EEVblog #887 - The Economics Of Selling Hardware

In this Fundamental Friday Dave discusses the economics of selling your own hardware. Both directly and through a distributor/reseller.
Everything you need to know about pricing your product for your hardware startup. Cost Multiplier, Gross Margin Percentage, Markup, and Cost Of Goods Sold are all explained.

Support the EEVblog through Patreon!

EEVblog Amazon Store (Dave gets a cut):

[ozturner]

Hi Dave, well done. You've explained in roughly 26 minutes what has taken me about 24 years to learn. I'm in the finance industry now and your numbers are spot on (as a minimum!). It's wonderful to see a tech savvy person who is also finance savvy. Keep up the great work.

[DrScientistSounds]

I've been a small scale electronics manufacturer for 10 years and this video is very accurate and appropriate, nicely done Dave.

[GadgetAddict]

Thanks for the video Dave. This will be a good reference point for those who argue a phone that costs $50 to make should be sold for $51.

[SebastianSonntag]

The 'profit' comparison between direct sales and reseller use would seem more useful if you were to take into account the opportunity cost of doing your own distribution: You may make 47K a years more by doing your own distribution, but if the additional work of doing all the shipping and handling means that you have to spend an extra 1000 hours working on this project, while you could be earning (just to pick a number) $ 60 an hour doing other work, you are actually losing 13K by doing all the work yourself.

[eingast]

I founded and ran a electronic company in the past (sold it now). IMHO a distributor is worth the mark up. Although in the first moment 60% (sometimes more) does not sound "fair" (=easy money you think you can have yourself), but the most important issues are: Reach far in the market to have huge volumes and do the work that you as an engineer probably dont enjoy: Dealing with stupid, time consuming customer and doing paper work, like single shipping, customs and national regulations in foreign countries etc. I did both, started selling the product myself and afterwards having an exclusive worldwide distributor (to whom I now sold my company). Also keep in mind: You might want to have time to develop further new projects in the future.

[FranLab]

Very true - the price is what it is! The realities of production.... It is always a challenge to sell a product that is not built down to a cost, and the higher the quality build, the more labor cost in production, and the volume of production is always reflected in the end price.

[Rizon]

This guide is completely wrong. Here are the true economics of selling hardware:
1. Think about something you want in your life
2. Now invent impossible but believable promises and an impossible but believable price
3. Put it up on Indiegogo and Kickstarter
4. Keep posting some promising updates every few weeks until you have all the money you'll ever need in your life

[bcastromusic]

Great overview and 100% accurate in my experience. It's really best to go for 3x to be comfortable but that 2.5x number is the common minimum. In some small markets such as Pro Audio distributors will get down to 30% markeup, and selling direct to dealers you can even get to 20-25% depending on what the product is. It does stink to think the distributor can make more money than your company - but you have to have massive respect that they are buying/investing in your product at at least 2x cost of what you are!
Another reason to go for 3x and above profit percentage is that you want to reinvest into your company - you don't want to rely solely on investors and credit accounts!

[Systemrat]

An electronics manufacturer in China showed me one of there products a yellow water proof AM / FM radio. It was well built and I was tempted. The cost was US $ 1.72 each with a minimum order of ten thousand units.

A year latter I see this unit in Dick Smith for A$ $39.95.

Dick Smith went bust but if you look at the prices at other electronics shops they are what the market will bear not cost plus margin.

My pet hate is things are 5 cents less than the next dollar value $29.95 $ 49.95 etc.

[scropion]

any new video or blog about applying for quality certificate like FCC or UL or CE. this information is badly needed

[AmRadPodcast]

Saw the blog post a while back... This is great info for hardware guys and could save many from shooting themselves in the foot.

[youu]

Dave, I’m using the same 2.5x rule in the construction business. Usually for stuff I am not sure what to charge for, i mostly work on restoring old houses. Love your vids, keep it up :)

[zifnu]

Awesome video Dave.

I would add that Economy of Scale is another important factor to consider when calculating the cost/profit of your widget. I've personally seen a >25% cost reduction on a single component/module when manufactured in 5k qty rather than 1k qty. When you get to 10k or 100k quantities things get interesting. In some cases, producing a product in less than 1k qty is not even worth the effort involved. You either get to a product price point that is more than most people would want to pay, or watch your profit margin vanish. Neither scenario ends well...

[John_Ridley]

One thing to keep in mind is that the reseller DOES add a tangible value besides pure profit - he frees up your time so that you can start doing the NEXT profit making enterprise. This is significant IMO. Unless you plan to skate on the same old products for years, as soon as you've got things worked out on one product and it's a proven product with cost reductions done and defects reduced, you should start putting your time into making the next thing instead of wasting your time on fulfillment.

[L.Lagrange]

This is awesome. Gonna watch this a few times. I've seen this in my feed several times, finally getting to the point where I might be trying to start a business myself.

[QoraxAudio]

11:04 "Don't pay for marketing"
Best advice I've heard in a long time.
Marketeers are frauds.

[crash]

Fundamentals!!!! YES! Thanks Dave. Fundamentals Friday are my favorite type of videos.

[FappyGnome]

This was a really nice video mate, I wonder how many kickstarters could have succeeded had they known this stuff

[Houstonruss]

Thanks for the info! could you possibly make another on getting a product certified and listed? like how much it could cost ect

[ben_r_]

Well done Dave! This will help a lot of people understand this part of product development!