The cost of a product is a critical parameter when it comes to a wider adoption or response from the market. Designers & manufacturers are always looking for ways for cost reduction so that they can give the most value to their customers at an affordable price.
Thumb rule : if you are not earning 25–30% net profit out of embedded product, you need to make some changes. Ofcourse, many products will be sold at very high margins and many will sell at few %, will still survive, but that all depends on either the very high value that product is providing or it is a very high volume product.
Price vs. Cost
It is important to understand the difference between price and cost. Often times people confuse between the two.
Price is the amount at which customer buys and the cost is the amount which is required to build & sell the product (this includes all costs involved) and the difference in net profit.
First thing First
In order to control or reduce your product cost, you first need to take steps to start measuring costs at each level.
It is quite a known fact that many companies/startups do not pay much attention to this or do not take all types of costs into account before arriving at the cost of their product. This could be a huge mistake.
Components a typical product costing should consider:
(the cost, company will incur even if you are not selling)
Company infrastructure / operating cost
you will need office space for employees to execute different operations, IT hardware & software/licenses, development tools, equipment for R&D, other common facilities, travel, entertainment, etc. facilities, all that will fall under this category.
Human resources required for various departments like R&D, components sourcing/purchase, sales, marketing, admin, HR, support, etc.
Standing Stock / Inventory Cost
Generally, all companies will keep some units in stock in order to quickly respond to the demand from the market. For very premium products it could be the made-to-order basis, where this component will not come into consideration.
(the cost, the company will incur only when a product is in production and selling)
Bill of material
Make a list of all the components which will be required to build one unit of your product and compute the cost. This should include electronic components, enclosure, software license fees, etc.
Manufacturing or Production Cost
If you are using an external company for manufacturing your product, they will charge for assembling, quality inspection and testing. If you are doing all in-house then also you will incur all these costs in the form of fixed cost as staff cost, infrastructure cost.
Variable Staff Cost
Additional human resources required if production increases.
It is rare that you won’t have a problem with your product in the field. You need to consider some % for the repair/replacement of the units under warranty.
Product Promotion Cost
Marketing/Promotion costs like social media / offline paid promotions, the cost involved to participate in some events or expos, marketing collateral. This usually becomes part of the marketing cost but only comes into the picture once you start promoting the product.
Packaging creates the first impression on the customers and adds quite a bit of cost to the product cost.
This is also a cost that a customer pays. In many cases where the shipping cost is significantly high due to distance, it could be a deciding factor for a customer.
Sometimes it is not easy to calculate how much we are spending on various things/services per unit of our product sale. One way to calculate would be by considering all those costs at an annual basis and then divide it by the number of units sold in a year. If you are just starting and have not sold enough, you have to make an estimate.
How to think about cost reduction
The general way would be to first find fixed vs. variable cost % distribution, per unit cost %, etc., whichever is more find ways to cut down cost looking at various possible ways and it’s consequences.
In this article, I will focus on the ways or options where an embedded engineer or a design manager can play a role in cost reduction. This will cover ideas to reduce BOM cost, production cost, packaging cost, shipping cost, etc..
12 ways to reduce costs connected to the product
Reducing the size of the board, product
of the embedded board/product can have a significant impact. Reduced size of the embedded board can impact PCB cost, storage cost, enclosure material cost, packaging material cost, shipping cost. Learn more here about ideas on how to shrink your embedded product.
Do not populate unwanted components/features
Based on market requirements/feedback you can reduce the features of your product. If you have done significant sales already, you will know which features are getting used the most or you need to collect feedback from your customers. This will have a significant impact on the cost of the board and hence the product. It’s good to have a design that can cover many features, but in production, you may want to only populate components for the features which are really required. Another way would be to divide your product into a base product with additional features as add-ons to reduce the base price for a cost-sensitive customer segment.
Variants of the Product
If you have more variants, it will add to admin. costs like sourcing, inventory management, etc. Look for ways to reduce the possible hardware variants to a minimum. Some companies keep single hardware design for all variants and only enable the part of hardware features via software and accordingly customers are charged. This adds to the cost of the hardware but now the same production line can produce more units so gets the benefit of the economies of scale and reduced admin cost.
Design changes (with no compromise on quality)
(a) Look for opportunities to change the parts used with affordable alternates like if you have too many passives, find ways to cut down on different types of passives, if you use values which are also used in another part of the circuit, it will reduce the number of variants + increase volume and hence lower cost.
(b) In the case of capacitors, look for alternates that are affordable, for example, many times due to demand, a capacitor with a slightly higher capacity /voltage rating will be available at less cost. If possible parallel capacitors to reduce the number of different types of capacitors used. In the case of ICs, there are possibilities to find affordable alternates.
(c) Think about how you can make your design simpler like if you are using many power chips due to multiple power rails, find an alternative to reduce the number of power rails.
(d) Find ways to knock off parts which you can offload to external components like by just changing the external AC-DC adapter rating(AC-24VDC to AC-5V DC) you can significantly impact the power section (affordable chip, reduced heatsink, reduced PCB space, etc.).
(e) Look for components which are used as over-design, you may want to remove them (only if you are sure that it will not have an impact on the overall reliability of the product).
(f) If you are using ready-made power modules, etc. based on complexity, cost, design challenge impact, could be designed using discrete components, don’t forget to consider additional overhead on purchase and inventory management.
Instead of using the custom-built enclosure, the readily available enclosure could be an alternate. The reduced size will have an impact on the cost. Moving from a plastic enclosure to a metal enclosure could be one way (but consider increased weight and shipping cost).
Collaborate with Suppliers/EMS
Suppliers may help find possible ways to reduce the cost by suggesting alternate components, so it is a good idea to work closely with your component supplier / EMS vendor. Make sure you evaluate the alternates suggested by them before approving it in the production lot, many times companies go for a small trial lot before using alternates in full production.
Production volume / annual volume contracts
Volume has an impact on the cost of production. If you are producing monthly x units, check if you can get into a yearly contract with your supplier for a discounted price? They will have a benefit of the assured business and better visibility for planning and you will get a discounted price.
Outsource Non-core Activities
For at least smaller volumes it makes sense to outsource manufacturing as the fixed cost for managing all manufacturing process is quite significant, you need to add resources to handle purchase, soldering, testing, etc. You can outsource to EMS company the manufacturing part including testing based on the requirement. This reduces a lot of admin and management overheads. Of course, you will be paying for the EMS services but now you can focus on your core activities than managing the manufacturing. You need to be careful about the quality, make sure you specify to your EMS vendor which component to buy and how the quality will be checked.
Partner with Customers
It is always a good idea to work closely with your customer and look for opportunities to get into long-term contracts. They get partial price benefits and you get assured and greater visibility + cost reduction due to higher volume.
Depending on the kind of product you are manufacturing, the time it takes to test the product could have a significant impact on the cost. Find ways to automate if it can reduce the cost and increase the test coverage. If full automation is not affordable don’t hesitate to go for a semi-automatic testing setup.
Think about if the amount you are spending on the packaging is worth, is it adding that much value. Look for affordable alternates, reducing the number of colors used in printing, reducing the size of the single unit packaging/bulk packaging will have an impact on packaging cost.
This method is used by many companies to test if making price attractive will have an impact on adoption volume which will then reduce the costs. This is a far better option than building more number of units to reduce the cost before having good market visibility.
Hope this article helps!
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Thats really informative for a beginner like me, thanks again for the wonderful insights about the cost factor
Thanks, Hegde. Glad, the article was helpful for you.