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> I'd later learn from some hardware experts that you really want to price goods like mine around 5x the cost to manufacture. This. If you're doing hardware, y

> I'd later learn from some hardware experts that you really want to price goods like mine around 5x the cost to manufacture. This. If you're doing hardware, your price needs to be minimum 3x-5x the COGS. If you think you're going to win some market by pricing with lower margins, like 1.5x-2x, you're setting yourself up for failure. Interestingly, the same rule holds for restaurants: food input costs should be no more than 20-30% of the meal price.

baybal2 8y ago
Yes, totally true. And this very reason "good goods" don't survive on the market for long. The need to just make any money at all, means that you have to import cheap goods from China, unless your competitive advantage will worth more than that 5x margin ones get from "cheap sh*t." And you will never ever get this for any non-high tech (which implies easy to manufacture) consumer product.
- JJMcJ 8y ago
  > cheap goods Price anything at professional grade. For example, a heavy duty professional microwave can cost well over $1,000, but you can run it 20 hours a day for years. Thanks to my former restaurant owner friend for this example.
preommr 8y ago
There's a good video from EEVblog (EEVblog #887 - The Economics Of Selling Hardware) where he suggests a MINIMUM of 2.5 x COGS. But I think that was assuming directly selling to customers and passing the cost of shipping to the customer.
- SquishyPanda23 8y ago
  I recall that episode. It was a Bobby Dazzler.
sharkweek 8y ago
Cousin is a restaurant manager in the bay area. He mentioned that the margins are so thin in the business that one or two "bad" nights can literally ruin the balance sheet for the entire month.
- aswanson 8y ago
  Brutal. Imagine the effect raising the minimum wage could have on top of that.
  - Waterluvian 8y ago
    I think the minimum wage laws apply to all restaurants. So prices just go up.
    - sokoloff 8y ago
      No diversion of consumption to home-cooked meals (single or multi family)? No marginal restaurants fail? No reduction in tipping? No reduction in add-ons to meals? (apps, drinks, deserts) No reduction in staffing count, hours, or benefits? It would seem unusual if “prices just [went] up” without any other changes to the overall system.
  - markdown 8y ago
    Not much, because (1) the effect would be felt by all restaurants at the same time and (2) your customers would have more money to spend.
    - pc86 8y ago
      #1 is definitely true but #2 is only true if most of your customers make the minimum wage. Since we're talking about less than 4% of hourly workers[0] (so excluding everyone making a salaried wage which is going to be almost everyone reading this and everyone they interact with professionally), it's extremely unlikely that a majority of your customers make the minimum wage even if we're talking about a fast food franchise. [0] https://www.bls.gov/opub/reports/minimum-wage/archive/characteristics-of-minimum-wage-workers-2014.pdf https://www.bls.gov/opub/reports/minimum-wage/archive/charac...
nostrademons 8y ago
I'm kinda curious where the rest all goes. Seems like there's a market opportunity to streamline operations & improve efficiency if 80% of the purchase price of a product goes into things that are not the product.
- colechristensen 8y ago
  5x the cost to manufacture, which would not include product development, not to mention sales, failed products, cost of returns or fixing defects, office rent, testing, certification, support, and on and on and on. There is a market opportunity and many people capitalize on it. Amazon is full of things like this. Generic items or barely designed items with your brand stuck on them, built by somebody found on Alibaba and shipped to the consumer. They're fantastically cheap, the margins are much thinner, and the products range from adequate to terrible. It's terribly difficult to build a high quality product people will want for many years (no new design costs) which you don't have to market or do anything with and can just manufacture and sell for a tiny profit. When it is done you'll usually find it as a small very specialized family type business which hasn't sold out yet.
  - megaman8 8y ago
    But still, most of those things are one time costs: product development, failed products, fixing defects, certification. once you have completed those things, you can keep selling the successful product for decades right? especially now that the pace of innovation is slowing down. I mean just look at the clothing industry: a t-shirt today is the same as it was 10 or 50 years ago, right? I would imagine things are super high tech and new, would need some iteration in their first 5 to 10 years, but after that, I don't know. the costs that scale with each good sold is: Support, cost of returns, Sales, marketing, etc.
    - colechristensen 8y ago
      Name something built by a hardware startup in the recent past or imaginable future which would be designed once and built for 10 and 50 years exactly the same.
JJMcJ 8y ago
Know the owner of a failed restaurant. He said you aim for 25% for food but usually it ends up around 33% no matter how hard you try. This was for a single non-chain restaurant. Someone else about to close a business down for a physical product. He was boutique sized, because of competition from factory made higher volume, he could never get above 2x COGS, and it has been a hard grind that is now losing money instead of the narrow margins he'd had for a while.
- cletus 8y ago
  Gordon Ramsay likes to say something similar. The costs should be: - 33% food - 33% all other expenses - 33% gross profit
  - vadym909 8y ago
    Is there a Net Profit target % too?
    - Qworg 8y ago
      On average, 3-5%.
icelancer 8y ago
We are tentatively at 3x COGS for a hardware product we are about to launch in Q1 2019 and the margin feels incredibly tight. We may go to 3.5 - 3.7x COGS.
- TaylorAlexander 8y ago
  Pricing is scary. But people have subsequently told me they would have paid $85 per board for my product. I charged $20 and it sunk me. $85 would have meant a small manageable launch that was well funded. Instead I went $100k in debt. Be sure you’ll hve enough to cover unexpected issues. Are you over optimistic about production targets, setbacks, etc? My time estimates were way too optimistic which compounded the price issues. I’m obviously biased from my bad experience, but do be mindful to do due diligence on pricing, delivery, and costs. Well, my other issue was that I didn’t know how to do those things and I ran out of time. Best of luck on the launch.
pdog 8y ago
This isn't true anymore. There are plenty of direct-to-consumer brands now thriving with around 50% to 60% gross margins, i.e., selling at 2x-3x COGS. If you have a quality product and a lean sales organization, the 5x COGS model is a thing of the past.
- JumpCrisscross 8y ago
  > There are plenty of direct-to-consumer brands now thriving with around 50% to 60% gross margins, i.e., selling at 2x-3x COGS Mature ones, sure. Unless you plan on financing growth pretty much exclusively out of the middle of your cash flow statement, however, you'll need a wider margin as an upstart.
weliketocode 8y ago
Always surprised to hear friends & acquaintances remark that a $50 dry-aged steak from a steakhouse is overpriced. 24 ounces of Prime beef, aged for a month? I'm not sure I can get it myself for less than $25/lb. No way they're making money on the beef.
- dirktheman 8y ago
  A well known Dutch chain restaurant owner once said "They're eating me poor, but drinking me rich". Good waiting staff is worth their weight in gold. Knowing when to ask if the customer would like an extra drink is an art. On a side note: I never get the 'free refill' policy in the states. Why would you give something away that has a 300% margin...
  - bballer 8y ago
    For drinks that get free refills the initial sale means more than the refills. It literally cost 1c to provide the drink and you sold it for $3.00 (that's the 300% margin). Who cares if you spend another 1c to provide a free refill if that would be the difference in the customers mind on whether they should buy the drink initially or just have water or OJ (something that has negative margin, or a very low margin).
    - dirktheman 8y ago
      Ah, so the refills are for fountain drinks only? I'm not from the US, and I never realized that. Thanks!
      - bballer 8y ago
        Yeah fountain drinks and occasionally tea (sweet or unsweet) depending on where you are at. No problem!
varjag 8y ago
That's an insane ratio. Maybe makes sense for consumer markets and sale through retail channels, but not in general. Your competition will eat you alive.

baybal2 8y ago

Yes, totally true. And this very reason "good goods" don't survive on the market for long. The need to just make any money at all, means that you have to import cheap goods from China, unless your competitive advantage will worth more than that 5x margin ones get from "cheap sh*t." And you will never ever get this for any non-high tech (which implies easy to manufacture) consumer product.

JJMcJ 8y ago
> cheap goods Price anything at professional grade. For example, a heavy duty professional microwave can cost well over $1,000, but you can run it 20 hours a day for years. Thanks to my former restaurant owner friend for this example.

preommr 8y ago

There's a good video from EEVblog (EEVblog #887 - The Economics Of Selling Hardware) where he suggests a MINIMUM of 2.5 x COGS. But I think that was assuming directly selling to customers and passing the cost of shipping to the customer.

SquishyPanda23 8y ago
I recall that episode. It was a Bobby Dazzler.

sharkweek 8y ago

Cousin is a restaurant manager in the bay area. He mentioned that the margins are so thin in the business that one or two "bad" nights can literally ruin the balance sheet for the entire month.

aswanson 8y ago
Brutal. Imagine the effect raising the minimum wage could have on top of that.
- Waterluvian 8y ago
  I think the minimum wage laws apply to all restaurants. So prices just go up.
  - sokoloff 8y ago
    No diversion of consumption to home-cooked meals (single or multi family)? No marginal restaurants fail? No reduction in tipping? No reduction in add-ons to meals? (apps, drinks, deserts) No reduction in staffing count, hours, or benefits? It would seem unusual if “prices just [went] up” without any other changes to the overall system.
- markdown 8y ago
  Not much, because (1) the effect would be felt by all restaurants at the same time and (2) your customers would have more money to spend.
  - pc86 8y ago
    #1 is definitely true but #2 is only true if most of your customers make the minimum wage. Since we're talking about less than 4% of hourly workers[0] (so excluding everyone making a salaried wage which is going to be almost everyone reading this and everyone they interact with professionally), it's extremely unlikely that a majority of your customers make the minimum wage even if we're talking about a fast food franchise. [0] https://www.bls.gov/opub/reports/minimum-wage/archive/characteristics-of-minimum-wage-workers-2014.pdf https://www.bls.gov/opub/reports/minimum-wage/archive/charac...

nostrademons 8y ago

I'm kinda curious where the rest all goes. Seems like there's a market opportunity to streamline operations & improve efficiency if 80% of the purchase price of a product goes into things that are not the product.

colechristensen 8y ago
5x the cost to manufacture, which would not include product development, not to mention sales, failed products, cost of returns or fixing defects, office rent, testing, certification, support, and on and on and on. There is a market opportunity and many people capitalize on it. Amazon is full of things like this. Generic items or barely designed items with your brand stuck on them, built by somebody found on Alibaba and shipped to the consumer. They're fantastically cheap, the margins are much thinner, and the products range from adequate to terrible. It's terribly difficult to build a high quality product people will want for many years (no new design costs) which you don't have to market or do anything with and can just manufacture and sell for a tiny profit. When it is done you'll usually find it as a small very specialized family type business which hasn't sold out yet.
- megaman8 8y ago
  But still, most of those things are one time costs: product development, failed products, fixing defects, certification. once you have completed those things, you can keep selling the successful product for decades right? especially now that the pace of innovation is slowing down. I mean just look at the clothing industry: a t-shirt today is the same as it was 10 or 50 years ago, right? I would imagine things are super high tech and new, would need some iteration in their first 5 to 10 years, but after that, I don't know. the costs that scale with each good sold is: Support, cost of returns, Sales, marketing, etc.
  - colechristensen 8y ago
    Name something built by a hardware startup in the recent past or imaginable future which would be designed once and built for 10 and 50 years exactly the same.

JJMcJ 8y ago

Know the owner of a failed restaurant. He said you aim for 25% for food but usually it ends up around 33% no matter how hard you try. This was for a single non-chain restaurant. Someone else about to close a business down for a physical product. He was boutique sized, because of competition from factory made higher volume, he could never get above 2x COGS, and it has been a hard grind that is now losing money instead of the narrow margins he'd had for a while.

cletus 8y ago
Gordon Ramsay likes to say something similar. The costs should be: - 33% food - 33% all other expenses - 33% gross profit
- vadym909 8y ago
  Is there a Net Profit target % too?
  - Qworg 8y ago
    On average, 3-5%.

icelancer 8y ago

We are tentatively at 3x COGS for a hardware product we are about to launch in Q1 2019 and the margin feels incredibly tight. We may go to 3.5 - 3.7x COGS.

TaylorAlexander 8y ago
Pricing is scary. But people have subsequently told me they would have paid $85 per board for my product. I charged $20 and it sunk me. $85 would have meant a small manageable launch that was well funded. Instead I went $100k in debt. Be sure you’ll hve enough to cover unexpected issues. Are you over optimistic about production targets, setbacks, etc? My time estimates were way too optimistic which compounded the price issues. I’m obviously biased from my bad experience, but do be mindful to do due diligence on pricing, delivery, and costs. Well, my other issue was that I didn’t know how to do those things and I ran out of time. Best of luck on the launch.

pdog 8y ago

This isn't true anymore. There are plenty of direct-to-consumer brands now thriving with around 50% to 60% gross margins, i.e., selling at 2x-3x COGS. If you have a quality product and a lean sales organization, the 5x COGS model is a thing of the past.

JumpCrisscross 8y ago
> There are plenty of direct-to-consumer brands now thriving with around 50% to 60% gross margins, i.e., selling at 2x-3x COGS Mature ones, sure. Unless you plan on financing growth pretty much exclusively out of the middle of your cash flow statement, however, you'll need a wider margin as an upstart.

weliketocode 8y ago

Always surprised to hear friends & acquaintances remark that a $50 dry-aged steak from a steakhouse is overpriced. 24 ounces of Prime beef, aged for a month? I'm not sure I can get it myself for less than $25/lb. No way they're making money on the beef.

dirktheman 8y ago
A well known Dutch chain restaurant owner once said "They're eating me poor, but drinking me rich". Good waiting staff is worth their weight in gold. Knowing when to ask if the customer would like an extra drink is an art. On a side note: I never get the 'free refill' policy in the states. Why would you give something away that has a 300% margin...
- bballer 8y ago
  For drinks that get free refills the initial sale means more than the refills. It literally cost 1c to provide the drink and you sold it for $3.00 (that's the 300% margin). Who cares if you spend another 1c to provide a free refill if that would be the difference in the customers mind on whether they should buy the drink initially or just have water or OJ (something that has negative margin, or a very low margin).
  - dirktheman 8y ago
    Ah, so the refills are for fountain drinks only? I'm not from the US, and I never realized that. Thanks!
    - bballer 8y ago
      Yeah fountain drinks and occasionally tea (sweet or unsweet) depending on where you are at. No problem!

varjag 8y ago

That's an insane ratio. Maybe makes sense for consumer markets and sale through retail channels, but not in general. Your competition will eat you alive.