This article was originally published on Predictable Designs (a company that helps entrepreneurs and makers develop new electronic hardware products). Download their free cheat sheet 15 Steps to Develop Your New Electronic Hardware Product.
Most makers drastically underestimate the costs required to develop, scale and manufacture a market-ready hardware product. This is one of the primary reasons so many hardware startups fail.
Having a proof-of-concept prototype based on a development kit is only the first baby step. There are many costs between you and your goal of creating and selling a new product.
Without knowing all of the costs you’ll either run out of money before your product is ready for market, or you’ll end up developing a product that can’t be manufactured profitably. Both situations are bad, although the second one is much worse.
Most entrepreneurs focus on the development costs because they are the first financial obstacle. However, the cost to scale from a prototype to a fully manufacturable product may be the largest cost hurdle.
Ultimately the manufacturing cost is the most important cost because it determines your sales price and your profit! You’ll eventually proceed beyond the development and scaling stages, but if your startup is a success you’ll be in the manufacturing stage indefinitely.
Note: This article is a shortened version of an in-depth guide I’ve created on the costs to bring a new hardware product to market. Download a free PDF version of the full guide for easy reading.
Development costs for most hardware products are broken down into three categories: the electronics, the plastic and other mechanical parts, and the retail package.Electronics Development Cost
The electronics will usually be the most complex and expensive part of your product to develop. Prototyping the electronics is divided into two steps: production of the blank Printed Circuit Board (PCB) and soldering of all the electronic components onto the PCB. The PCB is what holds and connects all of the individual electronic components.
For most products producing the blank PCBs will be about a third of the electronic prototyping costs, and the board assembly will run about two-thirds of the cost.Enclosure/Mechanical Development Cost
Unless your product will be marketed strictly to the DIY/maker market it will require some type of enclosure be developed, which is usually made of plastic.
Some products may require additional mechanical parts such as stamped metal components, or perhaps even moving parts. This will add additional costs for mechanical engineering and prototyping.Retail Package Development
Many hardware entrepreneurs neglect the importance of developing the retail package. This is a major oversight with serious consequences. Unless you plan to only sell your product online, or to industrial customers, the retail package is just as important as the product itself. Sometimes it is even more important.
For more details on developing a new hardware product see my Ultimate Guide on How to Develop a New Electronic Hardware Product.
Finishing the prototypes for your product is a major accomplishment so congratulations! But don’t get too excited. It’s a huge step to go from prototypes to large volume production.Certification Costs
Most Makers forget to factor in the cost to get their product certified. This is primarily true if the product is electrical in nature. The main certifications required for electronic hardware products include:
FCCcertification is required for all electrical products that will be sold in the United States. Other countries will require their own similar certification. So if you plan to sell your product in multiple countries be prepared for the costs to certify your product in each country. All electrical products radiate at least some electromagnetic energy so governments want to ensure they don’t interfere with RF communication.
Underwriters Laboratories (UL) or Canadian Standards Association (CSA) certification is required for any product that will be sold in the USA or Canada that plugs directly into an AC electrical outlet. However, most retailers and insurance companies require UL/CSA certification for any electronic product regardless of whether it plugs into an AC outlet. So unless you plan to only sell online you will need this certification.
CE certification is necessary for electrical products that will be sold in the EU (European Union). It is similar to a combination of FCC and UL certifications.
RoHS certification guarantees that the product is free of lead and is necessary for any electrical product that will be sold in the European Union (EU) and California. However, because California is such a huge market, most companies have their product RoHS certified if it will be sold in the USA.
We’ve covered the certifications required in the USA, Canada, and the European Union. There are numerous other certifications required for all the various other countries and regions.Manufacturing Setup Costs
The cost to setup manufacturing will mostly consist of the cost for the injection molds required to produce any custom plastic pieces (i.e. the enclosure). Injection molds, especially those used for high volume manufacturing, are very expensive.
Mold cost is mostly determined by the hardness of the metal used (higher volume molds use harder steel), the number of cavities, and the use of any side actions.
There will also be some minimal setup fees to manufacture the electronics but in most cases it will pale in comparison to the costs for the injection molds.
No doubt about it, the landed manufacturing cost is your most important cost. It tells you how much inventory will cost, how much you can sell your product for and how much profityour startup can make! Also, unlike the development and scaling costs, it’s a cost you’ll continually face for as long as your company exists.
The landed manufacturing cost is the total cost to produce and transport a single unit of your product to your warehouse. It is equal to the manufacturing cost plus all of the extra costs to get it to your warehouse or your customer.
Inventory is always one of the biggest costs for hardware companies. Your inventory cost is just your product cost times the quantity. So in order to estimate your inventory costs you need to first know your production unit cost.
Needless to say, you need to know your landed manufacturing cost as soon as possible. There’s no point in spending years developing and scaling a product that can’t ever be manufactured and sold at a profit.
Some of the many costs that make up the landed manufacturing cost include:Electronic components
For electronic hardware products the cost of the electronic components will likely be the most difficult to accurately determine before the design is completed. This is because considerable engineering design work is necessary in order to know which components are required for your product.
A lot of startups wait until their product is completely designed and prototyped before they try to determine their components cost and ultimately the manufacturing cost. This is a mistake because you really need to have an estimate of this cost BEFORE you spend tens of thousands of dollars developing the product.PCB production and assembly
The cost of the blank PCB is mostly determined by its size and the number of routing layers. At a bare minimum two routing layers (top and bottom) are required; however, most designs will require from 4 to 8 layers.
The cost to assemble the PCB (i.e. solder down all the electronic components) is primarily determined by the total number of components, the minimum pin pitch, the use of leadless packages such as QFN or BGA, and whether components are soldered on both sides of the PCB.Injection molded plastic parts
The cost you’ll pay per unit for any production plastic pieces is primarily determined by the weight, size, mold time, and type of plastic used. The size and weight for each piece is dependent upon your design so there isn’t much you can do to control those variables short of making your product smaller or less durable (thinner plastic).
You can eventually increase your production speed, and reduce the part cost, by using multiple cavity molds.Other mechanical parts
Some products will require various other parts such as stamped metal pieces (for internal shields, etc.), springs, gears, screws, motors, and etc. In many cases, stock components can be used which will eliminate any scaling costs.Final product assembly
Once the various individual components are ready the next step is to assemble them to form your final product. The cost of this step is almost entirely labor costs.Testing
Once the final product has been assembled it needs to be tested to confirm it is fully functional and meets all of the quality specifications.Scrap Rate
No manufacturing process is ever perfect and you are guaranteed to have some faulty units. Initially this may be 10% or more, but as time goes on and you optimize your manufacturing process you should be able to reduce this number to only 1–3%.Packaging
Packaging costs depends on whether your product will be selling in retail stores, or primarily online. For products sold in retail outlets having optimal retail packaging is a critical priority so packaging costs will be significantly higher.Returns
Just like you are guaranteed to have some faulty units that must be scraped you’re also guaranteed to have at least a small percentage of unhappy customers that wish to return their purchase. So be sure to include this in your final manufacturing cost.Freight
Most products will ultimately be manufactured in Asia. This means your finished product will first need to be trucked from the factory to the local sea port. Then it will be loaded on a cargo boat for shipment to your target country. Then, once the boat arrives in your country you’ll need to truck it from the port to your warehouse or directly to your customer.Duties
Don’t forget the taxes. Both the country of manufacture and the country of import will charge duties which need to be included in the final landed cost. Although, some product categories may be exempt from export and/or import taxes.
The cost to launch a new electronic product can be overwhelming. Development costs will be your first financial obstacle to surpass, and scaling costs will likely be your biggest financial hurdle.
However, the landed manufacturing cost will definitely be your most important cost since it determines your profit, sales price and inventory cost. You’ll eventually move beyond the development and scaling stages, but you’ll forever be in the manufacturing stage.
For more details about all of these costs see my Essential Guide on the Costs to Develop, Scale, and Manufacture a New Electronic Hardware Product.
This is a short summary of the costs. The full version of this article was originally published at predictabledesigns.com on January 19, 2017.