How to determine a pricing model for an electronic product?


1

I have an idea that I plan to develop into a product beta then boost with a crowdfunding platform.

I'm looking for a rough formula to develop my pricing model that will account for material cost, research & development time, working wage, etc. Ideally the product would be under $100, in the "consumer electronics" category, and the company would be 5 people are less.

Short of telling me to take a business class, is there any advice you can give? Does a general pricing model exist?

Pricing Business Model

asked Jan 12 '13 at 05:20
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Npc
108 points

1 Answer


2

Well it is an open ended question, the open ended answer is to to build a model that you can play with "in principal".

You have all your constituent parts

Fixed costs monthly / yearly (insurance, rent, stuff)
Wages (somewhat variable, and a monthly cost)

Costs dependent on scaling market Marketing and sales to fill and drive your pipeline. This is cost per click to look at the product, cost per lead that looks good but hasn't bought yet, finally these all aggregate into cost per sale.

For this you can produce X'000 units per month or per year.
Per 1000 units what are the input costs.

Given you have a physical product, how much per 1000 items is distribution going to cost you. Fulfillment, warehousing etc.

So over a 1 to 2 year period you can aggregate the fixed costs, you can aggregate your best guess on the sales cost per 1000 units. You then have another sheet which is income against 1000 units over time.

The Principal You now have both sides of the picture incoming and outgoings. You now bring them together to show your higher end (I have 20,000 people buying each month), down to I have 10 people buying per month ... have 3-4 other "somewhere in the middle" rows which can have various assumptions built in.

The goal here is not to end up with one magic number (because it will be wrong no matter what you do). But to end up with an equation in excel that you can tweak the numbers: hire new people, have better quality components, increase the amount you pay per click to increase the volume entering the pipeline etc.

You then run play with the spreadsheet which its primary goal is to train your brain as to what the numbers mean. Thus as you start and reality happens you have a good "feel" already, and a reference spreadsheet to enter reality against to get a feel for where you are heading which hopefully is up the higher end of the scale.

Guidelines for setting up the spreadsheets.

  • You need to understand 3 key things: time, money and volumes.
    • IF you have higher volumes your costs will likely drop. There will be thresholds and "local hot spots" eg between 1000 and 3000 units with a sale price of $100 you only break even after 2100 sales per month ... but over 3000 you need more staff and you don't break even again until around 4000 units.
    • Time. $1 million sounds like lots .. if its $1 million in 1 month IT IS, if its $1 million in 4 years ... your in trouble. Knowing per month is usually a good "guideline". It also gives you a good way of comparing outgoings and in-comings over time.
  • Your sales pipeline needs to be separate to get a handle on your conversion rates. This is its own subset because price per unit is a key factor in how many people opt to buy.
  • Make sure you find your break even points for your key variables (staff, cost per 1000 units etc). This sets up the minimum price thresholds for your pipeline. Again these will change given the numbers of staff and the other costs.
  • Be prepared to throw away your first few attempts at the spreadsheet. You won't get it right first time. Having things separated out means your can throw away parts at a time not everything.
  • Keep everything separate. You can afford to waste a few extra columns breaking down equations. It also allows you to utilize each separate assumption.
  • Make a variables area and reference the variables. This makes it easier when you playing your "what if" scenarios to change everything in one place.
answered Jan 13 '13 at 13:34
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Robin Vessey
8,394 points
  • Incredible... Thank you so much for putting the effort into writing this. Extremely useful! – Npc 6 years ago

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