Priced To Sell
Position yourself for growth in 2017—join us live at the Entrepreneur 360™ Conference in Long Beach, Calif. on Nov. 16. Secure Your Seat »
There are three key components to making a lot of money with your invention. One is a great idea people love; the second is a product that can be made at a low cost; and the third is a strong marketing plan. I've found the first and third goals much easier to attain than the second. Even if they build a working model that does the job, many inventors find out too late that the product costs so much to make, it can't be sold for a profit.
Herb Hoeptner is a professional inventor in Gilroy, California. About 30 products that he invented--or that include his designs--have made it to the market. Hoeptner's latest products include a Frost Proof Yard Hydrant, a water faucet that can be used in open areas and won't freeze; an Anti-Siphon Frost Proof Faucet, which prevents contaminated water from backing up through a hose; and a Backflow Preventer, which prevents water lines from freezing and keeps contamination from entering the water supply. The three products earn more than $1.5 million in total retail sales per year.
Hoeptner kept his costs in line by following four essential steps:
1. Create a working model. Hoeptner typically starts the invention process by building a working model. As an example, Hoeptner's yard hydrant--used by farmers, ranchers and campgrounds--permits water flow year-round, even in the coldest climates. Earlier yard hydrants let water in the pipe seep into the soil. This created problems, because bacteria from the ground could creep into the faucet and contaminate the water.
Hoeptner's product drains leftover water into an underground storage tank, which is drained by the vacuum effect that running water creates when the faucet is turned on. His concerns included how water would drain back into the tank and how well the vacuum system would work. The only way to find was to build a working model.
Even the simplest inventions should be tested with working models. Build one before applying for a patent to ensure you're spending money on a product that will actually work. Unfortunately, Hoeptner says, many inventors seem to think a working model is the only step in inventing. In fact, it's simply an early step.
2. Know the required manufacturing costs. Most inventors' products compete with similar products with a set price. For example, Hoeptner's Anti-Siphon Faucet competes with other wall faucets, most of which sell for about $20.
Even if a product doesn't have an exact competitor to set the price, there's still a top price people will pay. If a comparable product doesn't exist to use in pricing your product, find three to five products your target customer buys that are related to your product and at various price levels. Ask potential customers to rank the products, including yours, by value--the highest valued product first and the lowest last. If your product ranks between one selling for $20 and one selling for $30, your price should be somewhere in between--say, $24.95.
After you know your selling price, you can calculate the manufacturing cost you need to achieve. Suppose your projected selling price is $20. Divide that by one plus your retailer markup (in this example, 100 percent, or one) to get the price retailers will pay: $20Ã·2=$10.
Divide that price by one plus your distributor markup (in this example, 25 percent, or 0.25) to get your wholesale price: $10Ã·1.25=$8.
To get your manufacturing cost, divide the wholesale price by how many times over cost you want to price your product. In this example, you want your wholesale price to be 2.5 times your manufacturing cost: $8Ã·2.5=$3.20.
Your wholesale price should be at least twice your manufacturing cost. Hoeptner likes to set wholesale prices at more than twice the manufacturing cost so he can recover costs for products he works on that are never introduced.
Manufacturing costs tell you whether to move ahead with an idea. If the initial design you plan to sell for $20 costs $5 to produce, you need to simplify or modify the product until you hit the cost target. You won't make money on that product unless you can manufacture it for $3.20 or less.
3. Simplify the design. Most first working models have too many parts. Extra parts mean extra money and more potential problems. Hoeptner spent eight years simplifying his yard hydrant until it had only two moving parts. Simple designs typically perform better and are less expensive to build.
Producing a working model is only about 20 percent of a product's design work; you still have to simplify and refine your design. Inventors who aren't engineers often have trouble doing this. Industrial designers, listed in the Yellow Pages, can help. Most people think designers specialize in the visual look of a product, but they also do engineering and can reduce the complexity of working models. They typically charge $75 to $100 per hour, but it's worth it if their work enables you to make your product at a low cost.
4. Simplify the manufacturing procedure. The cost of manufacturing can vary by 500 percent from one manufacturer to another, and the same product can be made in many different ways. To get the right manufacturing process at the right cost, call on at least three to five manufacturers with several different manufacturing methods.
If you have no idea where to start, an industrial designer can help. Industrial designers know which manufacturing process will work best for your product and may also know appropriate manufacturers.
Once you get a target list of manufacturers, ask them if they can make your product for your target cost. Never approach a manufacturer without a target in mind. If manufacturers think money is no object, they may try to convince you to use their process. If they know you have a set cost, they'll give you honest advice about processes that might be more cost-effective and suggest things you can change to make your product easier to produce.
Hoeptner's Anti-Siphon faucet needed a $3-to-$4 manufacturing cost to be profitable. The only way to get that low cost was for someone to make substantial investments in tooling and equipment. Because Hoeptner wasn't in a position to do that, he licensed his product to a company that had the right manufacturing equipment.
A product is successful only if you make money from it. Low manufacturing costs are a key component to becoming successful. It may take you an extra year or two to design a simplified product, but taking the time to get it right is essential to profiting from your invention.
Don Debelak, author of Bringing Your Product to Market (John Wiley & Sons, $19.95, 800-225-5945), is a marketing consultant specializing in bringing new products to market.
Question: My company has a new baby cosmetic product I want to distribute. I'm not sure if I need a manufacturer's representative because of my lack of experience, or if I should use a distributor. Do you know a good distributor in the Chicago area?
Answer: New products are distributed in a wide variety of ways; there isn't one best way to distribute a product that applies to every market. There are two ways to find the information you need. One is to decide what types of stores you would like to sell to, visit them, explain that you have a new product and ask them how they buy products. They might tell you they buy from:
- a regional buying group, which is a cooperative of many manufacturers
- a distributor
- manufacturers' sales representatives
- directly from manufacturers
- at trade shows
- from rack jobbers (also called service and rack merchandisers), who put products in stores and bill the stores only for the merchandise sold.
Once you find out how the stores buy, call on the next level of distribution to see how they get their products. For example, if stores buy from rack jobbers, interview some jobbers to see how they select their products. Your goal is to set up a distribution system similar to those already on the market.
A second method is to look for new products in trade magazines for your target market. Call those companies; explain that you're going to be marketing a new product, and ask how they distribute theirs. Noncompeting companies in your industry will usually help you.
Baby cosmetic products are often sold by rack jobbers or purchased through regional buying groups. Two excellent directories for these distribution networks are Phelon's Discount/Jobbing Trade, which provides lists of wholesalers, jobbers, distributors, and rack and service merchandisers throughout the country, and Sheldon's Major Stores & Chains. Both are published by Phelon, Sheldon & Majar Inc., 330 Main St., Ridgefield Park, NJ 07660, (800) 234-8804, and are available in many large libraries.
Herb Hoeptner, c/o Hoeptner Perfected Products, email@example.com