Thank you for this interesting forum. Being so very new at this there are several terms I don’t really know. Could you explain the distribution system, automotive gadget and intrinsic value? For the sell price you talk about 1/2 the retail price. I have heard that you have to be able to sell for 4x the cost?? :o)

Sure, but I’m going to cheat and just take something off the “Steps to inventing a retail product” that I wrote for the Inventor’s mentors Library a while back – you can read all the steps at http://theinventorsmentors.forumo.biz/forum.htm

“Automotive gadget” is actually just left over accidently from the entire step posting – In the steps I take you through a product from idea (and how to get a good idea) to retail, I use the example of an automotive product and simply forgot to take that out before I posted this….sorry

“Intrinsic Value” is the unstated or “Obvious Value” that your product offers the consumer at the point of purchase. An example would be that you chose to make your product from thick plastic, you don’t say “made from thick plastic” on the package, but the consumer knows when they pick it up it’s durable and made from thick plastic.

When you take the tour of this process it’s a little like this….

Inventing: Welcome to Inventing ladies and gentlemen, or should I say inventors? Your eyes are not playing tricks on you; this is your garage, your basement, and your kitchen table. You have just entered the world of ideation and front line problem solving.

You have that great idea on your way home from work. You jot it down in your trusty inventors notebook, and the first chance you get you start to hobble together the parts needed to make a basic version of what was in your head. This basic prototyping effort is all about proof – proof, that what you see in your mind can be transformed into reality, and function the way you claimed. It’s YOUR responsibility to make sure your IDEA can be turned into an INVENTION

Product Development: Ladies and gentleman you have just left invention and are now entering Product Development – please watch your step!

In this stage, we’re taking that now proven invention and we’re starting to evaluate it for its market viability. After all, let’s not forget this is a business, and we want to make money. Not all inventions have market viability – in fact, most do not. Like climbing a hill, the road gets harder as we are forced to traverse each barrier on the product development journey. Barriers like, understanding the category, Intellectual property, manufacturing processes, packaging, branding, cost to manufacture –vs- cost to retail –vs- market value. These are the planets that must be lined up in order for that invention you worked so hard on to ever see the light of a store shelf.

Distribution: Welcome to distribution. I see looking around the group has gotten much smaller, in fact there appears to be only a few of you left. Not surprising, it happens every tour.

As I said, this I distribution, it’s actually broken down into several parts. Import and Fulfillment, Marketing, and Sales. In distribution we take the invention that some of you were able to turn into market viable products, and we ‘Distribute” them to retailers. It’s sounds pretty easy, but in fact it’s one of the hardest parts of the process. We have to bring those products in from the factories, through the physical inventory systems, at the same time we have to set them into the category and at a price the retailers will accept, and then we have to get to those retailers and convince them they can’t live without your invention. …not so easy, and yes, several of you will not survive.

Mark as always great info. I would also add the term “what the market will bare” and perception.
Look at music CD’s they range from $10 to $20 for new music. They can produce and sell that same music for $5 a unit and still make money, but they know the public is willing to pay the higher price becuase they “Want” it, not “Need” it. Look at thumb drives and the flat discs for your camera. The package is a lot larger than the product to deter theft and to give you a visual preception that you are getting more for your money than you are. Break a thumbdrive open and you will see most of the product is devoted to the USB connector not the actual storage space. It is all perception.

http://www.rogerbrown.net

Thanks Roger -

That is very true – Sometimes MSRP has nothing to do with your cost to manufacture. Just like sometimes you can never make it to an MSRP and you have to jump ship in order not to loose money.

Good post Mark

I’ve been told “Retail Price” ends up being around 5x the cost to manufacture, in most distribution models. Is that true? Manufacturing cost (maybe + profit, if I manufacture and then use a wholesaler), wholesale markup, distributor markup, sales markup, retailer markup. I’m sure I’m missing 2 or 3 more people who will make money off my invention. :) I am really beginning to see why the inventor is the least paid in the process!

Thank you for this post. This information is extremely helpful.

Mick – I’m not sure if the industry standard way to set a retail price is to mark the manufacturing cost 5X. I’ve always thought the standard markup is 3X with a 100% markup on sales to distributors and a 100% markup on sales by distributors to retail stores.

Well ok – It’s confusing.

The 3x and 5 times numbers come from DRTV – in that venue it’s a gauge used to figure out quickly if you can make money off the product. If the product can be made for 25 cents and sold for $1.25 it should cover all the costs and make a profit. The greater the “X” Factor the more money you can make.

In retail it’s entirely different – You start on one end with the manufactured costs and on the other end with the MSRP of the product. It’s up to YOU to develop the MSRP for the retailer by looking at comparable products in the market (we call that auditing) to see what price point the product will handle. Then you work from the other end at the manufacturing costs and add the sales, taxes, freight, discounts, displays….and profit to come up to the “sell-In” price. If you have done it correctly, the sell-in price should be about ½ the MSRP so the retailer can start with a 50% margin.

If after an honest evaluation of the MSRP you can’t get the retailer about 50% (never below 30% and sometimes as high as 75%) and you have squeezed all the other costs to the bone, then drop the product and move on.

This is where the rubber meets the road – ALL retail products are, at their core, a simple math problem.

Oh – and yes, many people will make money off your invention, and most will make more than you. But remember the math – 100% of Zero….is still just Zero. So unless you have the skills to do what they do, you should be happy they think enough of your invention to want to take it to places you can’t – and for that they should be paid.