Simple question, really. A lot of consumer products are unbelievably value-for-money, I don’t even want to use the word “cheap” because they’re not even necessarily bad. How can this ever be profitable?
Have any examples?
I don’t think anyone is making products that are profitable (selling for less than it costs to make). Why would you think this is the case?
R
Things are cheap to make. In fact I get upset when things that cost almost nothing to make are sold for exorbitant amounts. (Like the $99 HDMI cable they sell you at Best Buy).
As far as everything else - the more of something you make the cheaper it becomes.
When it comes to certain examples (Xbox, Iphones) there is often the theory that when the devices are released they actually are sold at a loss, which can be true. But the companies selling them (Apple/Microsoft) know 2 things:
1: The more they make and the longer they make them, the cheaper they will become. So a product that may cost $300 at the beginning of it’s lifecycle may only cost them $150 to produce towards the end.
2: Electronic devices which enable sales of digital content (Xbox Live, Apps) are worth more in revenue down the road then the hit they will take on device sales. So it’s worth taking the hit on the device to reap the benefits of the lifetime supply of app sales.
A fairly good general rule of thumb, is that something usually costs about 1/3rd of it’s list price to actually produce. Another third of that goes to labor, shipping and other middle man costs, and then that last third is profit. This isn’t always the case, but it’s a pretty good model that I’ve found to be true more often than not.
I think it is often the sheer economy of scale that’s needed to get a product to market that intimidates people. It might sound scary that your tooling is going to cost $100,000 but if you can spread that cost over the millions of products those molds are producing it gets pretty manageable if you can cover the up front investment and design a successful product.
The rule I’ve heard is you generally divide by four. You make it for X then there is a 100% markup for the middleman and 100% markup for the consumer. I guess it varies depending on the market and other variables.
rkuchinsky wrote> :
A fairly good general rule of thumb, is that something usually costs about 1/3rd of it’s list price to actually produce. Another third of that goes to labor, shipping and other middle man costs, and then that last third is profit. This isn’t always the case, but it’s a pretty good model that I’ve found to be true more often than not.
The source of your quote is incorrect.
yup, i didn’t say that. In fact, I think it’s closer to a 5x markup. Something that is $100 MSRP is $20 FOB.
R
Kevin, how did you think it worked? Just people selling stuff at loss all the time, to say they have more customers? I don’t get your angle on this whole deal?
Sorry about that. I hit the “quote” button, but I guess I should have double checked that it worked correctly before I posted.
Kevin, how did you think it worked?
Well, he’s by far not the only industrial designer that “doesn’t know how it works”. I didn’t get any “business” training when I graduated in 1973. It was enough, financially, just to get through the design program; a business minor on top of that would have been tougher still.
I don’t think anyone is in business to sell products for less than it costs to make them (except for maybe the Austin Morris Mini Car, which they say sold for less than it cost to make because they were so disorganized)…
For almost every small design client/manufacturer I have ever worked with, they held a consistent belief that the margins were too low with consumer electronic products for them to ever approach - they could never sell the volume it would take to get the cost competitive. They probably end up making a small fraction of the total cost as profit, multiplied by millions. on the other hand, if you sell to niche markets, even at lower volumes, you can ask for a lot more (and get it)
This is a few years old now, but there was a good reason why the auto companies almost died.