Commercializing Ideas

[Northboy]

Commercializing Ideas:



Often entrepreneurs wish to create new products to meet a perceived need in the marketplace, but they may be unfamiliar with the product development process.






Valuing the Product: The Price/Cost Relationship


Setting the price of new products can be challenging. The product developer must understand each of the components that create the final retail price. Product developers must then balance their customer's need for best price and value against the need to make enough profit to cover all costs and return a profit.

Components of Price:
· Cost of the Product Sold:
Paying someone to build the product and paying for the materials to make the costs of the product sold. This includes the workers' payroll, the fixed costs of leasing the production building, and the raw materials including any wasted materials like sawdust, breakage, or scrap.
Materials:

Raw materials
Waste and scrap
Labour:

Production workers' wages
Shipping and handling crews
Overhead
Fixed overhead costs like office rent.
Variable overhead costs like warranty and administrative help like accounting.
Loan payments or other investment costs
Profit Margin
A return on your investment
This leads to the simplified equation:

Materials + Labour + Overheads + Profit Margin = Price

Here are two additional ways to look at price and profit margin:
1. Customer's Perceived Value in the Product

While product developers often know their costs, the customer may perceive the value of the product to be even higher than the product developer's costs. In this case, it is a matter of the market bearing more price.

Example:
§ An electronics product developer creates new technology that cuts a vehicle's fuel costs by 30%.
§ At $0.75/liter for gasoline, a driver could save $0.225/liter. The average driver travels 24,000 km per year driving a car that consumes 14 liters/100 km at a cost of about $2600 per year in fuel.
§ If they use the new product, they save 1/3 of the annual fuel cost, or $867.
§ The customer will want to recover the price of the new product quickly, i.e. in one year.
§ Thus, the product developer may be able to set the price at $867, even if the product developer's unit cost is $90.

2. Going rate

More often than not, product developers are selling products known in the market. The price has been set by the competition, so the product developer may have to match or beat the price if the product is identical in the customer's mind.
Product Cost Investigation


The product developer must investigate their product costs very carefully to know if their product is viable. It is imperative that you start early getting estimates of cost and exploring reductions of cost by buying in volume, improved designs, etc.

As a quick test of whether to continue investigating your product, or if you have only material costs information so far, you can use this test to compare material costs to retail prices acceptable to your customer.

While there is no consideration of labour costs (which must still be investigated), you may want to use the equation:


Five Times Materials Costs + Freight (no labour) = Retail Price

Product Definition




At this point you may have a promising concept for a product. There appears to be sufficient demand for the product at "x