Article Technical Rating: 5 out of 10
Most entrepreneurs drastically underestimate all of the costs required to develop, scale and manufacture a new electronic hardware product. This is one of the main reasons so many hardware startups ultimately fail.
Don’t make the fatal mistake of underestimating the costs, or worse yet not estimating them at all, because in order to succeed to market it’s necessary to know your costs. Without knowing all of the costs you’ll either run out of money before your product is market-ready, or you’ll find yourself developing a product that can’t ever be manufactured profitably.
Be sure to also read my article 13 Reasons Why Hardware Startups Fail (and How to Make Sure Yours Doesn’t).
Most entrepreneurs focus on the development costs because they are the first financial obstacle. However, the cost to scale from a prototype to a fully manufacturable product is usually the largest cost.
The production cost is certainly the most important cost because it determines your profit and your sales price. You’ll eventually get past the development and scaling stages, but you’ll live with the production cost indefinitely.
Don’t wait until your product is fully developed before you estimate the manufacturing cost. There’s no point in developing a product if it can’t be manufactured and sold at a profit. Yes, it’s actually possible to estimate the manufacturing cost before you develop the product!
Part 1 – Development Costs
Development costs for most hardware products are broken down into three categories: the electronics, the plastic and other mechanical parts, and the retail package. The electronics does all of the magic, the plastic and mechanical parts hold the product together, and the retail package protects and sells the product. For more details on how to develop a new electronic product see my Ultimate Guide – How to Develop a New Electronic Hardware Product.
The electronics will usually be the most complex and expensive part of your product to develop.
Prototyping the electronics is divided into two steps: production of the blank Printed Circuit Board (PCB) and soldering of all the electronic components onto the PCB. The PCB is what holds and connects all of the individual electronic components.
Although the use of complex PCB technologies such as blind and/or buried vias will reduce the board size they also drastically increase the board cost. Their use will typically double the PCB prototype cost, so in most cases it’s best to use only standard through-hole vias.
For most products producing the blank PCBs will be about a third of the electronic prototyping costs, and the board assembly will run about two-thirds of the cost.
For small prototyping quantities (around 3-10 units) expect to spend about one to two thousand dollars per iteration. I usually recommend starting off with about 3 to 5 boards, then potentially increasing the quantity for each iteration.
Once you’ve confirmed functionality and worked out most of the major bugs then you can increase the prototype quantity and begin sharing samples with investors and potential customers.
Enclosure/Mechanical Development Cost
Unless your product will be marketed strictly to the DIY/maker market it will require some type of enclosure, which is usually made of plastic. You can expect to spend at least several thousand dollars to develop the 3D models for the enclosure. If appearance and ergonomics are critical for your product then the cost to design the 3D model will be higher.
Some products may require additional mechanical parts such as stamped metal components, or perhaps even moving parts. This will add additional costs for mechanical engineering and prototyping.
Prototyping of the plastic enclosure is most commonly done using 3D printing technology. 3D printing builds a custom shaped part by stacking layers of molten plastic. The popularity of 3D printing has really helped to bring down the cost of creating plastic prototypes. For some startups purchasing your own 3D printer may be the most cost effective strategy.
For a few products a technology called CNC machining may be a better choice than 3D printing. Unlike 3D printing which is considered an additive process, CNC machining is a subtractive process. Instead of stacking layers, as with 3D printing, CNC machining is similar to sculpting. The process starts with a solid block of plastic and material is removed to form the final shape.
The main advantage of CNC machining is it allows the use of production injection-molded plastic whereas 3D printing uses special prototyping plastics that may have a different look, feel, and strength, compared to the production (injection molded) plastic that will ultimately be used.
My own product required several precise snap fits so it was critical to use the same plastic as used for production. So in my case CNC machining was the better choice. However, for the majority of products 3D printing will be the better technology.
One word of caution when it comes to plastic, what can be prototyped can’t necessarily be manufactured. This is especially true with 3D printing. With 3D printing there are few limitations on the shapes that can be created. However, with production injection molding technology there are complex limitations on the shapes that can be produced.
So make sure you hire a 3D model designer that understands injection molding. Otherwise you may find yourself with a prototype that can’t be manufactured in volume without a massive redesign.
Retail Package Development
Many hardware entrepreneurs neglect the importance of developing the retail package. This is a major oversight with serious consequences. Unless you plan to only sell your product online, or to industrial customers, the retail package is just as important as the product itself. Sometimes it is even more important.
You can have the greatest product in the world but if your retail package doesn’t quickly convey this to the customer it won’t sell. Always remember, nothing matters without sales!
There are generally two types of retail packages used for electronic products: clamshells or boxes. Smaller products tend to commonly be packaged in clamshells, whereas larger products favor retail boxes.
Both clamshells and retail boxes usually consist of two pieces: a custom shaped plastic piece to hold and protect the product, and a cardboard artwork piece to convey your sales message.
Just as with your product’s enclosure, the custom shaped plastic part of the package will require the development of a 3D model. Then an injection molds will need to be purchased.
For clamshells, one cost-saving trick is to use a stock clamshell with a custom molded blister (the part of the clamshell that custom fits over your product). The molds for a custom blister will be much cheaper than molds for a fully custom clamshell.
The clamshell insert card can also initially simply be printed on regular paper prototypes, but eventually you’ll want to upgrade to a thicker card stock which requires stamp printing.
Part 2 – Scaling Costs
Finishing the prototypes of your product is a major accomplishment so congratulations! But don’t get too excited. It’s a huge step to go from prototypes to large volume production. It’s probably one of the most underestimated steps in launching a new hardware product.
Most entrepreneurs forget to factor in the cost to get their product certified. This is primarily true if the product is electrical in nature.
Certification costs may range from only a few thousand dollars up to as high as fifty thousand dollars. It really depends on the product and to a large extent how any wireless features are implemented. Just keep in mind certification isn’t required until you are ready to begin selling the product.
The main certifications required for electronic hardware products include:
FCC certification is required for all electrical products that will be sold in the United States. Other countries will require their own similar certification. So if you plan to sell your product in multiple countries be prepared for the costs to certify your product in each country.
All electrical products radiate at least some electromagnetic energy so governments want to ensure they don’t interfere with RF communication.
The FCC (Federal Communications Commission) classifies two types of certification. Wireless products are classified as intentional radiators because they intentionally radiate radio waves. Electronic products that don’t purposefully radiate electromagnetic energy, or that use pre-certified modules for wireless functionality, are considered non-intentional radiators.
Modules are pre-certified electronic circuits developed to perform a single function and to be incorporated into other designs.
Products classified as intentional radiators will cost about 10 times more to certify than non-intentional radiator products. This is the reason most companies developing products with wireless functions begin by using pre-certified modules.
Later, once the product is a proven success and higher volumes are being manufactured then the design is transitioned from a wireless module to a custom wireless design so as to increase the profit margins.
Underwriters Laboratories (UL) or Canadian Standards Association (CSA) certification is required for any product that will be sold in the USA or Canada that plugs directly into an AC electrical outlet.
Products running only on batteries with no recharging capabilities do not absolutely require UL/CSA certification. Also if your product is only charged using a USB charger then UL/CSA certification is not required. If you plan to include a custom USB charger with your product then that component will need to be certified.
However, most large retailers and insurance companies do require UL/CSA certification for any electronic product regardless of whether it plugs into an AC outlet. So unless you plan to only sell your product online you will need this certification.
Many electronic hardware startups choose to start with only online sales, then later obtain UL/CSA certification so as to sell to larger retail chains. This is a smart strategy since there is no point in spending tens of thousands of dollars on certification until you know the product actually sales.
CE certification is necessary for electrical products that will be sold in the EU (European Union). It is similar to a combination of FCC and UL certifications.
RoHS certification guarantees that the product is free of lead and is necessary for any electrical product that will be sold in the European Union (EU) and California. However, because California is such a huge market, most companies have their product RoHS certified if it will be sold in the USA.
In most cases it doesn’t make sense to stock both a RoHS certified model and a non-certified model. This certification tends to be significantly more affordable than the other certifications.
We’ve covered the certifications required in the USA, Canada, and the European Union. There are numerous other certifications required for all the various other countries and regions. If you plan to sell your product in a country we’ve not discussed then you should plan on spending some time researching the certification requirements for that country.
Manufacturing Setup Costs
The transition from prototype to mass manufacturing is a complex process that most people severely underestimate. Realistically, you can expect it to take about a year to make this transition. Having a finished prototype is a long way from having a mass manufactured product.
I recommend starting with a local manufacturer in your own country (if possible). Later, once your manufacturing volume approaches 10k pieces, then you can migrate to an Asian manufacturer. This strategy allows you to work out all of the manufacturing bugs before going offshore. Debugging problems with an offshore manufacturer is much more complicated.
Before making the move to offshore manufacturing I highly suggest you get help from experts in Asian manufacturing such as those at Dragon Innovation. Dragon is the company famously known for helping Pebble Technology setup Asian manufacturing for their smartwatch.
Although the electronics will likely be the most complex part of your product to develop, the plastic will usually be the most complex part to get setup for mass manufacturing. This is primary due to the need for high-pressure injection molds.
The injection molded parts needed for your product (enclosure, retail package, etc.) will likely be one of your biggest costs. Injection molds, especially those used for high volume manufacturing, are very expensive. Just about any product will require at least three molds (front and back side of enclosure plus one for the retail package); however, most products require 4-6 molds.
Mold cost is mostly determined by the hardness of the metal used (higher volume molds use harder steel), the number of cavities, and the use of any side actions. In most cases it’s best to start with a single cavity mold that uses a softer steel, and that is considered a simple pull mold (meaning no side actions are required).
For more details on injection molds see part 3 of my Ultimate Guide – How to Develop a New Electronic Hardware Product.
An injection mold consists of two pieces of metal that are pushed together using high pressure to create a cavity in the shape of the desired part. Then, molten plastic is forced into the mold. The main advantage of injection molding technology is that it’s a fantastically cheap method of producing millions of copies of a plastic part.
There are two big downsides to using injection molding: the high cost of the molds that I’ve already mentioned, and the limitations on the shapes that can be produced. The high mold cost is mostly due to the fact that the molten plastic is injected over and over at extremely high temperature and pressure. This means the mold must be incredibly durable.
To tolerate these extreme conditions injection molds are created using a hard metal such as steel. The more injections the mold must tolerate, the harder it must be and the higher it’s cost.
For example, you can use aluminum molds to make a few thousand units. Aluminum is soft so it degrades very quickly. However, it’s also much easier to machine (i.e. carve) into the desired shape, so it’s cost is significantly lower. As the required volume for the mold increases so does the necessary metal hardness and therefore it’s cost increases.
A single-cavity mold made from a softer metal may cost a couple thousand dollars and be good for a few thousand units. Whereas, a multi-cavity mold made from a really hard metal can potentially pump out millions of units, but it will cost you tens of thousands of dollars, perhaps as much as $50k.
Part 3 – Landed Production Cost
No doubt about it, the landed production cost is your most important cost. It tells you how much inventory will cost, how much you can sell your product for and how much profit your startup can make! Also, unlike the development and scaling costs, it’s a cost you’ll continually face for as long as your company exists.
The landed production cost is the total cost to produce and transport a single unit to your warehouse. If you are successful you will have a very long, intimate relationship with this number. You will always be striving to reduce this cost so you can ultimately make more money.
For most products you can estimate that your suggested sales price will be 3-5 times your landed production cost.
Inventory is always one of the biggest costs for hardware companies. Your inventory cost is just your product cost times the quantity. So in order to estimate your inventory costs you need to first know your production unit cost.
Needless to say, you need to know your landed production cost as soon as possible. There’s no point in spending years developing and scaling a product that can’t ever be manufactured and sold at a profit.
Some of the many costs that make up the landed production cost include:
For electronic hardware products the cost of the electronic components will likely be the most difficult to accurately determine. This is because considerable engineering design work is necessary in order to know which components are required for your product.
A lot of startups wait until their product is completely designed and prototyped before they try to determine their components cost and ultimately the production cost. This is a mistake because you really need to have an estimate of this cost BEFORE you spend tens of thousands of dollars developing the product.
There may be some desired features for your product that you determine are too expensive to include in your first version. By estimating your components cost upfront you can avoid developing a feature that isn’t profitable or necessary initially.
PCB production and assembly
Just as with your prototypes, producing the electronics is a two step procedure. First the blank PCB is produced, and then all of the electronic components are soldered on to the board.
The cost of the blank PCB is mostly determined by its size and the number of routing layers. At a bare minimum two routing layers (top and bottom) are required; however, most designs will require from 4 to 6 layers. More complex designs may require 8 layers or more. Increasing the number of layers generally allows you to reduce the overall size of the PCB.
The cost to assemble the PCB (i.e. solder down all the electronic components) is primarily determined by the total number of components, the minimum pin pitch, the use of leadless packages such as QFN or BGA, and whether components are soldered on both sides of the PCB.
Keep in mind that the cost to produce your assembled PCB in volume will be many times cheaper than the per unit cost of the prototypes. Much of the cost is the initial setup so as the volume increases the setup cost becomes minimal. That being said the setup costs for the electronics pale in comparison to the setup costs for the plastic (i.e. the injection molds).
Injection molded plastic parts
The cost you’ll pay per unit for any production plastic pieces is primarily determined by the weight, size, mold time, and type of plastic used. The size and weight for each piece is dependent upon your design so there isn’t much you can do to control those variables short of making your product smaller or less durable (thinner plastic).
You can eventually increase your production speed, and reduce the part cost, by using multiple cavity molds. A multi-cavity injection mold allows you to produce multiple copies of your part with a single injection of plastic. But having multiple cavities also significantly increases the mold cost.
Don’t jump into buying multiple cavity molds until you have worked through any tweaks or changes to your initial molds. It is wise to run at least several thousand units before upgrading to multiple cavity molds.
Increasing the number of mold cavities is usually the best method for reducing the plastic part cost since size, weight, and the type of plastic directly impact the end product.
Other mechanical parts
Some products will require various other parts such as stamped metal pieces (for internal shields, etc.), springs, gears, screws, motors, and etc. In many cases, stock components can be used which will eliminate any scaling costs.
Final product assembly
Once the various individual components are ready the next step is to assemble them to form your final product. The cost of this step is almost entirely labor costs. This means eventually you’re likely to need to have final assembly completed at a location with low wages such as Asia.
Once the final product has been assembled it needs to be tested to confirm it is fully functional and meets all of the quality specifications. Some testing of the electronics may also be done before final assembly so as to prevent wasting the cost of final assembly for a unit that has problems with the electronics. As your scrap rate decreases you’ll likely perform all testing after the final assembly is completed.
Improper testing, and ultimately shipping bad units to customers is a common mistake and one that can spell death for your startup. Many entrepreneurs tend to rush their new product to customers but shipping bad units will start your company off with a bad reputation which can spread quickly online.
No manufacturing process is ever perfect and you are guaranteed to have some faulty units. Initially this may be 10% or more, but as time goes on and you optimize your manufacturing process you should be able to reduce this number to only 1-3%.
Packaging costs depends on whether your product will be selling in retail stores, or primarily online. For products sold in retail outlets having optimal retail packaging is a critical priority so packaging costs will be significantly higher. The packaging cost can be greatly reduced if you plan to only sell your product online, via TV, or to industrial customers.
High-end retail packaging (i.e. full color boxes with custom plastic inserts) can be really expensive (costing as much as $5 to $10 each) so in most cases it’s best to start off with more simple packaging to minimize your costs. This is one reason it may be best to focus initially on online sales.
Don’t forget to include the cost of the master carton that will be used to ship your packaged product. The master carton cost is typically quite low since it usually just a cardboard box and the cost gets split between multiple units. Nonetheless, it’s important to include it in your cost calculations.
If your product requires a retail display stand then that can add another cost to your package cost calculations.
Just like you are guaranteed to have some faulty units that must be scraped you’re also guaranteed to have at least a small percentage of unhappy customers that wish to return their purchase. So be sure to include this in your final production cost.
Just as with the scrap rate your return rate should decrease as you optimize your product, packaging, and customer service.
Most products will ultimately be manufactured in Asia. This means your finished product will first need to be trucked from the factory to the local sea port. Then it will be loaded on a cargo boat for shipment to your target country. Then, once the boat arrives in your country you’ll need to truck it from the port to your warehouse or directly to your customer.
In rare cases you may wish to ship via air cargo, but the cost will be significantly higher than shipping via sea.
For shipping via truck it’s the weight that primarily determines the shipping cost, and for shipping via boat it’s the volume that determines the cost.
Don’t forget the taxes. Both the country of manufacture and the country of import will charge duties which need to be included in the final landed cost. Although, some product categories may be exempt from export and/or import taxes.
Each product classification has a number known as a Harmonized Tariff Schedule (or HS code). Once you’ve determined the HS code for your product then you can look up the export and import duty rates.
The cost to launch a new electronic product can be overwhelming, especially for entrepreneurs and startups. Development costs will be your first financial obstacle to surpass, and scaling costs will be your largest cost.
However, the landed production cost will definitely be your most important cost since it determines your profit, sales price and inventory cost.
You’ll eventually move beyond the development and scaling costs, but you’ll have to live with the production cost indefinitely.
Remember, don’t wait until your product is developed before you estimate its production cost. What’s the point in spending thousands of dollars developing a product that can’t be manufactured profitably.