Knowing the Basics of Money For Manufacturing a New Product

The first three steps in evaluating a new product are: Step 1, evaluating product features and the reasons people will buy; Step 2, determining how the product will be manufactured; and Step 3, whether or not the product has, or can receive, adequate intellectual property protection while not infringing on other patents.
Inventors and people in the know for new products tend to be in sync for these three steps in evaluating a product, although inventors tend to put patents as the most important step, while most new product experts put that lower on the list, but never the less the first three steps are very similar.
The next key evaluation step for people in the industry, and one that is often overlooked by inventors, is to answer the question “Can the product make money?” And hopefully lots of money. Inventors tend to feel if the product is right it will make money. New product experts know this is not the case. Pricing and perceived value versus manufacturing costs is the key issue for the experts.
The purpose of this article is to give inventors a better understanding of the money issues involved with a new product that determine whether or not the inventor will make money on each product sold. The goal is to assist inventors in evaluating the perceived value of the product to the end user, understanding how much they will receive from the sale of each product based on their chosen distribution channel, and then to understand if they will make money when they compare that amount to their manufacturing costs.
For example, consider a kit that makes a hard bound book for the scrapbook industry. A focus group comparison of the book to alternative products might determine that the perceived value is $30.00 retail. If the inventor is selling to scrap book retailers through a distribution network his or her take will be $12.00. A general rule when selling through distribution is that the manufacturers selling price must be twice the manufacturing costs to make money. So a new products person would feel that the product will make money if the manufacturing cost, including packaging, is $6.00 or less.
Making Money through the Distribution Network
I’m going to start with the area that inventors seem to understand least: the money the inventor will make through the distribution network. The most common distribution methods are:
Through distributors to retailers
Price paid by end-user: 100 percent
Price paid by retailer: 60 percent
Price paid by distributor: 42 percent
Typical Sales/Marketing Cost: 10-12 percent
Net to Company: 30-32 percent
Direct to retailers
Price paid by end-user: 100 percent
Price paid by retailer: 50 percent
Price paid by distributor: N/A
Typical Sales/Marketing Cost: 15-20 percent
Net to Company: 30-35 percent
Through distributors to Industrial users
Price paid by end-user: 100 percent
Price paid by retailer: N/A
Price paid by distributor: 60-65 percent
Typical Sales/Marketing Cost: 15-18 percent
Net to Company: 42-50 percent
Sell direct to consumers Industrial Revolution or industrial users
Price paid by end-user: 100 percent
Price paid by retailer: N/A
Price paid by distributor: N/A
Typical Sales/Marketing Cost: 30-50 percent
Net to Company: 50-70 percent
As you look at this chart you can see why most new products people feel a product needs to be produced for 25 percent of its final selling price. If that is not the case the company is often forced to sell to consumers or industrial accounts direct, and as a rule they can only generate a fraction of the sales volume that they can selling through distribution. That low volume makes it difficult to cover your fixed costs such as rent and administrative salaries, which includes the inventor’s salary. If your costs slide up, you dramatically cut your product’s ability to make money.
Perceived Value
Perceived value relates to what people are willing to pay for the product. Once you have established a perceive value, you can compare that to the expected manufacturing cost (which will be covered in the next section of this article) and then see if you can meet the guideline that products manufacturing costs needs to equal 25 percent of the end user price.
Inventors have a tendency to put too high a perceived value on their product, and experienced new products people have a tendency to put a lower end perceived value on most products. You will find that it is important to firmly establish your perceived value before talking to people who understand the business and who you want to eventually help you succeed. One reason is that demonstrating your perceived value will help you make a strong case that your product will make money. A second reason is that this evidence will show your contacts that you understand the importance of pricing in the new product process.
Consumer Surveys
Asking consumers for the perceived value for your product is effective if you have consumers do a price evaluation with several other products in the same product category. For example this is the procedure I might use for a consumer survey for the garlic twist which offers a new way to mince garlic. The inventor felt the Garlic Twist suggested retail price should be $12.95 to $15.95. To check the price the inventor needs to get five to eight other products that are in the kitchen with retail prices ranging from $6.95 to $19.95. Then the inventor just needs to show people the eight products and ask them to list them by value, placing the highest value product first. I’ve found that you can estimate the product fairly well with a group of 10 or more consumers. Typically seven or eight of the people you survey will rank the product in between two standard products. You would then put the product’s perceived value in between the price of those two products.
For the Garlic Twist, the inventor could use for evaluation these products:
NorPro Bread Slicer with Crumb Catcher: suggested retail $19.99 Progressive Vegetable/French Fry Cutter: suggested retail $14.99 Trudeau Adjustable Cheese Slicer: suggested retail 9.99 Borner Food Safety Holder: suggested retail $6.95 NorPro Grip Ez- Professional Meat Tenderizer Suggested retail $7.95 Progressive International Egg Slicer Suggested retail $12.95 Börner Thin Julienne Vegetable Shredder suggested retail $13.95 Note: All of these products are available on
You don’t want to tell anyone the prices of any of the products, and you want to show products whose prices your test participants won’t know. As your participants rank the products, highest value first, you should be able to establish a perceived value for your product. Before talking to industry people, make up a short presentation of your test, showing the products you used to evaluate your product’s pricing and a summary of what values your participants gave your and other products.
Store Surveys
Another tactic for showing perceived value, especially when you don’t have a product to show people, is to simply compare your product to competitive products. For consumer products you can highlight five to six products that would be in the same section of the store as yours. For industrial or business products you can use product directories from trade shows or trade magazines to illustrate competitive products. You can then show the prices of those products and then project your price based on your features and benefits compared to the competition. Again be prepared when talking to a potentially valuable contact. Have brochures or pictures of the competitive products and be prepared to demonstrate why your product is better than the others.
Your Projected Manufacturing Costs
Now that you have a perceived value for your product you next need to be able to show that your product’s manufacturing and packaging costs are 25 percent or less of the perceived value. That means that your manufacturing costs must be less than $0.50 if your product’s retail price is $2.00. What makes this process difficult is that the $0.50 cost is for large scale production. Since inventors are always starting small, sometimes they only have a prototype, their costs will be high, often very high, as they don’t have the volume to generate lower price and their costs will almost never meet the 25 percent threshold. An important skill for successful inventors is to have a variety of tactics available to estimate what a full volume cost will be. Since a product cost includes both the manufacturing costs and the packaging costs you need to estimate both.
The easiest way to estimate costs is to find products with very similar construction and packaging to yours. You might have to use two different products, one for construction and one for packaging if you can’t find products made like yours that will use similar packaging to yours. Then get costs on that product, as well as yours for small volume production. You can use the percentage difference in those prices to determine your expected costs. Here are the steps to follow:
1. Find products of similar construction. These products don’t have to be in the same industry, only a product with similar construction. For example if your product is made of high impact plastic and holds garden tools such as rakes and is 24 inches high by 24 inches wide by 18 inches deep with 12 slots for garden tools, you would look for another product made of high impact plastic parts with similar complexity. This could be a laundry sorting holder, a basement shelf system, a stereo rack or any number of office supply products.
2. You want to establish your product’s cost in large runs. You will use the retail price of the product and multiply it by 25 percent (or 0.25). That price should be close to the manufacturing price as most products in retail sell for four to six times its manufacturing cost.
3. Your price will not be the same as the comparable product, there will be differences. So you need to get quotes from manufacturers for both your product and for the comparable product.
4. You need to figure out how the comparable product is made. If you don’t know, you can contact SCORE, which are a group of retired business people who have a wide variety of experience, many of them in manufacturing. They will meet with at no cost to you. You can find the closest SCORE office by going to the web site
5. Once you know the process that your product will follow you just need to locate manufacturers that can bid on producing 1,000 and 5,000 units. You can find these manufacturers by:
– Asking contacts in the industry
– Look in your Yellow Pages or in a business to business telephone book.
– Look in your state’s and surrounding states industrial directories which are available in larger libraries.
– Look in the Thomas Register of American Manufacturers. They have a fairly complete list of manufactures listed by categories and state.
– Check out the web site of Job Shop Technology magazine List Of It Technologies which also provides a list of manufacturers by category.
6. Once you have a quote for both your product and the comparable product you can see what the difference is. Let’s say the quote for your product is 25 percent higher than the comparable product. Then your product’s cost for high volume production will be the cost of the comparable product you obtained in Step 2, multiplied by 1.25, or 125 percent.
The Final Analysis
Take your manufacturing costs from Step 6 and compare it to the perceived value from the previous section. People in the industry will believe the product has a chance to make money if the manufacturing cost is less than 25 percent of the end user price.

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