Technical Difficulty Rating: 3 out of 10
There are countless obstacles that you will need to surpass in order to bring a new product to market. This is especially true for physical electronic products.
Your best chance of being able to make it past these barriers is to know about them well in advance.
By knowing about them you can properly plan ahead, thus drastically improving your odds of overcoming them. Understanding all of the major obstacles well in advance will also significantly reduce the time it will take you to get your product to market.
Bringing a new product to market is simply not something that can be done by the “seat of your pants”. You can’t just make up your strategy as you go. You need to plan ahead for each of these obstacles.
In this article I discuss seven of the more challenging barriers in your path to market domination.
#1 – Development of a production-quality prototype
The first major obstacle that you will have to surpass on your way to market domination is the development of a production-quality prototype.
A production-quality prototype is very similar to the final product that will be manufactured at scale. This is in contrast to a Proof-of-Concept (POC) prototype which is usually built using an Arduino, Raspberry Pi or other development kit.
A proof-of-concept prototype is a very long way from being a product that can be manufactured and sold to the masses. POC prototypes are good for one thing: proving your product concept.
Many technical entrepreneurs may be able to build a POC prototype almost entirely on their own. However, that is not the case when it comes to creating the production version of the product.
For the production version of your product you will need a custom designed printed circuit board (PCB) for the enclosure. You also will most likely need a custom designed, plastic enclosure. Both of these require advanced engineering skills. Unless you are an electrical engineer, it will be hard for you to fully design a production product.
This means that most of you will need to outsource this development to experienced engineers. Engineers are not cheap, so this is going to be your first major financial obstacle to overcome in order to reach the retail market.
This becomes an especially significant challenge when you consider that crowdfunding is usually not a good funding source for early development. In most cases, you need to have the production-quality prototype before initiating a crowdfunding campaign.
Crowdfunding is generally best suited for funding your scaling and inventory costs, not your development costs.
This leaves you to either fund the development yourself, or raise money from friends and family, or perhaps an early-stage professional investor. Regardless, it is much more difficult to get funding if you don’t yet have a production-quality prototype.
# 2 – Scaling to mass manufacturing
Scaling to mass manufacturing is one of the biggest obstacles to overcome, both technically and financially. Most entrepreneurs severely underestimate the complexity and cost associated with going from the prototype stage to mass manufacturing of the product in large volumes.
And all this work also takes a lot of time. You can realistically expect to spend six to twelve months to set up manufacturing, especially in Asia.
Most entrepreneurs drastically underestimate the complexity to setup mass manufacturing.
So how do you overcome these challenges? It will be a huge benefit if you design your product from the beginning with manufacturing in mind. This technique is called design-for-manufacturing (DFM), and involves making your product as easy to manufacture as possible.
The plastic parts of your product will require the most attention, in large part because of the use of injection molded technology. Injection molded plastic is very different from the way plastic is used during 3D printing or other prototyping technologies.
With 3D printing, you can create pretty much anything, in any shape or design. Injection molded plastic, on the other hand, requires the injection of hot plastic into an actual metal mold.
You have to be able to remove your plastic pieces from the mold once the plastic has dried. This requires that your plastic parts be designed, from the beginning, with the ability to be removed from a mold.
This removal leaves a seam in the plastic, which leads to cosmetic decisions about your final design. And the details to designing for injection molding go on and on.
It’s a restrictive technology that is best dealt with as early as possible. Work with an engineer or developer who is familiar with injection molding, and who can design with this in mind from the beginning.
Scaling your production runs to produce hundreds of thousands of parts is also going to be expensive. Be prepared for the high costs of the molds you need to use during mass manufacturing.
It also becomes very expensive to make any product changes once you have moved to injection molded plastic technology. Once a mold is machined, you can only subtract more material, not add it. It is going to be difficult and expensive to tweak the design of your product in any significant way.
High-volume productions molds can easily cost $10k – $50k each, and since most products will require several molds you can see how the cost gets quite expensive.
This is why I recommend that you work out all the kinks in your manufacturing domestically. You can begin with lower cost molds made out of softer metals, like aluminum, which can be purchased for a couple thousand dollars each.
Use small production runs (domestically if possible) to get everything running smoothly, including the PCB production and any plastic parts. You will also want to streamline the assembly process, something that is much easier to do before you move production to Asia.
One way to delay paying setup costs all at once is to arrange payment terms with your manufacturer. They may be willing to amortize the molds’ costs over your first few production runs.
For example, if your production molds cost $50,000 then the manufacturer may be willing to fund these molds in exchange for $1 extra on the first 50,000 units.
#3 – Electronics certification
Any type of new electronic product will need to obtain certain electrical certifications in order to be sold on the market. The certifications required will depend on your product and where it will be sold.
In the U.S. you will definitely require FCC certification, and other countries will have similar certifications to insure that your product doesn’t produce radio waves that interfere with other wireless communication.
There are two different types of FCC electromagnetic radiation certifications, depending on if your product is classified as an “intentional radiator” or a “non-intentional radiator.”
As the name implies, intentional radiators are products that intentionally emit radio waves. This means any wireless product is an intentional radiator. You can expect to pay over $10,000 to obtain this type of certification.
Fortunately, even if your product is wireless, you can get around this steep fee by having your product classified as a non-intentional radiator. If you utilize pre-certified modules for your product’s wireless functions instead of a fully custom wireless circuit, your product can be classified as a non-intentional radiator.
If your product includes no wireless functionality then it can definitely be classified as a non-intentional radiator. For non-intentional radiator FCC certification you will only need to spend around $1,500, thus saving you about $10,000.
Wireless modules have other benefits too. They will cut down on your development complexity and risk, which saves you time and money.
The other major certification necessary in the U.S. is UL certification. This typically is only needed for products that plug directly into your home’s AC electrical outlets. Expect to pay over $10,000 for UL certification.
Fortunately, for many products it is possible to completely bypass the need for UL certification. Most electronic products really need DC power, not AC power. To bypass UL certification you just need to make sure this AC/DC conversion is performed by a pre-certified module.
For example, if your product has a battery which will be recharged via a USB port, then simply purchase an existing pre-certified USB wall charger which you can then include with your product.
There are various other types of certifications that may be required such as RoHS, UN38.3, etc. but those are relatively low cost and shouldn’t present a serious obstacle.
#4 – Initially low profit margins
When you start off manufacturing in small batches, using contract manufacturers in perhaps the US, your profit margins are going to be low. This is true for all products that aren’t taking advantage of “economies of scale”. As your manufacturing volume increases, the production cost per unit decreases.
You first need to smooth out all the kinks in your manufacturing process, while focusing on sales. Then, you can strive for lower production costs and a higher profit margin.
However, the lower your profit margins the more challenging it is to grow your company. So having low initial profit margins means it will likely take you longer to ramp up to higher profit margins.
This is why it is generally best to start by selling your product direct to consumers via your website. This allows you to maximize your initial profit margin because there are no others (retailers or distributors) taking a cut of the profit.
While most businesses suffer through an initial period of low profit margins, you will have to eventually make enough money to support yourself and your company. Doing some upfront research will help you along the way.
First, you need to accurately estimate your Cost of Goods Sold (COGS) across different levels of production. COGS is the whole cost of manufacturing, plus shipping. This will enable you to forecast your profit margins at every level.
Its normal to have little to no profit level when you first start. Earlier I recommended working out all your production kinks before you transfer production to Asia. The downside to this is your profit margins will stay small for a longer period of time.
Remember, not having money forces you to you make the smartest decisions from the beginning. What if you calculate your COGS, and realize your product will never make a profit even after moving manufacturing to Asia?
This upfront work projecting your COGS across different production levels can save you years of time and money trying to develop a product that can never be sold at a profit.
#5 – Funding inventory
You’ve completed your product development, and you’ve got manufacturing smoothly running. Your next big obstacle becomes cash flow, and the difficulty of funding your inventory.
Here’s the problem – your manufacturer will require you to pay for your inventory before it is shipped out. Usually they will require you pay at least 33-50% upfront before they even begin manufacturing. For your first order or two, expect to have to pay 100% upfront.
You, on the other hand, won’t get paid by your customers for several months after shipment (when selling to retailers and distributors). Essentially it is up to you to finance the cost of your inventory for this interim period.
Let’s look a little closer at the timing involved, depending on where you sell your product. If you sell directly to your customer base through your website, then you get paid immediately. This helps with cash flow but it will probably take you several months to sell your inventory.
On the other hand, if you are selling through retail outlets, expect to be paid 30 to 90 days after you’ve shipped them your product. Don’t expect any stores to pay sooner than 30 days.
I know, it sounds ridiculous, that you are expected to ship retailers product but not get paid for months. But that, unfortunately, is the way it works. Retailers have used this “trick” for decades in order to essentially get free financing from their suppliers.
Financing inventory and cash flow are major obstacles for hardware startups.
A great arrangement is to find a manufacturer who will give you better payment terms. This isn’t real common, but it does happen. For my own product, I negotiated for net 90 payment terms with my manufacturer in China.
This meant I had 90 days after shipment to pay for my inventory. This was a huge boost to my cash flow because I was paid by my customers before I had to pay the manufacturer.
While net 90 terms with a manufacturer isn’t common, it’s worth trying to negotiate for a payment plan that is better than paying 100% upfront.
Purchase order financing and invoice factoring are two other ways to finance your inventory during this interim period.
Purchase order financing allows you to borrow money to pay for manufacturing once you have a purchase order from a large company. The beauty of PO financing is that your credit score doesn’t matter, and the loan is based entirely on the credit rating of your large customer.
Invoice factoring is for obtaining financing after the order has been manufactured and shipped. This type of loan is similar to PO financing where it is based on the credit rating of your customer.
However, invoice factoring has significantly lower interest rates because of the lower risk to the vendor. The risk is lower for them because you will have already shipped the order.
#6 – Marketing
Have you started to build an online community for your product? If you answered no, then your priorities have to shift, and fast. The earlier you start building an online community, the longer it has to grow and proliferate naturally, on the sidelines, while you finish your product development.
Successful Kickstarter campaigns need to begin with your own audience. For instance, Eric Migicovsky, founder of Pebble Technology, built a community of 6,000 email subscribers and want-to-be customers of the first Pebble smartwatch.
Beginning with an email list of subscribers, Pebble’s first Kickstarter campaign raised more than $10 million.
It’s hard to believe that the first crowdfunding platform, Fundable, started less than 7 years ago. Running a crowdfunding campaign is practically required these days, because it helps you gain attention, validate your product idea, and raise money.
But you can never run a successful crowdfunding campaign without being able to directly contact potential buyers of your product.
So, your next question might be, how do you develop an online community for a product that you haven’t finished developing?
The first simple step is to create a web page that showcases your product. Request that anyone who is interested, enter their email address.
There are so many great articles, books, podcasts, and blogs about how to build an email list around your company or product, that I won’t go into any detail. You need to dive into researching and understanding this aspect of sales and marketing as soon as possible.
Running a successful campaign on sites like Kickstarter requires that you already have an existing audience. If you haven’t started building an audience of customers, do so right now!
#7 – Sales!
A great deal of the entrepreneurs I have worked with over the years are singularly focused on how to develop their product. Their comfort zone is the engineering, software development, or other technical aspects of hardware development.
For many entrepreneurs this is the fun part, so it’s easy for them to wait far too long to focus on sales.
If you fall into this tech minded category, or if you really dislike or fear making sales, you should really try and bring onto your team a co-founder with sales and marketing experience.
You should also consider hiring an independent sales representative who already works in your industry. Independent sales reps work for commission only, so you pay them after you’ve been paid by the customer.
If you are a solo founder, and don’t have marketing expertise, bringing on a sales rep that intimately knows your industry can be especially helpful.
These reps will already have contacts and even meetings set up with retailers in your industry. When I brought my own product to market, I hired an experienced sales representative in the lighting industry.
His established relationships with retailers made it easier for him to get my product into stores, than if I had pitched the retailers on my own. My sales rep even decided to be a stockholder in my company, and his feedback was immeasurably helpful.
It has never cost less, or been easier to bring a hardware product to market. The vast, global marketplace means you can outsource everything from your 3D modeling to your contract manufacturing.
Not only does it cost less to get to market, but there are more ways than ever to raise capital. Nonetheless, funding the early development usually falls on the founders, since a prototype is typically required in order to gain significant outside funding.
There are also just more resources available to hardware entrepreneurs today than there have been in the past.
It’s still a long, challenging process, but the sky is the limit if you can overcome these 7 common obstacles.