As Season 3 started, Curt set out a parameter that wasn’t explicitly stated in Season 2: the cost of production should be ¼ to ⅕ of the retail cost of the product. This was a shock to some of the contestants in the room who were unfamiliar with the way product pricing works. But, ¼ is the accepted number in the inventing world.
If a retailer sells a product on the shelf for $50 they generally are willing to buy it from the producer for $25. If I am selling my product wholesale for $25 I will need to make it for half that – $12.50. Of course, the hope is that the producer and retailer are making money along the way. But, the marked up price is not all profit. We all know that retailers have significant costs in running a business. Brick and mortar stores have to pay rent, salaries, utility bills, insurance, and other costs. Online retailers also have facilities costs and shipping is another major expense.
The producers are also not looking at 100% profit. Start up costs tend to be very high. There is time and money invested in design and prototyping. Production costs are significant. For example, injection molds for plastic parts can run from $10,000 or more for simple designs to over $100,000 for more complex, multi-piece products. Few products succeed without marketing so that is another cost not added in to the production cost. So, the $12.50 “profit” that is made on each sale can quickly disappear with other expenses associated with bringing a product to market.
One of the reasons that bringing a great idea to market is difficult is because of this formula. Just because the math states that I should make a $50 product for $12.50 doesn’t mean that people will pay $50 or that I will be able to get my production cost down to $12.50. Many good ideas don’t end up in the store because they can’t be produced for a price that consumers are willing to pay. One key to inventing a successful product is finding that sweet spot – coming up with a product people want and are willing to pay for but that is economical to make so there are profits for producers and retailers. The Make48 competition has mentors with expertise in production and bringing products to market that help contestant estimate their costs and make sure the economics work. This is a large part of the judging process as well. Whether for the competition or for an independent inventor, costs of production and sales determine whether a product has a chance of success.
This is one reason that many inventors seek out licensing deals for their products. I am working with a local inventor who estimates he has spent $20,000 on designing his product and getting a first, single prototype made. To produce a batch for sale he expects another $50,000 for injection molding set up, packaging, and and initial production run of products. And, if his product doesn’t sell, then he has lost a huge upfront investment. If he is able to license his design the licensee will take on all of the risk and expense.
This is what the winners of a competition like Make48 hope for: a licensing deal with a company like Handy Camel that will help them minimize their risk while still getting their product to market. The sacrifice is that the inventors will only get a small percent of the profits and usually give up control of the product. The upside, though, could be a significant flow of cash with little investment of time or money. The hope is that a good licensing deal ends up creating a win-win scenario for both parties involved.