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Kevin De Smet

How Can Consumer Products Be So Inexpensive?

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I understand consumer products are mass produced products. Profit in numbers. More often than not, the products are pretty good and of a fair level of quality. What I don't get is how they can sell for so little and still make a profit in the end?

 

The price you pay in the store sometimes seems to hardly even cover the gas it took for shipping and handling!

 

Of course I'm not complaining but I am intrigued to know how they manage to do it.

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Wasn't there a thread exactly like this recently?

 

The main answer to your question is economies of scale.

 

When you make 1 of something, it is expensive.

 

When you make a million of something, all of those costs get absorbed in mass. In fact you'd often be surprised at how cheap some things you buy probably are to manufacture. Take a look at your garbage can which you probably paid $5-10 for but only cost $.50cents worth of material to make.

 

Shipping does get expensive, especially with the rising cost of oil. But when you're filling a cargo container full of something, efficient packaging methods make for a lot of optimization.

 

It's one reason you hear the term "designing for a palette". Those cargo containers are standard sizes, so are shipping palettes. If the pallet is say 4' wide and you design a product packaging is 13" wide, you can now only fit 3 containers across instead of 4. Taking that 1" off your packaging not only saves you 1/13th of your packaging material, but it now makes your shipping 25% more efficient.

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What about all of the upfront engineering and thinking to design a functional product? How can that ever get earned back without making not just "a" profit but a good profit. When does a company go break-even on a product? Is it expected to take years to reach that? Risky business.

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If you're interested in this it may be worth taking a business class at a local college.

 

In general the process goes like this.

 

At the beginning of any project, whether it is a laptop computer, or a trash can the business case needs to be looked at carefully and understood.

 

If I'm making a widget I need to know:

 

-How much will the NRE (Non-Recurring Engineering/Expenses) be? NRE includes the money I have to pay all my engineers and manufacturer for research, development, and tooling costs associated with a project. NRE is money that includes all of your big costs up front to get the product to market, and is the reason most designers come on these boards with a "Brilliant" idea that never goes anywhere, because they don't have the capital to pay for all the NRE. This usually gets all laid out by a business team or program manager.

 

-How many widgets can I sell in a year? To what markets? How will I get products from my warehouse onto store shelves, or websites, or TV commercials. This is typically the responsibility of a marketing person. They dictate the business case and say "it will cost us $1 million dollars to make our widget, but we can sell 500k a year and make $5 profit on each one".

 

Generally there is also the idea of margins - which dicate how much profit you want to make on a product. Certain products may have higher or lower margins depending on the space.

 

For example - if you sell low run, highly proprietary bike parts you can probably charge very high margins. You know you will sell fewer of them, so you need to make more money on each one to pay for your business. As long as this price will be supported by the market, you may be able to sell something that cost $100 to make for $500.

 

Some products have very low margins. If I am selling paper plates I can't expect to sell them for 5 times what it costs to make them. I may have to sell a $1 plate for $1.50, but I know I'll sell millions so the profit will be realized and I can still be competitive.

 

There are business models that are even more complex these days.

 

For example - it may cost Apple almost as much to sell an Ipad as it does to make them. But - they can afford to do this because the Ipad is only a gateway to other services. Now for every iPad sold, Apple may realize an extra $200/year in music downloads, app sales, etc.

 

Oh yeah...I knew I had answered this question before...haha

 

http://boards.core77.com/viewtopic.php?f=6&t=23478&p=166188#p166188

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All the expensive products are always high involvement products because a consumer pays attention to buy them. Shipping costs reduce the price advantage of online merchandise, though depending on the jurisdiction, a lack of sales tax may compensate for this. Shipping a small number of items, especially from another country, is much more expensive than making the larger shipments bricks-and-mortar retailers order. Some retailers (especially those selling small, high-value items like electronics) offer free shipping on sufficiently large orders.

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As said the shipping cost plays main role that's why most of the local consumer products people prefer because its inexpansive while comparing to the others country make. Eventhough some people go for expensive because the cosumer product brand is rich....

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