch, too low and you risk imploding. The only surefire way to avoid this is to actually produce and pay for your product before selling a single one. For most startups, this is impossible: so you must estimate.

Read the whole thing here.


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3 Comments

  1. If your product has the potential to become high enough volume so that cost will decrease, you may have to price it low to build the volume. Of course you could always develop the product, make it open source with a product forum, use download stats and forum activity to judge interest in the product and then offer a new and improved model for sale. Even if you just fix the bugs that are discussed in the forum, you should be able to sell it for less than an individual could build it for.

  2. Hmm… seems to assume there is no way of doing things outside of China, this is a bit sad.

  3. The article says: “Returns… Add in 1-5% based on how confident you are in your product.” …but returns in the consumer products market space can easily be much higher than this. Google for “consumer product return rate”. According to Forbes.com: 5 percent of returns are related to actual product defects. While 27 percent reflect “buyer’s remorse,” 68 percent of returned products are characterized as “No Trouble Found.” (eg. customer expected it to work differently than it did).

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