But does this product make business sense?

Yesterday one of the junior partners in our company designed a really nice self calculating worksheet for me that does all the things I have been manually doing for a very long time. It started me thinking about the math involved in that transition from an idea or invention to a retail product sitting on the shelf at your local retailer. So I thought I would explain some of what goes into that magical mathematical process.


What you see pictured (click on it to make it larger) is a screen shot of the upper part of the worksheet (I can’t show you all of it because parts of it are proprietary) But you can see the 10 areas that make up the “math” on a retail product. I’ll go through them one at a time for you. (Keep in mind these are made up numbers on a hypothetical product)

Landed – This is the basic manufactured cost of the good including freight, taxes, tariffs, and manufacturing - Delivered to our warehouse.

Fulfillment – In this case we assign a value of 43% to the cost of moving freight to the retailers, billing, coordinating the manufacturing, reporting, auditing, and disbursement of funds.

Sales Commissions - We pay a base 10% of “Discounted Wholesale” to our independent reps.

Discounts – Not used on every product, but often a retailer will require manufacturers to offer a discount for shipping or advertising when they place large orders.

Royalties – We normally pay a 10% of discounted wholesale as a license royalty when we license things from inventors

Total Developed Price – All those things accounted for

Wholesale Price (also called Sell-In) – The price we are selling it to the retailer for.

Profit – The delta between the Developed price and the wholesale price

Retail Price (also called MSRP) – What we recommend the retailer sell the item to the public for

Retail profit – The delta between the wholesale Price and the Retail Price


So what does this look like in a classic math form?

Landed / .7 = Fulfilled ($2.53)

Retail / 2 = Wholesale ($4.50)

Wholesale($4.50) – Royalties (.45 cents) – Discounts (.23 Cents) – Commissions (.45 cents)– Fulfilled ($2.53) = Developed ($3.65)

Developed ($3.65) –Wholesale ($4.50) = Profit (.85 cents per unit)

It looks a bit more complicated than it really is, but it’s the mathematical equation every manufacturer uses to decide if the product they are developing can make money or not…..it can be the greatest product in the world, but if you can’t get this math to work properly it’s never going anywhere

So when you do this math on a product does it mean you will make money?

Susan

NO, I wish it did. But it really just means if you play your cards correctly you "should" make money.

By using a price guide like this one, you make sure you account for everything that needs to go into the price structure. It also lets you see the effect of changing the MSRP and the manufacturing costs on the profit line.

Often we will dial in those two numbers to edge up the profit a little. In the end, you don’t know until the units have been sold and you analyze the sales data how much money you actually made.

That’s a great question though….since in the end, inventing comes down to making money.