What It REALLY Costs to Launch an Electronic Product
Nearly everyone drastically underestimates the cost required to develop, scale, and manufacture a new electronic product.
This is one of the main reasons so many hardware startups ultimately fail.
Without knowing all of the various expenses, you’ll either run out of money before your product is ready, or you’ll find yourself with a product that can’t ever be manufactured profitably.
Are you going to be one of them, or are you going to keep reading this article?
So let’s break it down.
Okay, great let’s get started!
We’re going to look first at development costs, then scaling costs, then manufacturing costs.
Development costs for most hardware products are broken down into four categories: the electronics, the software, the enclosure and other mechanical parts, and the retail package.
The Electronics
The electronics will usually be the most complex and expensive part of your product to develop. The costs can range from a few thousand dollars for very simple electronics, up to hundreds of thousands for really complex designs.
If you have the skills to do your own electronics design then that will obviously save you a lot of money.
If you outsource the electronics design, just be sure you get independent design reviews to ensure you are getting a quality design.
Offshore engineers will always be the cheapest option, and freelancers are usually cheaper than design firms. But be careful, because sometimes you get what you pay for.
You can minimize your electronics design cost, and lower your risks and future certification costs, by using pre-certified modules for any wireless functions or highly complex functions like a high-performance microprocessor.
The Software
Nearly all electronics products, except for maybe a basic power supply, require some kind of software or firmware.
In many cases, the costs for electronics development and software development will be similar. Some products may be more hardware-complex, and some may be more software-complex.
But in most cases, you are looking at a minimum of at least a few thousand dollars up to tens of thousands for more complex software development.
Just like with the electronics, the location of the engineer and whether you hire a freelancer or a firm will have the biggest impact on cost.
The Enclosure
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 extra 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.
The Packaging
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.
Okay, so those are the development costs which tend to be what I see most people focus on the most the first time.
But you need to be thinking beyond development if your goal is to commercialize your product, and that includes scaling costs and manufacturing costs.
Finishing the prototype for your product is a major accomplishment, so congratulations!
But, sorry, don’t get too excited.
It’s a huge step to go from prototypes to large volume production.
In fact, it’s probably one of the most underestimated steps in launching a new hardware product, so let’s look at the major scaling costs for an electronic product, starting with certifications.
Nearly all electronic products will require certifications depending on where the product will be sold. For example, in the US this may include FCC and UL, and in Europe CE.
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.
By using pre-certified modules for wireless functions, you can reduce your certification costs by thousands of dollars.
Just keep in mind certification isn’t required until you are ready to begin selling the product. In many cases, you can also perform small sales tests without the need for certifications.
Setting Up Manufacturing
The transition from prototype to mass manufacturing is a complex process that most people severely underestimate. Realistically, you can expect it to take 6–12 months to complete this transition.
Having a finished prototype is a long way from having a mass-manufactured product.
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 set up for mass manufacturing.
This is primarily 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 the 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.
The high mold cost is due to the fact that molten plastic is injected over and over at extremely high temperatures 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 its cost.
Manufacturing Costs
No doubt about it, the single most important cost to know is the manufacturing cost per unit.
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 development and scaling costs, this is 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 first need to know your production unit cost.
Some of the many costs that make up the landed production cost include:
Electronic Components
For electronic products, the cost of the components will likely be the most difficult to accurately determine upfront.
This is because considerable engineering 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 you really need to estimate this cost BEFORE you spend tens of thousands of dollars developing the product.
This can be done with only a high-level design before you begin the design of the full custom schematic.
The PCB
First, the empty PCB is produced, and then all of the electronic components are soldered onto the board.
The cost of the blank PCB is mostly determined by its size and the number of routing layers. The cost to assemble the PCB 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 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.
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.
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.
Other Mechanical Parts
Some products will require various other parts such as stamped metal pieces, springs, gears, screws, motors, and so on.
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 into your final product. The cost of this step is almost entirely labor costs.
Testing
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 to prevent wasting the cost of final assembly for a unit that has problems with the electronics.
Scrap Rate
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
Packaging costs depend on whether your product will be sold 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.
Returns
Just like you are guaranteed to have some faulty units that must be scrapped, 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.
Freight
Depending on where your product is manufactured and sold, it likely will need to be trucked from the factory to the local seaport. Then it will be loaded on a cargo ship for transport to the target country.
Then, once the boat arrives in the target country you’ll need to truck it from the port to your warehouse or directly to your customer.
Duties
Of course, we can’t forget about duties and tariffs!
Both the country of manufacture and the country of import will charge duties and tariffs which need to be included in the final landed cost.
Although, some product categories in some countries may be exempt.
This is a complex and fast evolving topic so you definitely want to consult with experts.
