Easy access to design software, 3D printers, and crowdfunding has changed the game for anyone with a great sketch on a napkin wanting to make a serious go of a product idea. But what does it mean to take that awesome prototype into production? Step one: Pull out your cash-flow statement.
The cash-flow statement? Isn’t the point of making a product to get cash flowing? Sure—eventually. A great prototype will tell you if you can make the product; the cash-flow statement will tell you if you should. Ahead of moving into production, the more you understand the numbers of how your prototype translates into a manufactured item, the better off your decision making as a young company.
Kickstarter and other crowdfunding projects have provided a wealth of case studies for learning what it takes to scale (Kickstarter’s Hardware Studio makes the daunting task a bit easier). More often than not, it’s the late or failed projects that teach the most. A recent CBInsights article, “Why Do So Many Hardware Startups Fail?,” profiles several successfully funded projects (such as device maker Jawbone, which raised nearly $1 billion before crashing and burning) that failed due to product-strategy mistakes, high burn rates, and the ultimate killer: lack of consumer demand.
The upshot? Whatever can go wrong, will go wrong, take longer, and cost more. No big deal, that’s life. But better to plan for it and skip the surprise.
Here are nine considerations to make before taking your idea from prototype to production. (And if you haven’t seen the below acronyms before, you will.)
1. BOM (Bill of Materials)
Paper or plastic? Metal or fabric? How many parts are in your product? Open market or custom fit? Your factory partner is unlikely to share the cost breakdown, so you’ll need to tap into every network you have to compile this due diligence and decide if that (insert potentially-unnecessary-but-cool-part-you-cannot-live-without here) is really worth it.
2. MOQ (Minimum Order Quantity)
The factory you choose gets a vote in your business. You will get a quote based on MOQs with volume price breaks that factor in time to set up and take down your project plus required labor and material resources, with some profit margin for the factory. Sometimes MOQs are in the hundreds and negotiable. Made in China? Probably in the thousands and not very negotiable until you are as big a company as Apple.
3. PO (Purchase Order)
To hit “start,” factories ask for a third to half the total cost up front. When it’s time to ship the goods, you pay the rest. It might be weeks or months before you see any sales attached to that investment.
If you are working with metals or plastics or even paper, your product might need tooling—a custom mold or fixture the factory uses to make your product—that can cost anywhere from $1,000 to $200,000. The good news? You own this tooling. The bad news? It’s probably custom fit to the factory that made it. You better like the factory because you might be stuck with them for as long as it takes to amortize that tool.
Know your factory partner as intimately as possible, especially if you are small. If you take your production offshore, this relationship will be much harder to manage without outside help, and even then it will still be hard. Use your imagination and work with your prototyper and factory partner to understand the steps required to translate handmade or low-volume production into large quantities. My company made a thousand mistakes by not understanding how factories work.
We prototyped a white microsuede item that looked beautiful as a sample. In production, however, instead of one hand touching it, dozens of hands get in there as it moves from station to station. Guess what? Hands don’t always get washed. I almost cried when I saw the FedExed production samples, 25 percent of which had discernible fingerprints. Nobody pays for new goods that look used. This unexpected quality problem cost us time, money, and relationship tension with our factory.
If your product is destined for retail shelves, you’ll need packaging, and it better be good. It’s not just what protects your product, it’s your marketing pitch. My company spent 10 times as long developing the packaging for our products than we did on the products. Mistakes cost us a year and several thousand misspent dollars.
Packaging is a separate product that needs resources and time for—you guessed it—prototyping. It’s practically its own product. Don’t forget the packaging around the packaging. If you need to ship goods almost any distance, you need to protect them with inside boxes. This cost is low, but if your factory partner isn’t on top of it, you will receive damaged goods that you own and cannot sell.
At some point, you’ll need to get your goods from the factory to somewhere else. Whether you use a plane, train, truck, or ship, budget $1,000–$5,000 for relocating your wares to their new home. And before that, unless your factory partner is within driving distance, you will be doing a lot of business with FedEx to get samples back and forth. It doesn’t sound like much, but it seemed like every time I even looked toward our factory in China, I was handing FedEx a Benjamin.
Once you own your products, you have to keep them somewhere. Unless you have a garage, you will need storage or a fulfillment center.
9. Other Fixed Costs
If you are building a company around your product, other costs can creep up quickly: website, e-commerce site, merchant account, bookkeeper, workspace, trade shows, and so on. Most of these costs can’t be turned off easily when sales are slow.
This article has been updated. It was originally published in November 2013.