[earthling]

There is/has been a lot of talk about the cost of a given (pick one) amps individual components and how that extrapolates to the perceived value of commercial amps, and how SRP (suggested retail price) is calculated (or in this case, perceived). The information below is for those people who have no idea what goes into a commercial product. Those that do might have a different experience from my own, or perhaps have never considered what the total cost of production is. This is all based on my own experience in the industry and is JMHO.

First off some background, I have been in the commercial electronics business designing and commercializing PC cards, embedded devices, and peripherals since the early 80s. I have worked at or owned companies that range in size from 2 people to over 700. I have also written and published or spec'd and published software products.

The product ranges I have designed, worked on, or implemented, covers everything from 10$ products to products that sell for more than 20K$.

In all of this I have learned some fundamental rules of thumb. In order to be a profitable business in the hardware industry you should use a 3x calculator from BOM (bill of materials) as a very small or high volume company to 5x for a larger company and or a niche (mid to low volume) company.

People have mentioned several factors for this but not all. Here is a larger but still partial list of everything that goes into these costs.

1a. Product specification
1b. Pure R&D (depending on the type and size of the company, these two might be interchangeable or one and the same)

2. Purchasing: on a large project procurement can be quite expensive; this just covers the administration cost. On medium to major projects this also includes the cost of second sourcing components as well as managing forecasts and commitments.

3. Design (the make it so stage)

4. Prototyping: the costs of low volume product spins, which are always greater than quantity production

5. Debug and re-spin: If there are any problems in initial design or production

6. External certification: FCC, CE, etc.

7. Parts acquisition cost: including acquisition of parts that may soon be EOL (end of life), quantity discounts to get reasonable discounts, initial commitments

8. Productizing: packaging, finalizing features, etc... May cause a re-spin all the way back to R&D for one or more feature adjustments

9. Production: actual volume builds of release products

10. Testing and QA: Per unit testing before final sales

11. Marketing and sales costs: cost of sales whether its your online sales system or actual warm bodies

12. Support: Post sales costs

13. Continuous, ongoing development: product revision development as well as incremental design revisions for production efficiencies

14. Productizing revisions: Once any new development is to be incorporated into an existing design it has to be put through the entire process of debug, QA, production, parts, marketing if necessary, etc..

15. Administration: taxes, accounting, accts payable, receptionist (auto or human), management

16. Lost $$: Some would classify this as cost of sales but I choose to file this under in-efficiency. These are costs associated with distribution. Spiffs, discounts, supplemental marketing, etc... This obviously only affects mid size to larger companies but it is a part of any companies initial cost evaluation unless they are only going to sell direct.

These are all steps along the way that add up to a products final cost. History has dictated the 3x-5x rule of thumb to cover all of theses costs. Keep in mind that the sales price of a product has to cover not only the ongoing cost but also the initial investment.

For smaller companies you might have only a few people covering all of these various duties. For larger companies there might be teams assigned to each duty listed. The time that each person (in hours) contributes to a project or product is added up along the way to calculate the total pre-sales costs.

On a small project, something like the Meta42 the pre-sales cost of development might add up to anywhere from man weeks to man months of initial time put into the project (prior to release). On a mid-size projects this might range from many man months to man years. It is probably accurate to say that on a product of any significant size that the initial investment in time alone is going to be man-years. For very large companies and larger projects it might be man-decades or even man-centuries

Consider that most companies use 1.5 as a rule of thumb to calculate a per man cost with all overhead (salary, benefits, electricity, tools, etc).

Now, figure out how much might go into a product like a Krell or Mark Levinson and compare that to the work that goes into a Kevin Gilmore amp. The basic initial steps are the same; the cost factor rises with the commitment necessary to achieve a certain sales target. For instance if you think the market for your product is 5K units a year you will be making a different level of commitment to parts, support, R&D, and staff, than if your projections are hundreds of thousands or even millions of units.

The irony here is that companies that move extremely large volumes tend to be at the 3x cost factor end of the range or even lower (think creative labs) forcing more compromise throughout the product development cycle. Companies in the middle volume or lower middle volume arena (think Krell) tend to live (probably) in the 5x or greater arena, partially due to real cost control constraints( high quality manufacturing or component costs), somewhat because they can get away with it. The products physical design and implementation can scale a products perceived and real value, either by adding real-world costs (complex manufacturing) or by creating a sense of value due to design. Either way you end up paying for it.

Somewhere in the middle (3x-5x) is the average cost scaling factor and more specifically where most successful companies live, and where products we all like to purchase (great value) come from. Occasionally a large company will come up with a great product that is both cheap and has the quality/features that we all like.

It is only the very largest and very smallest companies that can afford to break these rules (in my experience). A one man shop like Jan (I assume it is a 1 man shop) might be able to get away with between 1.(n)x and 2x cost from BOM to SRP. If a one man shop is using less than this as a calculation then they are either approaching this as a hobby or as supplemental income, not as a real business. On the other end of the scale you have companies like Microsoft (xbox) and Sony (PS2) that can go into a project, spend man-centuries on development and intentionally lose money to attain market share, market position, or synergistic and strategic product placement (which rarely actually works).

The bottom line is that you cannot look at the bill of materials and say that because a certain list of components only costs x$ amount that the cost of the final product should be x$ plus some percent for profit. Nor can you look at changing one part of a design and calculate that the overall cost should only go up by the difference of the new part cost. It is likely that changing one component can cost quite a bit in terms of design, testing, QA, purchasing and procurement, commitments, and production which are all pre-sales costs and must be factored in.

We are very lucky that there is such a resurgence in the DIY communities lately and that the products that are available to us hobbyists are such high quality and more importantly very accessible. We should be extremely grateful for the time and effort put forth by the groups that develop the products. We should also be aware of the real world costs that go into these projects/products.

That’s my 2c.

 

[rickcr42]

In my experience the average markup for the end product is X5 "wharehouse" price for Audio Electronics. And as you pointed out above is a fair price.

If one is to run a 'legitimate" business , not a small home based operation , a large markup is essential or that business will soon be no more . You still have to pay the bills during times of slowing sales.
Either that or just fire everyone and torch the stock for insurance !

 

[smokey]

Excellent job earthling! Your explanation would have done my old Cost Accounting professor proud! In fact I wish he'd have done as well.

 

[Suedama]

earthling: We should be calling you "herr doctor professor." Well written and eye-opening.

One of the factors you could have elaborated on is profit. The product ultimately must have a decent return on investment for the owners/stockholders. If there was no prospect of a profit, the investment would never have been made in the first place. And of course, if there was no capital investment in the first place we would never have the tremendous selection of high-quality audio products from which to choose. This is private-sector, free-market capitalism at its best.

Thanks again for the words of wisdom.

 

[kelly]

earthling
I agree with everything you've said yet question the motive of your post. If it is to say that us wee unsoffisticated consumers should not talk about new products, features or parts quality and pricing then I disagree wholeheartedly.

I realize that it is frustrating to commercial companies that consumers have difficulty understanding the differences between commercial costs and DIYFSE costs. But this is another reason to simplify things to basic formulas like 4X. It's not like there is some magic universal formula that everyone adheres to but it gives you a rough guess of where things should fall. I think this generalization is quite useful.

 

[earthling]

Quote:

Originally posted by Suedama earthling: We should be calling you "herr doctor professor." Well written and eye-opening. One of the factors you could have elaborated on is profit. The product ultimately must have a decent return on investment for the owners/stockholders. If there was no prospect of a profit, the investment would never have been made in the first place. And of course, if there was no capital investment in the first place we would never have the tremendous selection of high-quality audio products from which to choose. This is private-sector, free-market capitalism at its best. Thanks again for the words of wisdom.

I didn't want to get into profit as there are so many factors involved. The primary one is whether or not you actually want to achieve a true, company wide profit.

For all companies, if everything else is working out, profit can be a matter of controlling growth. At any given time if everything else is going well you can simply stop growing for a year and reap lots of profit. On the other hand, if you are small, in it to make a good living, you might take large salaries, invest a lot in growth, or invest your returns into something completely different in which case there is no profit but you have a very successful company. This is of course for a private company, public companies have entirely different goals (ugh).

 

[earthling]

Quote:

Originally posted by kelly earthling I agree with everything you've said yet question the motive of your post. If it is to say that us wee unsoffisticated consumers should not talk about new products, features or parts quality and pricing then I disagree wholeheartedly. I realize that it is frustrating to commercial companies that consumers have difficulty understanding the differences between commercial costs and DIYFSE costs. But this is another reason to simplify things to basic formulas like 4X. It's not like there is some magic universal formula that everyone adheres to but it gives you a rough guess of where things should fall. I think this generalization is quite useful.

My motive was only to educate some people as to the real cost that goes into a product and to share some of my experience from being on the design and manufacturing side of the fence.

Maybe I had a hard time getting my point across or I was being misleading somehow. dunno.

How about this..

Should we second guess product design... yes, in fact it is not only a consumers right, it is their responsibility. (how else will you really know what you are purchasing)

Are we in a position as to second guess someone elses 'business'.. no, not really, it is their business after all. It is a subtle difference I know as everything sort of blends together at some point.

My other motive was that the timer on the coffee pot failed and I didn't have anything do while I was waiting for my morning cup.

 

[kelly]

Quote:

Originally posted by earthling Should we second guess product design... yes, in fact it is not only a consumers right, it is their responsibility. (how else will you really know what you are purchasing) Are we in a position as to second guess someone elses 'business'.. no, not really, it is their business after all. It is a subtle difference I know as everything sort of blends together at some point.

I have trouble differentiating these two points. I feel that the consumer is most concerned about "bang for the buck." I feel like this can be attributed to three things: component value, perceived value and performance value. Since I've just invented these terms, allow me to explain them.

By component value, I mean that a consumer is concerned with what a product costs to manufacture. No matter how a product performs or looks on the outside, if popping the hood reveals little of importance, the consumer will feel ripped off. Even with overhead, labor and profits, expectations exist for what something costs to make. If two products are compared and one seems "far cheaper to make" than another that is equal in every way, then we would expect it to be lower in price. If it isn't, then we wonder what they did wrong or whether they are "ripping us off" by trying to make excess profits from a market condition.

By perceived value, I mean of course the way the product is largely viewed by consumers. Someimes a nice enclosure for an audio product, for example, can go a long ways to make up for cheap parts and manufacturing deficiencies. Sometimes little things like laser etching even can come back as making a product look more professional--this could be $10 spent but make a consumer feel more comfortable about spending $100 more. Someone could get everything right but presentation and produce a product that is perceived as being of poor value.

By performance value, I mean how the product performs against comparably priced products given the same features and uses. Since I consider myself somewhat of a "prosumer", I pay far more attention to this aspect than most consumers. With audio products, it's often difficult to do comparisons in the same environment with the same associated equipment so consumers are often left feeling uncomfortable judging by this aspect alone. Often I think the other two factors overshadw this one--if there is any question as to performance, someone with only a little knowledge will begin to add up parts costs. Of course, this completely overlooks the fact that some designs are simply better than others--some designs require less parts, less labor to achieve equal or better performance.

Ok -- so with all that said, what do I think the consumer has a right to judge? All of it. You're right to say it's none of our business how someone else operates their business, but if we perceive the value of their products to be lower for ANY of these reasons, we will feel less inclined to purchase.

 

[earthling]

"Ok -- so with all that said, what do I think the consumer has a right to judge? All of it. You're right to say it's none of our business how someone else operates their business, but if we perceive the value of their products to be lower for ANY of these reasons, we will feel less inclined to purchase."

Absolutely. Vote with your pocketbook. Its the ultimate criticism.

 

[Magic77]

I agree what Kelly says that people do not want to feel "ripped off" based on the points he made.

Such as "bang for the buck". I would say most people want the best for the most reasonable price; and not feel they have been ripped off.

But, I aslo feel that it dosen't matter how much a consumer chooses to spend for their electronics; As long as you are happy with your purchase, and are enjoying it, and most of all feel that you "were not" ripped off". (Am I making any sense?)

 

[Suedama]

kelly: I suppose it would be nice if every product could be analyzed in terms of an arbitrary cost factor (3x, 4x, etc.), but it couldn't work that way in the real world. Even for companies that manufacture tangible products, no two companies have the same costs in any of the areas mentioned by earthling (financing, start-up, R&D, rent, overhead, advertising, etc.) Nor do these costs remain stable from year to year.

It get exponentially more complicated when the value of a product is not directly related to the cost of its components. For example, if you were a drug company with a new life saving product why shouldn't you be able to sell it for 500x or 1000x? The fact that a product is 1000x its component cost does not mean that it is not a good deal, (especially if you are the person whose life gets saved). And, when innovation is rewarded in this manner we get more innovation and better drugs. Heck, back in the 1980s all we had was oat bran. Today, thaks to capitalism, we have VIAGRA! (I'm sure this is selling at thousands of times its cost.)

In the last analysis, as earthling says, you always have a veto over a product ... just say no.

 

[BDA_ABAT]

Sorry for the thread drift, just want to clarify an issue with examples used for the pharmaceutical industry, and specifically one thing that suedama wrote...
Quote:

thaks to capitalism, we have VIAGRA! (I'm sure this is selling at thousands of times its cost.)

I have no idea what it costs to make each tablet of Viagra, just wanted to point out that it takes (on average) ~ 13 years and ~$500,000,000 - $1 billion to bring a new drug to market. Keep in mind that the company only has the patent on that new chemical entity for 17 years from the date of initial discovery. Leaves (on average) only 4 years to make up ALL of the costs and THEN profit before generic drugmakers can start to market the same exact drug (assuming the generic passes FDA review as being identical to the trade drug).

Bruce

 

[kelly]

Suedama
Your reply makes me wonder if you'd read the other two thirds of my argument. I suspect Viagra's popularity is due to branding and lack of competition. It is only when there is a viable alternative that comparisons can be made.

Life provides few certainties. I often feel that I am asked to ignore what information I have access to rather than accept that my estimations have a margin of error. I'd rather not. If I look under the hood of an audio product and see less than I'd hoped to see, I will use my own judgment. But I would suggest you read the other two thirds of my argument.

 

[Wodgy]

Earthling, thanks for the really informative post!

One more thing probably worth mentioning is that the country of manufacture can have a profound effect on prices. Production, labor, legal, and parts costs are much higher here than in China, so you can often get a better deal by buying gear made overseas. I personally don't like this, since it probably means fewer jobs for americans, but it's the truth. For instance, my current DIY project is Pete Millett's hybrid tube amp. My total parts cost (without accounting for labor or anything else) is not that far from the retail selling price of the Sonic Adventure Reality, made in China, even though the Sonic Adventure Reality is a more advanced hybrid design with more expensive parts. I don't know how they do it.

 

[Suedama]

Kelly: Sorry if I missed any of your argument. I thought I was saying that Viagra's value had nothing to do with "component cost," but rather with, to use your term, "performance value." Judging by the sales, people have "looked under the hood" and liked the horsepower.