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  1. #1
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    Default Development Cost/Pricing Help

    Some of you may recognize me or have seen me elsewhere on the forum. To preface this, I am a small one man shop. Job shop, used to do a lot of Tool & Die work. Lately (this year especially) I have been spending more and more time on developing products and bringing them to market. I have two questions related to this topic.

    Question one relates to associated costs with development work. Just for random numbers, Product A took 30 hrs to model, develop, machine. Once finalized, it takes 45 minutes per piece to machine and $1000 worth of consumable tooling to run 100 pieces. Material costs $100.

    One side of me says time X shop rate, + cost of materials and tooling/100 = "cost" of product

    The other side of me says, there is a good chance I will make many batches of this product over my life time, so the development time should not be factored directly into the cost of the initial batch of product? How do you handle this? How do the big boys handle this?

    Question two relates to development work for a customer. I currently have a repeat job I am hoping to get with a customer. Part up till now has been the customers product, I bought this product on a regular basis. Due to several reasons they can no longer make them. After several discussions I was given the go ahead to develop the part. They had no prints, no models, only existing parts. All the parts are made on jigs and fixtures. They sent me what information they could in regards to their production of the part. Taking my knowledge of the product, hours of research, reverse engineering, and development, I now have a solid model, and a machined part. Sent the customer a sample which they are happy with. That sample cost me.... god, I don't even know how many hours. I tracked my out of pocket costs closely, that totals shy of $2400 in tooling, materials, soft jaws, etc.

    How do you carry expenses and break them down for a job? I can see if it is a short term contract for a customer, I would have documented closer and carried those costs into the job. In this case, I will likely be making, and selling this product, for near on the rest of my life, until I retire, the market dies, or I get put out of business by some Jetsons style printer that magically creates parts.

    Currently I have this part priced to the customer at a price which covers all of my tooling and material costs per batch, labor at shop rate, including inspection, and a minute or so per setup (8 total) per part cushion. The above $2400 will be enough tooling to cover the first batch of parts, so I am at a loss for my development labor.

    The NEXT time I do a job somewhat like this, how SHOULD I do this?

    I've asked several people about this and gotten some interesting responses. The most interesting was from my dad. The company he works for is currently working with a Federal agency to develop a product. The last 4 years they have been developing a product to bid for a job. They have spent over $6 million on the job so far. What they have learned, is that they do not want the job. They do not want to make the product. They have learned a lot developing the product, and as far as I understand it, will essentially eat the $6 million and move on with their lives. Other friend in other industries, every dime is paid, time & cost, by the customer. Would be curious to hear some opinions from the machining side.

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    If someone hires you to develop a product, you need to charge separately for that development, unless there's an agreement at the outset for development plus a batch, in which case that total should cover both the development and the production. If you take the initiative to develop the product then you have to amortize that development cost over a certain production number. Never work for free!

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    You're talking about being an ODM, an Original Design Manufacturer, rather than being a job shop or contract manufacturer. There are two ways to play this:

    1) You design the product, you own the product, the customer gets exclusive rights to it as long as they purchase some minimum amount per (month, year, whatever.) You carry the development cost and roll it into the expected lifespan of the product. You're taking all the risk, so this is usually the cheapest for the customer. You're free to develop similar stuff for other customers.

    This approach works best where you have some established technology base and you're making minor variations to meet customer needs. For example, if you make hydraulic valves, you have a core set of designs and the customer needs a custom housing shape.

    They can't take the design elsewhere.

    2) You design the product for them, charge them for engineering and development as a one-time charge (called an NRE, Non-recurring Engineering) and then make the product. Typically they own the design, as you did it on a work-for-hire basis, but not always. Customers always yelp about NRE charges because they're always seen as too high. Designing products takes more time than it looks like from the outside. But then it's their design and they can do what they want with it.

    We only do the first one. I hate tracking engineering time, I hate being budget limited for development and I hate having to re-do work because while I made a perfectly workable solution a month ago, it was for a different customer so I don't own it and can't copy/paste.

    Original design manufacturer - Wikipedia

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    For my own products I don't track development time. Just hard costs. A lot of products go nowhere. I just amortize the hard costs to develop over a theoretical lifespan and make sure the product pays shop rate for making it, selling it, packing and shipping it and supporting it.

    Some things are best priced at what the market will bear VS cost to develop/ manufacture though.

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    It has been my experience that some days you eat the bear, and some days the bear eats you.
    Which is to say, sometimes self developed products make lots of money over the long run, and pay for their development over and over again, and others are a loss.
    All companies that develop products have duds.

    Pricing of the final product, in my case, has often been based on market forces- that is, you can ASK a price that includes your development costs, but you dont always get it. If you can get it in the first batch, great. But many products have to make certain price points or they dont sell, which means you just hope you sell enough to amortize those costs.

    I find it funny your dad's company isnt getting paid for the product development costs- most military contracts are cost plus, which means a guaranteed profit on development. And many of the government stuff I have worked on has built in design phase fees, which I get paid whether we actually do the final project or not.

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    I deal with this constantly but in a different way. A lot of my customers want a custom conveyor or machine or item that is 1 of a kind and I know I will only make 1 or maybe make 1 and then make 10 more and sell them, but never more then 25. I would say that 50% of my work is fabrications that are 1 off PITA projects that at the end I probably would have been better off not doing. But it keeps the customer coming back since no one in the area does what I do for the quality I do.


    I have been working on taking some of the things I have done severe custom jobs and turn them into products. Changes are being made but the idea is solid. What I have found is if I had 1,000 hours or 10 hours into a project, I have to charge accordingly to what the market will bear. If i charged all 1,000 hours for a $150 part, i will never get any sales, but at the same time i can't charge 10 hours on a $1,000 project. Since my price would either be too high or too low, I still can't sell them or make a living. So you have to do what walmart does and sell items at prices the market will bear for the item. Because at the end of the day, if you can't sell the product, it's going to make you go down hill fast.

    Sent from my SM-G960U using Tapatalk

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    I agree totally with pricing to the market, not by what your shop time adds up to. You quote a job's minimum cost time wise to determine the lowest price you can make something for, then price to what the market price should be. This tells you whether to accept an order or not. If there is a profit margin to be made this pays for development costs.

    I did not go into business to earn a shop rate . . . this is exactly like working for an hourly wage. No thanks!

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    Development Cost Theory: Amortize the development cost over the product life cycle. You spend $10 developing it, and expect to 5 a year for 2 years, you at $1 onto the cost of each (simplistic, you can also also amortize to account for time value of money).

    Price Theory: you'd charge as much as you can, limited by 1) the value it delivers and 2) the price of competing items or alternatives the customer has. A job shop doesn't charge time & material plus X% because there is some magic to it, they do so because its a way to predict what competitive alternatives the costumer might have. That seems like stating the obvious, but its a different way of thinking about price that you need to have when pricing inventions/products etc.

    I would say take that as baseline truths to figuring it out. If you can't charge enough to recover development costs, maybe its not a very good product, or maybe its so-so and you do it to fill production holes. The theory is sound, but of course theories suffer from not taking into account every specific factor in a situation, so you work it to suit.

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    The danger of "price what the market will bear" is the larger the profit, the faster you'll get a knockoff.

    You'll get a knockoff anyway, but the juicier it is for you the juicier it'll be for someone less creative but just as hungry. Especially for stuff that was hard to create but easy to copy.

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    Take a gander at the project and guesstimate its market value to the customer. Then take that number and multiply by Pi. There's your development costs for making the Mark 1 model . Can you do it for that? If you get a really large order to make a batch, then the price starts to approach more like what it appears it should be.

    Seriously, I've had people turn down a quote that was half of new factory list price, for a duplicate that I would make. So either, you're both playing in the same ball park, or you're not. You weed out the 'inventors' who might be one or two orders of magnitude away from real world pricing. A price that is double or triple the original estimate is still not an order of magnitude out (that's 10x).

    For your own products, consider the sacrifice you make now (fewer dollars) on price, stretches out into a future where you can spur at least some sales. You don't want to lock yourself into a losing situation either (no one expects that, everyone thinks you are making giant profits, no matter how little you charge, so don't charge too little). Get some respect by charging a respectable price. If that doesn't work, then the project is dead.

    People waste years of time on pointless hobbies. If you can think of work as your hobby, then investing time and thought into development is, at least, no worse than a hobby. It is also no worse than investing thousands in an education that has a payoff years in the future. But, you gotta make a living now so there has to be cash flow from somewhere that will support this endeavor if it dies on the vine.

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    Honestly im firmily in what the market will bare for product price wise. I tend to very much evaluate future products backwards from that number, not pricing them the conventional way from the ground up. What i do, im kinda indirectly competing with china and india. Hence they + there postage sets the price to a fair degree. Its then down to me to make it for less cost to make my money and to a higher quality to get the sale. If im selling that through dealers i have to allow margin in it for them too.

    I have a very solid idea of my material cost and have a very solid idea of my tooling costs. By having them i can then take a prediction of what it will cost me to make, i like that number to be a approximate percentage of what it can sell for. That percentage of tooling and material cost is inversely dependent on how much labour it then has in it. If its high labour i very much want tooling and material costs sub 30%. if its say a turned nylon part then spending even hours on a HSS form tool makes great sense if it then lets me make a part that has a material cost in the single digit percent range of sales price and a on machine time of seconds per part. Sure i may not make much the first or even second time the job repeats, but i do have a more than a few parts that repeat every qtr and make a killing on the hourly rate numbers after covering the one time "super" tooling costs.

    That said a lot of what i do has similarities to other bits in my 400 product range, hence if i can find the right thing, making a loss on tooling that up can be very comfortably absorbed by 3 other similar products that then go onto share the tooling cost can still be a very profitable risk reward ratio. None of this can be set in stone, none of its a dead certainty and there is risk. Flops happen and it's key to realize why. Some thing i have made just have not sold and no one customers, dealers or other wise is sure why. Others have been a blinding success.

    IMHO more products and especially families there of parts help you spread and manage the risk rewards far better. As does a great indepth understanding of the market place.

    With tooling its also worth adding multi process parts have far more potential and less people are able to copy thoes, I frequently make items that see a mix of 2d and 3d pipe bending, simple pressed components, bent laser cut bracketry, Tig welding and oftern some mill - turn type work. Very few places have that mix of capabilities in house or designed to deliver them at the low price point i can. Hence whilst theres a high risk of what i do being copied, few people bother as the relatively low volumes make it seam unappealing to attempt to compete with me. Or they simply dont have the in house capabilities - cqan not farm it out cheaply enough.

    Compare that to say a simple Billet alu auto part were anyone and his dog with a cnc mill can compete with you. Having that complexity can really help the long term sales! of my 400 unique parts - assy's 300 repeat annually, probably 40+ repeat qtrly.

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    Quote Originally Posted by Garwood View Post
    Some things are best priced at what the market will bear VS cost to develop/ manufacture though.
    Can't get a better answer than the above. If your gut feeing about what the market will bear is accurate, welcome to good times.

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    Quote Originally Posted by Comatose View Post
    The danger of "price what the market will bear" is the larger the profit, the faster you'll get a knockoff.

    You'll get a knockoff anyway, but the juicier it is for you the juicier it'll be for someone less creative but just as hungry. Especially for stuff that was hard to create but easy to copy.
    Make it complex enough that copies don't perform well.

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    Quote Originally Posted by Comatose View Post
    The danger of "price what the market will bear" is the larger the profit, the faster you'll get a knockoff.

    You'll get a knockoff anyway, but the juicier it is for you the juicier it'll be for someone less creative but just as hungry. Especially for stuff that was hard to create but easy to copy.
    I don't agree with this.

    I think a bit like Adama where I work backwards from what the market will bear, not forwards from what it will cost. I do know exactly what it costs to make, sell, support, etc, but that is not as relevant to me as is what people will pay for it.

    You bring up a very valid point about people copying it. That's one of the first aspects of any product I consider. There are a lot of bigger, fancier shops than mine out there with smarter folks so when I design something it has to be hard to copy. I like to make my stuff difficult to copy by mixing processes. Forming, machining, castings, etc.

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    From the very small business perspective tax treatment can have a major bearing on what the most financially effective way of dealing with design / development / marketing costs is. If you can offset some or all such costs against tax it gives you a lot more freedom in pricing the product.

    Clive

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    If China is going to copy your item, then price it accordingly.

    For example. If you make a new baseball and it costs $10. Why sell it for $11 when you will only sell 10,000 of them before China copies you. If you sell them for $14 each and sell 7,500 of them, that's $30,000 in profit instead of $10,000. That's also as long as the market can handle a $14 price for a baseball. China is going to screw over everyone who makes an item for less than $100. So you may as well get it good while you can.


    I'll quote a thing from shark tank.... it doesn't matter how many patients you have if you dont have any money to defend them in court......

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    Quote Originally Posted by Garwood View Post
    I like to make my stuff difficult to copy by mixing processes. Forming, machining, castings, etc.
    BINGO! That way a potential copier has to have all those processes in-house or own the tooling.

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    Quote Originally Posted by Bondo View Post
    If China is going to copy your item, then price it accordingly.

    For example. If you make a new baseball and it costs $10. Why sell it for $11 when you will only sell 10,000 of them before China copies you. If you sell them for $14 each and sell 7,500 of them, that's $30,000 in profit instead of $10,000. That's also as long as the market can handle a $14 price for a baseball. China is going to screw over everyone who makes an item for less than $100. So you may as well get it good while you can.
    Honestly thats not entirely true, i have currently 2 products were i have played the last man standing game. It helps they have all been things i can make exceedingly cheaply and in one case from effectively ofcuts, hence near zero cost to actually make apart from a little time. There just a bent, formed and drilled component, so no ooling cost that matters, its kinda pure labour.

    I have been sitting on a third product that use to do well but got extensively copied almost to death, went into a price war on that and made a little money, but more so just cleared my stocks. Well seams i dropped the price so much 2 of the competitors on that one closed up shop. hence i probably better try another batch before too long. Theres probably a load of quick sales to be had at a good price before the competition starts up, but i kinda need to almost make em to order as im sure some one else will have another pop at competing with me on those! Hence the secret of get em made and sold Fast and FIRST!

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    That's true, I just made a reference to a baseball because it is a very common item, but if your building a specialty item, say a turbo for a sports car, people want quality over price. There are a hundred different variables that comes into play when setting pricing.


    Like you can sell baseballs or airplanes, each one will have a different price setting.

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    don't forget to factor in liability insurance into the cost of the product, that's about 10k per year, make sure to amortize this into your product cost as well.


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