EEVblog #887 - The Economics Of Selling Hardware

In this Fundamental Friday Dave discusses the economics of selling your own hardware. Both directly and through a distributor/reseller.
Everything you need to know about pricing your product for your hardware startup. Cost Multiplier, Gross Margin Percentage, Markup, and Cost Of Goods Sold are all explained.

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  • What do you charge for software? So if you make a circuit sim, how would you figure out what to charge for it?

    companymen42companymen426 gün önce
  • Moral of the story - become a reseller

    VoltageLPVoltageLP9 gün önce
  • I do not know. In the west we are used to the formula 2,5xcost. Remember that our basic cost is already higher than in the rest of the word because every compagnie in the west wants high salaries and wants at least 2.5x the cost. Is this really only because otherwise we will go bankrupt or is that because we are used to high profits. In other words we want to "make it worthwhile" . In that case the Chinese, who are happy to work for any profit as long as they can earn something, will wipe out all western markets.... as is happening today. Perhaps we have to rethink our margin of profit 2,5xcost is nice to have... but it most likely will bankrupt your business in the end because the Chinese will sell cheaper The choice is ours..

    Spikejwh1Spikejwh120 gün önce
  • OK Dave I just gave a thumbs up on this one because I came here from your post bitching about how no one is watching your series on three cent pain in the ass parts. Now, in this context, WTF is one of your viewers going to produce that sells so cheap, in such large volume, that a ten cents difference in price between the micro selection is going to matter in any meaningful way?

    Brad ScottBrad Scott20 gün önce
  • Great overview and 100% accurate in my experience. It's really best to go for 3x to be comfortable but that 2.5x number is the common minimum. In some small markets such as Pro Audio distributors will get down to 30% markeup, and selling direct to dealers you can even get to 20-25% depending on what the product is. It does stink to think the distributor can make more money than your company - but you have to have massive respect that they are buying/investing in your product at at least 2x cost of what you are! Another reason to go for 3x and above profit percentage is that you want to reinvest into your company - you don't want to rely solely on investors and credit accounts!

    bcastromusicbcastromusicAylar önce
  • I am going to invent a Turbo Encabulator.

    Chris GriffithsChris Griffiths4 aylar önce
  • Do I include paying myself in the COGS? or is the 2.5 enough of a profit to cover that? (i.e. If it takes me 1 hour to process and fulfill the order, and I make $25 an hour at my day job, should I add that to my COGS?) Thanks!

    J 3J 34 aylar önce
  • Ya know Mr Davie? Build something needed and they will come at any price; play with the consumer market - you'll wish 7:1 , I should change my name to " 1 OLD FART "

    Jim MitchellJim Mitchell5 aylar önce
  • I was just considering doing this very thing and living in NorCal, made in California means something to the world. Thanks for the vid.

    Reginald MortonReginald Morton7 aylar önce
  • Lets just think about that....250% markup just to stay in business.....20 years ago 100% markup was amazing and you were flowing in profits. The avg just to stay in business was 25% mark inflation has risen 1000% while our pay has risen 5-10% of inflation!!!! WTF.....when does it end????? Just ridiculous

    S JS J8 aylar önce
  • How do you do when pricing a product for your client that you developed?, How would you price the work on software, desing etc and then add it to the product? or maybe price it separated from the product itself?... Thanks for all you work, grettings from Chile.

    ElectroMaticElectroMatic8 aylar önce
  • how about OEM ?

    Chirag PanchalChirag Panchal9 aylar önce
  • Great video. That distributor might be able to sell 10k units instead of the 1k you can sell so even though you only make $28 each now you earn $280k instead of 75k. That number might get even higher because of economies of scale. Or you can use that time you are not packing/shipping products to develop another product and then you have multiple products earning you 28k a year. It all depends on your plans and the benefits the distribution agreement brings.

    excited boxexcited box9 aylar önce
  • Hi Dave (or anyone): very useful post, thanks! I put together a simple spreadsheet for a hardware product I am building, based largely on what I have learned listening to you. Would you (or someone here) be able to help review this for any obvious errors? Thank you!

    Johnny JohnJohnny John9 aylar önce
  • 11:04 "Don't pay for marketing" Best advice I've heard in a long time. Marketeers are frauds.

    QoraxQorax10 aylar önce
  • Great video! You left out the two most annoying and expensive bills: Legal and insurance. lol

    David PyperDavid Pyper10 aylar önce
  • Okay what about the "WHY" behind it? So there are a million products out there in every niche that all say they are the best in the world! They all say that! So how can you stand out? Well of course if yours has a slightly different thing of value but the main thing is the "STORY" BEHIND IT AND THE "WHY". Have a compelling one and you can charge 5000% markup and the people will go with you if they have the money. Some people can sell an ice cube to an eskimo or a handful of sand to someone at the beach.

    Brenden HenryBrenden Henry11 aylar önce
  • Awesome vid Dave... never thought about this subject..😉

    West StarrWest StarrYıl önce
  • Sadly, you could have created the greatest gizmo the world has ever seen, but then some shady Chinese manufacturer blatantly copies it (read: steals your idea), flooding the market with a cheap clone, essentially driving you out of business. Then you spend a fortune on litigation, yet in the end you just can't win. Nowadays, the scales of economics have put the small time tinkerer at a huge disadvantage, to a point where it's almost not worth it. Yes it's easier to build something, but a lot harder to mass market it without loosing the shirt off your back. Just my 2cents.

    Bill ABill AYıl önce
  • Thanks Dave. After learning something useful, I had a good laugh at the Turbo Encavulator video.

    Scott HolmesScott HolmesYıl önce
  • Can we download the excel sheet? I can't find it on the form or the website

    BoehoehuahoeiBoehoehuahoeiYıl önce
  • But the problem here is now every man and his dog claim to be a design engineer ...electronics is one of the skills that no longer has any saleable value in that. It’s pretty impossible to make a living as an electronics engineer.

    Chris CainChris CainYıl önce
  • You put %60 markup, then the distributer/reseller puts %60 markup, final product costs 1.6x1.6=2.56

    Ergin DemirErgin DemirYıl önce
  • Thanks for the video Dave, very well done.

    Chuck SampsonChuck SampsonYıl önce
  • 💲Economics 💲Of making time machine spare parts & Flux-cap engines - Murphy's law - one day you'll end up running into yourself & knocking you 🙉 out cold chit happens 🐌💬wot?

    Mark ArnottMark ArnottYıl önce
    • dont ask - i never know were this chit comes from just does :) its like pics in my head i join the dots like

      Mark ArnottMark ArnottYıl önce
  • There's something I dont understand... you say at the beginning that the COGS includes "wages". Why doenst that also include the wages you pay yourself? You later on say that the profit after you calculate everything is how much you pay yourself, so clearly COGS isnt including that wage and you're presumably working for free. This suggests that the COGS you calculate isnt a valid measure of how much it costs to make that item. COGS should include ALL the costs... at least that's how it seems to me. But, I'm not an economist or business owner, so what do I know.

    DeusExAstraDeusExAstraYıl önce
  • Not an expert on this but doesn't the EU require the CE certification on ANY electronic product? This could be another cost to the COGS? I do know in the USA where I am safety certification is not mandatory expect in consumer retail where the retailer may require it. FCC part 15 is easy to dodge. But I have heard CE is very strict.

    Andy DelleAndy DelleYıl önce
  • Thank you! I needed this video two years ago. Very usefull!

    Guat AgelGuat AgelYıl önce
  • I thought manufacturing and selling in Australia was just a dream these days. Most just re-sell, no manufacturing. Its impossible, if you create /invent a new product, even with the patient, you will find other major manufactures will steal you're design, improve on it and re-sell it or build it into another product, and they know you will not have the funds to fight them in court. They may even beat you to market too.

    bjtaudiobjtaudioYıl önce
  • I'd hate to see the mark-up for high end hi fi gear..speakers for example are extremely expensive. Even 2.5 x is a massive markup. My understanding is to factor you're labor charges and tax into the cost of the product first, the labor which is you're wages. So the 2.5 X is pure profit hence why everything is so expensive in this country. The 60% markup by the re-seller is over the top too, that is clearly excessive in most markets. You would be better selling it you're self in that case.

    bjtaudiobjtaudioYıl önce
  • Hi Dave, could you comment on certification requirements? I'm somewhat confused on whether or not electronic devices require electrical certification before they can be sold (FCC, CE, ROHS, etc.).

    Teague HallTeague Hall2 yıl önce
  • old fashion dead tree hahaha

    biakrobiakro2 yıl önce
  • As for the "lost in shipping" part, I would like to say that you can add shipping insurance, so that if there's a problem, you get your money back, or at least that's what they promise. I'm not sure about the effectivity of this, but it could be interesting.

    GRBTutorialsGRBTutorials2 yıl önce
  • I also add in the "auto plus" drive factor. Chevy, Ford ect=1x suggested price point. Mercedes, BMW ect=1.25-1.4x pp, ect, ect, ect...

    A MA M2 yıl önce
  • I would like to know where you are getting low cost PCBs without buying 10,000 or more units.

    Robert's Electronic HobbiesRobert's Electronic Hobbies2 yıl önce
    • China!

      Chuck SampsonChuck SampsonYıl önce
  • I'm considering that maybe your view, being the big monolith that is eevblog, is a bit bias. If I, someone who hadn't touched electronics 6 months ago launch a product I'm not sure I could find people who would want to receive the packages, nevermind review them. It's a bit pessimistic but there's probably plenty of products that couldn't really get anywhere without the exposure and customer assurance your product gets from a site that sells for you. I find that the upsides that resellers offers aren't really presented here. As a consumer I don't particularly mind buying directly from people on their own sales platforms but its difficult finding out about their stuff usually.

    MrSnowmanMrSnowman3 yıl önce
  • Boring!!! It's like finding Stereo Record Player adverts in your fav ELECTRONICS MAGAZINE. Fell asleep. :)

    supertimismsupertimism3 yıl önce
  • The only caveat that I would add to going through a distributor would be if they can dramatically increase the number of units sold. In the example of $28 profit through a distributor vs $75 sold direct, if you can only sell 1000 per year but the distributor can sell 10,000 per year, you'd make $75K direct vs $280k. All this is dependent on the distributor and market size. but it is another factor that wasn't discussed.

    Tom CourtneyTom Courtney3 yıl önce
  • How to Build List Inside Facebook?

    Ric FloresRic Flores3 yıl önce
  • Free Posting of your Products and Services to 23,000 Facebook Group Members of Global Selling and Marketing. Post your products and services

    Ric FloresRic Flores3 yıl önce
  • better off reselling used electronics

    punker4Realpunker4Real3 yıl önce
  • Thanks a lot, Dave

    Hrnek BezuchaHrnek Bezucha3 yıl önce
  • Any recommended books on small business economics, as applied to electronics hardware?

    Mason Austin GreenMason Austin Green3 yıl önce
  • The negative notion on distributors isn't justified. A developer with less capital can use them to avoid investments into infrastructure. Or if you don't have the money for distribution facilities use a distributor. Another reason to use a distributor could be the focus on new products instead of managing the whole chain.

    Ralph KoettlitzRalph Koettlitz3 yıl önce
  • Would you like to do a video on regulations and such ? What sort of stuff has to have to be CE branded (in Europe) for example

    AxelAxel4 yıl önce
  • Great information!!! I'm looking into this process at the moment.

    Peter XYZPeter XYZ4 yıl önce
  • Great video, thanks a lot!

    Indiskret1Indiskret14 yıl önce
  • +EEVblog Hey Dave have you got a video or explained anywhere about the electrical safety, standards, regulations and testing (by test labs) .etc. that is required for a product before it's sold? And where kits fit into the picture and AC vs DC devices and so on.. For those of us who don't know anything about this?

    Tharun SontiTharun Sonti4 yıl önce
  • Great video! Clear and concise. Love it. Quick question though...I have a product I'd like to sell, and running the numbers of my BOM, it will be ~850 dollars (~$2125 with the 2.5 multiplier). My question is: Is the 2.5X multiplier a constant e.g. does NOT change no matter the COGS? Or is there a tapering off at higher COGS?

    futurepower89futurepower894 yıl önce
  • It's a minor nitpick, but 60% is in fact 0.6. You say "not the 60% figure, but the 0.6" which is nonsense, since they are exactly the same. Just like 100 centimeters is the same as 1 meter, 60% is the same as 0.6. The sign itself originally meant "for a hundred". Knowing that it's quite easy to see why 60 for a hundred is the same as 0.6.

    DelusionalLogicDelusionalLogic4 yıl önce
  • Brilliant video Dave thank you. Really outstanding to have it all so clearly summarised. ps my turbo encabulator is for sale if you're interested, still in its packing crates.

    m3chanistm3chanist4 yıl önce
  • Hey there, you mentioned that there are companies that will take designs and handle the rest and you end up with what amounts to a royalties cheque. Would you be able to elaborate on such companies ie: examples of them, how to find them, what sort of criteria they look for, etc?

    Robin HiltonRobin Hilton4 yıl önce
  • Ello :) I just got my DS1054Z. Got a nice free multi with it, UNI-T UT33D. Better than the POS I had before :) Needto figure out how to use the Rigol and get me some readings! Any tips? I bought it for learning

    TheDroidBayTheDroidBay4 yıl önce
  • I would rather sell 10.000pcs to a distributor in 10 batches instead of 1000pcs myself to retail customers.

    Frank JoostenFrank Joosten4 yıl önce
  • Dave a very nice and educational video! Thanks! Its so good to listen to a domain professional talking about selling specific industry products than some Economic / Finalcial weaboo that does not even know what the product is about and how it is made, Thumbs up for the Libreoffice....

    FlankymangaFlankymanga4 yıl önce
  • Isn't cost of goods (COG) supposed to include design phase as well? Some money in spend in software licences (Computer Aided Design), etc, etc

    DmitriDmitri4 yıl önce
    • Well, that would be your initial cost and, meanwhile you can add it to your COGS, you can also omit it and subtract it from your total profit after selling. Also you don't necessarily need to buy a software license. You can get away using free software, like KiCAD.

      GRBTutorialsGRBTutorials2 yıl önce
  • Dave, I’m using the same 2.5x rule in the construction business. Usually for stuff I am not sure what to charge for, i mostly work on restoring old houses. Love your vids, keep it up :)

    Claudiu BurdujaClaudiu Burduja4 yıl önce
  • Let's see how this works out for the Batteriser.

    Ernst Stavro BlofeldErnst Stavro Blofeld4 yıl önce
  • Hey mate did you figure out git?

    ank2000ank20004 yıl önce
  • wow a your getting into accounting?

    Adrian ConnollyAdrian Connolly4 yıl önce
  • loved watching this. much to think about. I was wondering, if I sent them say a 1000 diodes on a reel but they only used 100. will the return the rest or ahould i be sending exact quantities?

    kieranjr1kieranjr14 yıl önce
    • Sometimes the shipping cost backward will be more than the whole rail. Assume this. However, for our customers we provide warehouse (as a separate service), so anytime they decide to manufacture another device we can reuse the components if they fit the BOM.

      Emil KirilovEmil Kirilov3 yıl önce
  • Surprised you did not talk about the time value of money, opportunity registers or Net Present Value.

    Upton Robotics Pty LtdUpton Robotics Pty Ltd4 yıl önce
  • Pickup needles in the old days had a 30 - 60 x COGS

    Infinite loopInfinite loop4 yıl önce
  • now i know why these VR headset cost so much

    djaysenpaidjaysenpai4 yıl önce

    John ConradJohn Conrad4 yıl önce
  • I really learned so much with this Video Thank you Dave, because of you I Now have a stronger grasp on how to formulate my product to market. My only question is and maybe you can make a video of it. When my final product is for sale and I use all these different parts IE...Components and so on from all these different companies ....if I can patent the product do I need their permission? let's take your multimeter for example you used a whole bunch of components to create the unit if you were to patent it would you have to pay each company for their components? I hope this makes sense. Love your work it keeps me inspired to develop my on hardware.

    gorgster dgorgster d4 yıl önce
  • Wow, what a fantastic video, thanks Dave.

    BHBalastBHBalast4 yıl önce
  • I founded and ran a electronic company in the past (sold it now). IMHO a distributor is worth the mark up. Although in the first moment 60% (sometimes more) does not sound "fair" (=easy money you think you can have yourself), but the most important issues are: Reach far in the market to have huge volumes and do the work that you as an engineer probably dont enjoy: Dealing with stupid, time consuming customer and doing paper work, like single shipping, customs and national regulations in foreign countries etc. I did both, started selling the product myself and afterwards having an exclusive worldwide distributor (to whom I now sold my company). Also keep in mind: You might want to have time to develop further new projects in the future.

    Ein GastEin Gast4 yıl önce
    • These are exactly my thoughts at this moment. Why spend time slaving with all of that when you could enjoy a better quality of life and even design more products to sell.

      Ayson BaxterAyson BaxterYıl önce
    • Ein Gast You could hire a person to do the customer service. But yeah if the distributor gives you 3 times or more sales and more time to work on improving/inventing new products it is a good deal.

      RanEncounterRanEncounterYıl önce
  • Thanks for the video. I am getting into all this stuff with my new product. I am dealing with allot of Chineese people that tell me what to think and what should do, and it's not a very good way in making decisions. But I have nobody to advise me, so that makes things hard. I was shocked to hear you say that it is easier than ever. What kind of a person would I have to search out to be able to get down to earth advise as this video?

    Ralf SchooneveldRalf Schooneveld4 yıl önce
  • When comparing the benefit of using a reseller should you not price in the cost difference of your time in handling sales, rather than just the possible volumes of either method?

    Ed CooperEd Cooper4 yıl önce
EEVblog #887 - The Economics Of Selling Hardware