Hustler Series: Estimating Costs

05: Estimating Costs

Once you’ve matured your product concept it’s time to estimate costs. This step is crucial before you move along to the design and manufacturing phases because it will determine your ability to launch the product. If this is your first startup there’s a real possibility that you underestimate the cost and burn through your money before selling a single product. That’s why it’s important to double-check the numbers before moving on to the next stage. Most broadly you’ll want to estimate both the startup costs and the per-unit cost of your product.

The startup costs refer to any expenses incurred before you actually make the product. This includes the cost of hiring designers and engineers to help you design the product, the cost of making and testing prototypes, and the cost of tooling for injection molded parts.

Here is a breakdown of what to expect for these expenses. Both the design and engineering work varies widely depending on who you hire. It can range anywhere from $50 to $500 per hour depending on what kind of freelancer or consultancy you hire. The low end of that spectrum represents the more inexperienced freelance designers/engineers and the high end represents highly experienced and niche consultants. Of course there’s risk associated with hiring less experienced but cheaper freelancers/consultants so you’ll need to determine what level of expertise you’re willing to pay for. If you need help on a simple project the low end of that spectrum is probably more reasonable but, if your product is highly technical or cutting edge, you’ll likely start approaching the upper end of the spectrum.

Prototyping costs are also on a spectrum. A simple plastic 3D print can cost less than $100 while a production quality prototype can cost over $1000. A simple apparel product like a custom shirt will likely cost in the low $100’s to prototype but a custom jacket will run much higher. The quantity of material required, the complexity of the prototype, and the level of finish will all be driving factors for the price. You’ll likely iterate through a few prototypes before you hone in on the final design so keep that in mind when estimating your expenses.

As for tooling, this also exists on a spectrum. Depending on the size, surface finish, and part complexity of your part, an injection mold can run anywhere from $2,000 to over $20,000. And each unique plastic part in your product will need it’s own mold to be tooled. This is where a large chunk of your startup expenses will go. Unfortunately there’s not really much you can do to cut tooling costs other than simplify the parts for easy molding. But even then, you’re still looking at a few thousand dollars per mold.

If this is your first time developing a product, I recommend doubling your initial startup cost estimate. This is because it’s unlikely that everything will go perfectly smoothly your first time and you will have unforeseen expenses pop up. As you gain more experience with the process you’ll improve your ability to estimate expenses and reduce the likelihood of unexpected costs. But, until you have that experience, I recommend doubling your initial estimate and only proceeding forward if you can afford to lose it all.

Also if you’re unsure about manufacturing costs a good resource to use is Alibaba. You’ll be able to find various manufacturers around the world that you can work with to get your product made. I recommend contacting a few and getting quotes for your product concept so you get a ballpark figure of the cost. This will likely change as you begin refining the design of your product, but the ballpark number is a good place to start if you’re new to product development.

For Hez Cases the startup costs predominantly came from tooling. Thanks to my background as a designer and mechanical engineer I was able to do all the design and engineering work myself and save big on those expenses. I also work at Q Design Studio, a product design consultancy, and have prototyping equipment at my office. I had my boss’s permission to use the equipment after hours so I could save a few hundred dollars on prototyping. However, the tooling costs ended up being more expensive than I anticipated. I initially thought a simple plastic case would run closer to $3,000 on the molding spectrum but this was quite off. Because my case design features a hard plastic back and soft-touch sides, it requires two molds. One is for the hard plastic piece and the second is for molding in the soft-touch material over it. Due to this complexity, the tools cost around $10,000 before adding the finish and an additional $8,000 was spent on the surface finishes. Because the product is something that consumers will hold and interact with constantly throughout the day, I couldn’t cut any corners when it came to the surface finishes. That’s why they ended up doubling the cost of the tooling. So there you have a look at the Hez startup costs. $0 on the design and engineering since I did it myself, around $200 on prototypes, and around $18,000 on mold tooling.

In addition to startup costs you’ll need to consider the per-unit cost of your product. This includes the raw materials, the packaging, and the warehousing/shipping. If your product requires exotic materials, or lots of material, the cost will be driven up. Similarly, achieving an Apple-like finish to your packaging will drive unit costs up considerably. And size and weight will drive up the warehousing/shipping costs. There are also marketplace fees that you need to account for. Amazon, for example, typically takes 15% of your profits when you sell on their website. It’s important to run an accurate estimate on all of these costs so you can determine what kind of margin you’ll be able to sell your product at. It’s better to be conservative and over estimate these costs than underestimate them only to find you can’t sell your product for a profit.

I’m in the process of negotiating some of the costs for Hez Cases but I can get into what the per-unit cost weas for the initial production run of 500 cases. The raw plastic materials were around $9. The packaging was just over $3. The cost for Amazon to house and ship the product was around $2.5. In addition to that, Amazon took 15% of the profits and 10% went to After-School All-Stars. Given all this, I selected a sales price of $29.99 with free shipping and ended up with a 25% margin. This means 50% of the per-unit cost goes to raw materials/packaging/shipping, 15% goes to Amazon fees, 10% goes to charity, and 25% is gross profit. Increasing the quantities does drive the per-unit cost down but it’s not by a huge amount. We’re talking about around a 10% reduction in raw material and packaging costs. It certainly helps the margin but it’s not a night-and-day saving.

So there you have a guide to estimating your product costs. There are many expenses you need to consider when launching a product so go through this list and make sure you’re not overlooking anything. And once you’ve established that you can finance the product launch, it’s time for the next stage: the initial design work.