BOM cost vs. retail cost?

[NogginBoink]

I suspect this question has been asked/answered before, but I was unable to find it after 10 pages of Google results on "BOM cost site:adafruit.com"

I'm wondering what my BOM costs must be in order to hit certain retail price points if I wanted to sell a product, say, through the adafruit store. It's easy to think, "Oh, I can buy parts for $10 and sell the doodad at $20 and make $10 per unit!" but I know enough to know that's some pretty naive thinking, even if I don't know all the costs involved.

I've seen references that say anything from "retail cost should be 3x BOM cost" to "parts cost should be one-eighth of the retail price."

I'm sure there's a wide range in which possibilities exist, but as a first-run estimate of the feasibility of commercializing a product, what figures would you suggest I use?

[adafruit]

here's a good one to check out:
http://blog.ponoko.com/2010/11/16/ten-r ... 94-rule-1/

cheers,
adafruit

[MrGlass]

I'm just curious, what does BOM stand for?

I have a feeling you don't mean Byte Order Mark.

[NogginBoink]

I'm just curious, what does BOM stand for?

I have a feeling you don't mean Byte Order Mark.

Bill of Materials.

[Chuckz]

I'm sure there's a wide range in which possibilities exist, but as a first-run estimate of the feasibility of commercializing a product, what figures would you suggest I use?

I called a seller back in the 90's for a printer. He informed me that it would require extra for shipping because of the weight of the printer and it was quite expensive. I asked him what would happen if the printer got delivered and it didn't work. The seller told me he wasn't like Sears.

Sellers don't open up every product and test them to see if they are working but they ship them in good faith the product is working. Then I open it up to discover whether it is working or not.

Suppose I returned it. What costs does the seller have to go through to return it to the point of origin? He takes a loss and it is the cost of doing business.

The seller doesn't know what the buyer is going to do with a product once they get it but they take general liability until it can be proven that the buyer was destructive in some way.

My boss pays employees and has overhead and won't sell anything unless he makes at least 5% or it isn't worth it. You basically have to pay expenses for running a business and 5% will only pay for a salesman. If you are going to sell LEDs, you have to figure out what it is worth to stand there and count LEDs all day because I'm sure they wouldn't be in business if that was all they sold unless it was worth it to them.

This is not a full lesson on business because you would have to generate a budget for running a business and you would determine costs based on your rent, electric, supplies, shipping, payroll, healthcare, etc. It is something you would have to figure out.

[westfw]

5x.

Although, I think the ideal situation would be to say "I want $5 for each one of these sold" and let Adafruit use their parts sources, manufacturing capabilities and contacts, and marketing expertise, to set the list price and do all the hard (and less interesting) work. Alas, there is probably a tremendous chicken and egg problem with something like that. It might be considered IF you have a wonderful and well-established product, but it's tough to have that without having gone through the hard part yourself first.

(Doesn't "Dangerous Prototypes" have a relationship sort-of like this with Seeedstudio? Though I haven't gotten the impression that this was currently immensely profitable for either party...)

[lyndon]

The multiple I start from is what westfw said: 5x

This is purely for historical reasons: the first company I went to work for used it and it worked well so I began to use it also. But in reality one thing has nothing to do with the other (obvious pedantic points notwithstanding!).

The answer to retail cost is "whatever the customer is willing to pay." It's a much harder answer to figure out, but it's how real money is made. If the customer will happily pay $200 for something that costs $10 to build, then that's what you charge, not $50.

[Chuckz]

The answer to retail cost is "whatever the customer is willing to pay." It's a much harder answer to figure out, but it's how real money is made. If the customer will happily pay $200 for something that costs $10 to build, then that's what you charge, not $50.

That also gives you the highest rate of returns and when the customer sees it cheaper somewhere else, he or she will return it.

[philba]

Sure, charge 200 for something costs you 10 to make and you will discover competition. if it's not terribly unique, China will stamp them out by the container load and you will lose all your business or, at the very best, wind up charging a lot less. If you create something that is hard (technically or legally) to copy, you may be ok with higher prices but you better put buckets of money into marketing so people perceive your widget as having value. Of course, Apple has been the master of that for a long time, not a bad idea to emulate them.

As to what to charge. There is no science here. You do need to add up all the costs: bom, manufacturing, packaging, distribution, design, support, returns and marketing overhead to decide what net margin you are willing to accept. There is no substitute for a business plan with a spreadsheet that factors all those things in. You play the what-if game to see where your risks are. What if I have 5% returns? 10% What if cost of sales is higher than I think. What if I have to give points for distribution? What if my components stop being produced and I need to redesign? I would never try to create and sell something that I couldn't get at least 10% net margins on with conservative assumptions.

[lyndon]

With all respect, that's not "what to charge?" that's "what's the minimum I can charge and stay in business?" Those are two completely different questions.

The pricing model I use works for me because I sell small quantity, specialized devices for industrial users. They are not very interested in the price difference between a $200 product and the same thing selling for $250 because the cost to them to install and operate the system it's a part of is much, much, much more than the $50 difference. They're more interested in whether or not I'll be around a year from now to sell them more product, or if I can provide rapid support or emergency repairs/replacements if needed, or one-off modifications for special uses.

If you're selling to hobbyists or experimenters, you need to take a different approach that is much more price sensitive and in that case, I agree you should focus more on what the minimum price can be.

It's software-focused, but one of the best articles I've read on product pricing is this one: http://www.joelonsoftware.com/articles/ ... ckies.html

As to what to charge. There is no science here. You do need to add up all the costs: bom, manufacturing, packaging, distribution, design, support, returns and marketing overhead to decide what net margin you are willing to accept. There is no substitute for a business plan with a spreadsheet that factors all those things in. You play the what-if game to see where your risks are. What if I have 5% returns? 10% What if cost of sales is higher than I think. What if I have to give points for distribution? What if my components stop being produced and I need to redesign? I would never try to create and sell something that I couldn't get at least 10% net margins on with conservative assumptions.

[Chuckz]

You can charge whatever you want but there are people like me who shop around and study prices. My relatives also only buy something when it goes on sale so if it isn't a bargain and if it isn't on sale then it isn't going to be bought.

Products should be able to sell themselves and if you have to charge a lot to make a profit then it reveals price gouging and that only runs a business into the ground as customers get burned up from being taken advantage of. It also spurns consumer confidence because if I believe they are taking advantage of me then I believe they don't have my best interests in mind and I'll also believe that the seller passed bad merchandise off on me rather than take a loss and pay shipping to return items to the manufacturer.

I've seen businesses that don't pay their taxes, their owners put the money into their pocket and didn't re-invest it into their business and they are now out of business. It shows that the owners don't know how to handle money.

[philba]

Yeah, I agree. A fairly priced product fosters customer loyalty. Charge more than the customer perceives it worth and you don't get a sale but worse, you have lost their trust.

And, no, I disagree that what you should charge is unrelated to business costs. I'll say it again, if you charge too much you open yourself up to competition. And customers that think you are taking advantage of them will no longer be customers. Of course, if all you want to do is make a killing and move on, so be it. If I was going to put the effort into making and selling a product, I'd want to create something a little more durable than a flash in the pan.

I think a good example is sparkfun - they have a number of products that are priced higher than the exact same product from other sources - 40% in one case. I used to be a loyal customer but once I saw that they were asking me to fail an intelligence test, I stopped being quite so loyal. I still buy things from them but generally only if I can't get it from elsewhere. (actually I could go on and on about how SFE has fallen but that's not germane to the discussion here).