Wesley Chang

October 25, 2016

The 3 Largest Costs of Launching a Hardware Product

Manufacturing Costs

Underestimating the costs of building a hardware product could mean failure for your entire company.

Unfortunately, too many hardware makers underestimate their expenses.

Of course, the cost to launch a product varies drastically but in order to launch a successful hardware product, you need to know how much money you’re going to be spending when and where.

When it comes down to the most critical and sensitive costs, there’s 3 major expenses that you have to prepare for.

Buckle Down for Product Development

Most people believe that building the physical product is the most expensive part of a launch.

And they’re right.

But why?

Materials. Prototypes. Engineers.

The cost of microchips, sensors, and screens aren’t free. And on top of that, you need an electrical engineer to wire up your product!

Unless you’re an electrical engineer then you’re good to go on that front!

What about prototyping? You need to test your product somehow right?

Well, the cost of prototyping is directly related to how many times you have to build a prototype.

Chances are that you’ll see at least 10 prototypes.

Prototype with Display

But let’s say you’re following the lean startup method.

For each iteration over the Build, Measure, Learn Feedback Loop, you’ll almost always have to build a new prototype. So for each iteration, you’ll be spending more money.

John Teel, the founder of Predictable Designs and contributer to Entrepreneur.com recently wrote the article, “The 4 Big Costs to Launch a New Electronic Product,” about 4 of the main costs that a hardware startup should prepare for and understand. In it he said,

“Usually the electronics will be the most complex and expensive to develop, totaling at a bare minimum $15k. You can then expect to spend at least several thousand dollars to develop the 3D models for the plastic and the package. Keep in mind these are minimum amounts.”

Think of it like this.

How many times are you going to have to revise your designs, scrap your prototypes, or even break a display?

It adds up and it does so extremely fast.

And that’s just the tip of the iceberg my friends. Let’s move on to something that’ll make or break your credibility.

Don’t Cheap out on Getting Certified

Most electronics need to be certified. Especially if you plan on selling your product internationally.

It’s often overlooked, or forgotten, but your products certification is a direct reflection of how thorough and credible your company is.

iphone-certification

Nobody wants to buy a product that claims to be water resistant but isn’t certified IP68

Getting certified isn’t free, nor is it cheap, but that doesn’t mean you should neglect it.

John Teel summarized a few of the most common certifications in the article, “The 10 Costs You’ll Pay to Bring Your Hardware Product to Market.”

To make things easier for you, those certifications are:

  • FCC certification – certification for all electronic devices being sold in the United States
  • UL certification – certification for all electronic devices that plug into an electrical outlet being sold in the United States or Canada
  • CE certification – certification for most products being sold in European Union
  • RoHS certification – certification that the product is lead free

Teel says, “certification costs may range from only a few thousand dollars up to as high as fifty thousand dollars.”

But in all honesty, no matter the price, if you want to succeed and establish a brand that’s worth speaking about then get your product certified.

Product development and certifications are pretty costly, but let’s not forget about manufacturing!

Ready to Mass Manufacture?

Once you have finished up the product development and certifications you may be in a position to scale up and start mass assembling your hardware.

If that’s the case, there’s a few things you’ll want to keep in mind.

Design for Assembly

There’s design for manufacturing and design for assembly.

Most startups focus solely on DFM, but what happens when your manufacture can’t make all of your product’s components?

Believe it or not, the possibility of your contract manufacturer being able to create each and every one of your products components is pretty slim.

Christine Evans, the content lead over at Fictiv, who has written countless articles for the hardware community stated in the article, “Luna on Best Practices for Manufacturing Your First Hardware Product,”

“The process to make all of your components work together may not be as simple as you expect. For example, with Luna’s mattress cover Massimo ended up working with three different manufacturers since there wasn’t just one who could manage all the necessary parts of the product assembly.”

But when working with more manufacturers, the difficulty of collaboration increases quite a bit.

In layman’s terms, Evans said, “the main takeaway here is that the process is never as simple as designing some schematics or 3D models and sending them to a factory for production and assembly.”

And on top of that, each factory is likely to have their own hourly rates or fixed prices.

Manufacturing Locally or Overseas

If you’re looking for the best prices and cost optimizations then you’ll probably want to consider manufacturing in China.

SVV Manufacturing China

However, in many cases, locally manufacturing your hardware makes sense.

Perhaps your company is pressed for time, values communication, or doesn’t need to scale as much.

Of course cost is important when launching a product but when time is extremely limited, the manufacturing process is a lot more efficient and quicker than overseas.

On top of that, communication is 10X better because there’s no language barriers.

So much can all of this cost you?

Well, if you’re leaning towards hardware in China, then you’ll be paying close to 50% less than you would if you kept it local and here’s why.

Ben Einstein over at BoltVC wrote an article that shared a ton of information on raising funds for your product, the costs of manufacturing, and even how much money went into traveling overseas.

In “Hardware by the Numbers Part 2: Financing + Manufacturing,” Einstein said,

“One of the largest fixed costs associated with manufacturing can be tooling. This unfortunately comes as a large upfront payment and represents one of the hardest/most expensive things to change once the design is released. This can vary by several orders of magnitude, but a simple injection mold tool (straight pull, single cavity, single shot, steel tool including texture/polish) averages around $6.5k in China. Keep in mind, most products that startups make can have between 5 and 50 different injection molded parts which can represent 1–50 tools.”

That’s at least $6,500! If your product needs 5 molds, than you’re looking at over $32,000. But in the US, the same tool would typically cost twice as much.

So just based on those two numbers, manufacturing in China is looking a lot more cost effective. But consider how many units you plan on building.

Ben says, “Most Chinese contract manufacturers (CMs) have a minimum order quantity (MOQ) of 5k units. More importantly, these CMs want to see a lot of growth (ie: your second production run is 10k units, your third is 20k, and so on).”

Depending on how expensive your product is, your manufacturer(s) might let this slide but if you don’t plan on making a $1M worth or product or don’t expect to grow your production, then manufacturing in China isn’t your best option.

To sum things up and help you make a better decision on where to manufacture, Christine provided these 5 key things to consider:

Scale – how many units will you ship?

Cost – how does the cheaper cost to manufacture overseas compare with the cost of hotels, flights, and time?

Communication – what is the value of more efficient and streamlined communication in the US vs China where the language and customs may be unfamiliar and thus the risk of miscommunication greater?

Material needs – where can you find the best quality materials for your product?

Time to market – how quickly do you want to take your product to market? (domestic manufacturing is faster than overseas)

What to Do Next

In general, you should be preparing to spend more than you estimated in case of any complications during this entire process.

Launching your product to market is an extremely timely and sensitive process.

The more accurate your estimates are, the more money you’ll be able to save and allocate for emergencies or quarterly employee bonuses.

There’s a lot more that I have yet to mention when it comes to costs, but if you’re already set on manufacturing in China but don’t know how to get connected with a factory then a hardware incubator such as SVV is the place to go. You’ll get expert advice on prices, materials, designs, and direct contacts to leading manufacturers.

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