Without question, the manufacturing cost is the single most critical expense when bringing a new hardware product to market. You will eventually get past the development and scaling stages, but you will never get past manufacturing.
You need to know what your production cost is in order to set your retail price, so know how much inventory will cost you and, most importantly, determine your profit margin.
There are several terms I need to explain first. Production cost and manufacturing cost are synonymous and refer to how much you will pay per unit to have your product manufactured. The landed production cost refers to the production cost plus the cost to transport each unit to your warehouse. It is also known as the Cost of Goods Sold (COGS).
If your startup is successful, then you will have a long, intimate relationship with this number. You will always be working to reduce it so you can maximize profit.
Most entrepreneurs wait until after they have fully developed their product before they try to even estimate the production cost. This is a serious mistake. You should know the production cost for your product as soon as possible. You do not want to spend years of your life developing a product that cannot be sold for a profit.
The Cost of Producing Electronic Hardware
These are all of the production costs you will need to know if you are making an electronic hardware product.
Electronic Components
The electronic components cost will be the most challenging to accurately estimate. Considerable engineering is required to select all of the electronic components (mostly the microchips and other critical parts).
Selection of all the major electronic components is essential to accurately estimate the production cost. You will need a Bill of Materials (BOM) which lists all of the electronic parts required.
Printed Circuit Boards (PCBs)
Manufacturing the electronics is a two step process. The empty Printed Circuit Boards (PCBs) are produced first. Then the electronic components are soldered on.
The empty PCB cost is determined primarily by the number of routing layers and the size of the board. Two routing layers are required at a minimum, although most designs will need four to six. Complex designs may need eight or more. The more layers used for routing, the smaller the board size.
The PCB assembly cost (i.e. soldering on the components) is primarily set by the number of components, the pin pitch, whether or not the IC packages used have lead, and whether or not parts will be soldered on both sides of the PCB.
Plastic Parts
Although the cost of injection molds themselves are quite expensive, the plastic parts produced are fairly low cost. The type, size, weight, and molding time of the plastic used determine the plastic part cost. Your product design determines the mold time, size, and weight for any plastic parts. This leaves only one option to reduce your plastic parts cost without impacting your design: multiple cavity molds.
A multi-cavity injection mold will allow the production of multiple parts with a single shot of plastic. The use of multiple cavity molds allow you to increase production speed and reduce the part cost. The downside is that multiple cavity molds are considerably more expensive than a single cavity mold.
Final Product Assembly
After the individual components (assembled PCB, plastic enclosure parts, etc.) are ready, the next production step is to assemble everything into the final product. Final assembly cost consists almost entirely of labor costs. Eventually you will likely need to have assembly done in Asia where labor costs are much lower.
Testing
Once the final product assembly is complete, the product must be tested to confirm proper functionality. Improper testing, and ultimately shipping bad products to customers, is a deadly mistake that can kill your startup. A high level of testing is essential to shipping quality products.
Scrap Rate
You are guaranteed to have some faulty units since no production process is perfect. Initially, this scrap rate may be 10% or more. However, as the manufacturing process is improved, this should eventually drop between 1-3%.
Retail Packaging
Will your product be sold online or in brick-and-mortar retail stores? Retail packaging is not as critical for products sold online, since the packaging mainly just needs to protect the product from damage during shipping. On the other hand, packaging is just as important as the product when sold in retail stores since the package itself must sell the product.
Fancy retail packaging can be quite pricey, so it is best to usually start off with something simple to minimize your costs. This is one reason why it may be best to initially focus on online sales. Selling online will also give you more flexibility since tweaking your sales message on your website is much easier than tweaking a physical package.
Returns
As with scrap rate, you are also guaranteed to have some percentage of units returned by customers. You need to include this in your COGS estimate. Also just like the scrap rate, the return rate should drop significantly as you improve your product, packaging, and customer service.
Freight
Most consumer hardware products will eventually be manufactured in Asia. This means the finished product must be trucked from the factory to the local sea port where it will be loaded on a cargo shipping vessel. You will then have to transport the products by truck from your local sea port to a warehouse or the customer.
Duties
Do not forget the taxes! Both the country of import and the country where the product was manufactured will charge you duties. Fortunately, some product categories are exempt from import/export duties.
Conclusion
In this three part series, we have covered all of the costs to develop, scale, and manufacture your product. Just remember, although you will advance beyond development and scaling costs, you will be dealing with production cost indefinitely.
Do not wait until your product is fully developed to estimate its production cost. Any big tech company developing a new product will have a good estimate on the production cost before they begin development, and so should you.
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