10.5 Economic Viability

• Cost


  It is the expense of developing and producing a product and bringing it to market.
• Price


  It is the amount a customer pays for a product.
• Profit Margin


  It is the amount of money earned after all costs, taxes, etc., have been paid.
• Cost Effectiveness


  Businesses have to spend money to make money. They need to invest in design, production, and distribution, and marketing to bring a product to market. The price of the product must take into consideration these costs while also ensuring a profit margin. By doing an analysis of costs associated with the materials, scale of production, distribution and marketing of a product, business can determine whether a product is financially viable to bring to market.

  Cost effectiveness focuses on strategies that minimize the cost of producing a product.
• Different types of Cost

  • Fixed Costs
  • Variable Costs
  • Total Cost
  • Cost Analysis
  • Break-even Point
• Fixed Costs

  They are costs that do not change regardless of the level or production. They are time-based and include rent, salaries, insurance, and warehousing. Fixed costs need to be paid regardless if a product is being produced.

  Fixed costs make up one part of the total cost of a product
• Variable Costs

  They change with the level of production. They are related to volume. These could include, raw materials, energy, wages, and distribution

  Variable costs make up the second component of the total cost of a product.
• Cost Analysis

  It is a tool used to determine the feasibility of producing a product. Using various analytical tools, designers and companies can measure the cost of producing a product, and the expected profit it can generate. 
• Total Cost


  The total cost of a product, calculated by adding together the fixed and variable costs. 

  
• The Break-Even Point (BEP) 


  It is the point of balance between profit and loss. It represents the number of sales of a product required to cover the total costs (fixed and variable).

  The BEP represents the point at sales of a product start to generate profit.

  
• Calculating Product Price and Pricing Strategies

  Designers need to consider the economic viability of their product. If the design is not economically viable then the company is unlikely to bring it to market.

  Many strategies and tools are used to calculate the product price, and these are often used alongside price setting strategies to determine the price. 

  Price-setting strategies include:

  • cost-plus pricing
  • demand pricing
  • competitor-based pricing
  • product line pricing
  • psychological pricing
• Money terms

  • Price-Minus
  • Retail Price
  • Wholesale Price
  • Typical Manufacturing Price
  • Target Costs
  • Return on Investment (ROI)
  • Unit Cost
  • Sales Volume
  • Financial Return
• Price-Minus

  Based on market research, manufacturers will determine a maximum price that consumers are willing to pay for a product or service. Based on this constraint, the manufacture designs and produces within these constraints. 
• Retail Price

  The Manufacturers Suggested Retail Price (MSRP) is the price the manufacturer suggest the product to be sold at. This is to standardize pricing across regions. Some retailers may sell  below this price in order to attract customers.
• Wholesale Price

  This is the cost of the product sold by a wholesaler.  Wholesalers sell products in large quantities to distributors or retailers. The wholesale price is higher than the manufacturer's price, but lower than the retail price.  Typically the wholesale price is twice the manufacturing price.
• Typical Manufacturing Price

  This is the price the manufacturer sells the product at. This cost include the total cost per unit (including fixed and variable costs) and a profit margin.
• Target Costs

  In this strategy, the final cost is determined before manufacturing. A profit margin is subtracted to determine the typical manufacturing price. The manufacture then designs and manufactures within this constraint.
• Return on Investment (ROI)

  It is the profit made from a product. It is usually expressed as a percentage. The higher the percentage, the greater ROI. It is usually used to compare investments in order to evaluate their efficiency.
• Unit Cost

  The costs a company incurs to produce, store, and sell one item. Unit costs include fixed and variable costs.
• Sales Volume

  It refers to the number of products sold within a specific time. Sales volume can be organized and tracked according to demographics, region, etc. 
• Financial Return

  It is the profit made from sales for a particular product after subtracting the costs to manufacture, distribute, and market it. 
• Pricing calculators

  • Invention Calculator: The Invention Calculator is an educational tool to help the individual innovator understand the global market potential and financial implications when exploring the different routes to take a new product idea to market.
  • Manufacturing cost estimator: There are a variety of cost estimators and calculators for different manufacturing processes. Such as casting, molding, and machining
  • MSRP calculator
  • ROI Calculator
  • Profit Margin Calculator
  • Sales Volume / Break-even point calculator
• Resources

  • Examples of different pricing strategies compared
  • Read an interview about the inventor of the Invention Calculator and what inspired him to develop this tool.
  • Detailed explanation of how to calculate unit cost for manufacture