There are a lot of factors that go into determining the cost of making your product. This is why in early conversations with your manufacturer it usually isn’t possible to give you an impromptu, off the top of the head estimate to how much it will cost you to make your product. Of course it’s a valuable and necessary piece of information to know before going forth with manufacturing, but an accurate quote needs to be based off of something—mostly the details relating directly to your product and design.
If you are serious about getting a quote, there is some information your contract manufacturer will need from you first. This will include any drawings (2D and/or 3D), designs, blue prints, prototype, etc. In some cases you may not be far enough along to properly quote, in which case there would need to be design completion first. All of this information needs to be reviewed before a reliable quote can be shared.
So what are some of the main factors that end up determining the cost of manufacturing your product?
Materials
Specific raw material, hardware, electronics, and more must be determined. There are countless types of each, so pricing depends on which meets your criteria. For example, if you want your product to be plastic, which type? What grade? What kind of durability? Does it need to bend? Should it be stiff? How much is needed? Does country of origin matter? Answering questions like these will help guide you to the right type of plastic, which will be used to determine price for that component. The complete list of the raw materials, assemblies and components needed to manufacture an end product is referred to as your Bill of Materials (BOM).
Tooling
Tooling is a necessary item in custom manufacturing, but it is also often one of the most expensive. Determined by the material it is made from, tooling has a lifespan and won’t last forever, even with proper maintenance. The cost of your tooling will vary by your design, and the type and volume of production you plan to use it for. Tooling can be injection molds, stamping molds, or casting molds. It may also refer to production line gauges and fixtures that are meant to assure manufacturability, efficiency, and quality. In any case, a quality end product will require a quality tool to make it.
Packaging
There is a wide range of options for packaging—it can either be very basic and cheap, or it can have a wow factor that comes with a high price tag. You may desire your product to be individually wrapped, in a blister pack, a fancy box, or shipped in bulk, but each of these types of packaging will correlate to its own cost structure. It just depends what makes the most sense for your product, your brand, and your budget.
Volume
Each transaction needs to be a win-win for customer and supplier/manufacturer, which is part of the reason why volume discounts exist. It’s common to receive a discount if you order in larger quantities. This is because there is still the same overhead, operational and setup costs, known as non-reoccurring engineering costs (NRE cost), whether you produce 200 or 20,000 units. Generally cost per unit goes down as volume goes up. In addition, minimum order quantity (MOQ) affects your cost. Materials are typically sold in specific amounts, so your manufacturer may either have to find another use for any extra or account for it in price.
Yield, Scrap, & Rework
Some excess material will need to be accounted for, for errors or defects. There will likely be some material that will be damaged as a normal part of the process. These are variable factors that can affect product cost dramatically depending on product complexity and design. As a rule of thumb, a higher number of BOM materials and more complexity will lead to lower yield, higher scrap rate, and more rework. As a result, the product cost will be higher.
Labor
The workers that are putting their efforts towards creating your product are of course not doing it for free. Labor cost will always be a factor of your product cost. But how much depends on where your labor is coming from. This is one of the most commonly known reasons why many choose to manufacture overseas: reduced labor costs. Of course skill level is another factor which can potentially double the cost of labor.
Overhead & Margin
In order to make a manufacturing business work, capital investment is necessary. It wouldn’t be possible without the land, buildings, equipment and more that the manufacturer has to fund, plus a little extra for reinvestment. None of this can be attributed to your particular product, nonetheless it is an expense that is necessary.
Quality Control & Testing
For a quality product, don’t forget to budget for the cost of quality and reliability testing. You want your product to come out right each time and the best way to be assured of that is to test it before it leaves the factory.
Compliance
This won’t necessarily apply to all products, but you should be aware if your product needs approval from a third party such as UL, ETL, or FDA. Third party compliance testing can turn out to be a decent chunk of money and time as well, so talk to your manufacturer about this in the beginning.
Shipping, Tax, & Insurance
Every level of government will have their VAT, import and export duties, handling fees, local and international shipping fees, and insurance fees. If your manufacturing partner is handling your logistics for you, you can count these associated costs into the cost of your product. Ocean freight? Air freight? Ground? It’s good to have someone to help figure out the best freight option for your product. Not to mention to help navigate the customs process and any associated import/export taxes.