In my previous article, I mentioned that planning should be the first step you focus on when pricing a product. Next, understanding all costs associated with manufacturing a product will help you determine how to price a product effectively. So let’s go over them.
1. Prototype: Before manufacturing or producing your product, you will need a prototype and/or what they call CAD (computer-aided design) or mechanical drawings to submit to the factory. If your product is fairly simple, you may be able to create a prototype on your own, but if it involves engineering, it’s best to work with a product designer or product developer. The more detailed you are with your presentation, the easier the process will become when working the factory, especially if it’s overseas.
2. Moulding or Tooling Cost: If your product involves what’s called a mould, you will have to pay separate molding or tooling cost. After a product is designed, a mould is made from metal and precision-machined to form the features of the desired part. Then the material is forced into the mold cavity where it cools and hardens to the configuration of the cavity. This manufacturing process is known as injection moulding. Depending on your product, it may need multiple moulds and can cost up to thousands of dollars.
3. Product Unit Cost: The unit cost is what a factory/manufacturer will provide to you for producing your product.
If your product includes a box or packaging, you will have to supply the artwork to the factory. Most factories will include packaging cost when quoting the unit cost. Unless it’s a custom die line, the factory will often supply you with a die line based on your desired specification. A die line is a template that a graphic designer will use to create the artwork for your box. Keep in mind that you may have to pay additional packaging charges to a packaging engineer or graphic designer (if they are capable of creating die lines) if you need a more custom die line, and then of course the cost for branding (logos and logo treatments) and designing and producing the packaging artwork.
4. Transportation (FOB Consolidator) Cost: Most quotes will also include transportation cost (FOB consolidator), which is the cost to transport your goods from the factory to your consolidator or freight forwarder. But for the sake of this article, I’m including this as a separate line item.
5. Inspection or QC (Quality Control): This cost is also usually built into the unit cost. Quality control emphasizes testing of products to uncover defects and then a decision needs to made to allow or deny product release. Inspection or QC is usually done by an agent or independent vendor. Make sure that the factory implements these procedures and meets your standards.
6. Testing & Compliance: Testing is a separate cost for which you must be prepared to incur. Most product categories have specific requirements imposed by the Consumer Product Safety Commission (CPSC), an independent agency of the United States government that regulates the sale and manufacture of consumer products. To find out what rules are applicable to your product, visit their website at (www.cpsc.gov).
Manufacturers of children’s products, for instance, must certify that each product complies with all applicable children’s product safety rules with a written certificate that shows that the product passed all test results obtained from the required third party testing at a CPSC accepted laboratory. So you must pay a third party testing laboratory for every certification.
There are other voluntary standard organizations such as ASTM International (www.astm.org) and the ISO, International Standards Organization (www.iso.org). Make sure that you abide by these standards because the last thing you want is for your product to be recalled. Not only will this cause your products to be pulled off the shelves, in turn causing you thousands of wasted dollars, but you will also be fined a significant amount.
7. Duty rates & Other fees: Depending on your item, you may have to pay for duty. To find out if your product has duty and its specific rate, you can search the U.S. Customs & Border Protection website, (www.cbp.gov). The U.S. International Trade Commission has a tariff database that will enable you to get an approximate idea of the duty rate for a particular product. You can also get guidance by calling our local port of the broker with whom you work. In addition, new companies with first shipments are inspected and imposed a fee. Random inspections are also made as a protective measure by the homeland security which a manufacturer has to pay.
8. Brokerage Fee: This is a separate fee that you must pay to your broker for handling shipping of your goods. Most broker fees will include domestic transportation, which is shipment from the port where your goods were dropped off to your final destination such as your own warehouse or a third party warehouse.
9. Warehousing/Third Party Warehouse: If you don’t have your own warehouse, you will have to store your shipment somewhere, so most businesses pay for a third party warehouse to store, ship and sometimes even fulfill customer orders. Third party costs can add up. They will charge you storage fee for each pallet, and in addition, they will charge you what’s called an “in and out” charge, which is a fee they impose every time they touch your goods. There are also miscellaneous charges such as labeling fees, so make sure you are aware of all their fees when you work with them.
Hopefully this gives you an idea of what types of costs are associated with manufacturing a product.
Next, I will provide information and examples how to price a product and calculate margins. Understanding margins is critical because it is what drives the pricing process when taking products to market. So stay tuned!
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