How to calculate a price for the Pyra

Discussion in 'Pyra News' started by EvilDragon, Feb 22, 2014.

  1. EvilDragon

    EvilDragon Administrator Staff Member

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    And here, as promised, is a blog post about how to calculate the sales price - probably also explaining why we can't give any fixed price yet :)
    Be warned - it is quite a lenghty post!

    I hope you enjoy reading it though, it's full of information you probably didn't think about :)

    Basically, the price of a device being sold is being calculated using many different factors:

    • Development Costs (one-time costs)
    • Production Costs (costs per unit)
    • After-Sales Costs (Support, Repairs, etc.) (monthly varying costs)
    • Monthly company costs (fixed costs per month)
    • Marketing Costs (monthly varying costs)
    • Some money put aside for bad things that can happen (i.e. the touchscreen issue we had with the Pandora)
    • Profit and Distribution (varying costs)
    Let's take a look at all of these, shall we?
     
    1. Development Costs
     
    The development costs are one-time costs.
    It means: Once development is over, they won't change anymore, so they will be a fixed value in the final unit price.
     
    Development costs include everything you need to do to create the unit up until the part the mass production is going to start:

    • Wages for the designers
    • Costs for prototype parts and production
    • Costs for samples, evaluation parts, etc.
    • Costs for doing different tests (CE certification, reliability testing of various parts)
    • Costs for parts needed for mass production (case molds, stencils for PCBs, machine programs, etc.)

    Wages for the designers should be clear - someone needs to create the device and he / she needs something to live from as well ;)
    Of course, using a company for the design (i.e. for the case design) will increase the costs, as the company needs to cover their costs and wants to make profit as well, but in exchange you have additional safety. In our case: The case design company is also the company producing the actual molds. The designer knows their machine quite well, and if something doesn't work, it's THEIR job to fix it.
     
    This was different with the Pandora - the case had issues (as you know), and the company blamed the designer for that whereas the designer blamed the company. I am in no position to tell who was right (I'm no expert here), but this is something that needs to be prevented - as in the end, it cost more time and money.
     
    Next are the costs for prototype parts and production.
    You don't just create and design a product and then mass produce it.

    There are many many tiny little steps until the final product is ready.

    With such complex technology, it's nigh impossible to have a design fully working on bug free on first try.

    The Pandora had 5 revisions before it went into mass production.

    We already had 3 revisions for our dummy PCBs as well.

    It is possible to save costs here, as we did it with the Pyra: 2-layer PCBs only partly populated are less expensive than creating a full working 8-layer PCB with the SoC, etc. each time.

    Then we have the costs for samples, evaluation parts, etc.

    As you probably know from all the discussions on these boards and due to my previous blog costs, there are multiple solutions for everything. Be it SoC, Storage, etc.

    To find out the best possible solution, you can't just read the datasheets (though it's a good start). It's better to make your own testings.

    If we want to find out which SoC is best, we'd need to buy devboards for all of those. These cost money.

    Doing all the tests also needs time - and cost wages for the designer as well.

    This was just an example for the SoC. There's a lot more - touchscreen, LCD Cable, etc.

    These all need to be produced and extensively tested - and if they don't work as planned, you might need to find another company or solution and start from zero again.

    These costs all add up - and need to be covered with the sales later.

    For the Pyra, I expect development costs of about 50,000 EUR - but it's impossible to tell until everything is finished and working.

    It might be less, it might be more. But I think we won't hit more than 50,000 EUR, I'm always pretty careful with that.

    Next are the costs for doing different tests (CE certification, reliability testing of various parts)

    To be able to even sell the units to the public, we need to be sure they follow all the given guidelines.

    Which means: The prototype will need to pass tests like CE, FCC, etc.

    These tests cost money as well - and if they fail, you need to change the prototype until it passes.

    These are one-time-costs like the development costs.

    Additionally, we need to expect to sacrifice things as well.

    The OMAP5 devboard has a heatsink, and we also need to create one for the Pyra as well.

    However, what happens if the OMAP5 doesn't have a heatsink? Does the SoC die when it gets to hot, or does it simply get very very hot and crash?

    The only way to be sure is to try that - so it might be we have to sacrifice a devboard for that.

    I expect about 10,000 EUR for the Pyra here - so certainly less than the development costs.

    There is something else before the Pyra will finally be ready for mass production:

    Costs for parts needed for mass production (case molds, stencils for PCBs, machine programs, etc.)

    Once everything has been confirmed to be working, mass production needs to be prepared.

    Molds will be created (or finalized), the mass production machine needs to be programmed, stencil layers need to be produced, etc.

    My expected costs for the Pyra here would be 100,000 EUR.

    These are all the fixed one-time costs you have before you can start mass production.

    Now, the expected sales are VERY important for that.

    Whether we sell 10, 1000, 10,000 or 100,000 units - these costs won't change.

    If we sell 10, it would break down to 15,000 EUR per unit. With 1000, it would be 150 EUR per unit. 10,000 would go down to 15 EUR per unit, 100,000 would be 1.50 EUR per unit. And so on.

    This is one of the reasons why low-quantity devices are always more expensive than devices that sell in millions.

    It's also the reason why we can't try as many different approaches and solutions as a huge smartphone company.

    With low production quantities like about 10,000, it makes a huge difference whether the production costs are 150,000 EUR or 500,000 EUR (from 15 EUR to 50 EUR per unit)

    With quantities like you have for smartphones, it doesn't really change the price at all (from 0.15 EUR to 0.50 EUR per unit).

    2. Production Costs (costs per unit)

    Next up are the production costs.

    Unlike the development costs, this is no fixed value, of course. Producing 100,000 units costs more than 10,000 units ;)

    The production costs itself consists of different factors.

    • Parts
    • Production time
    • Assembly, testing and packaging
    • Failure Rate
    Parts costs probably are pretty clear: All the parts that are needed to produce a unit are in there.

    That's the case, the PCB, the SoC, the keymat, the LCD Cables, the Battery, the packaging, all those tiny little components that are on the PCB, etc.

    For the Pandora, these costs are about 200 EUR each.

    I expect slightly higher costs, as the SoC, memory and LCD will cost more. However, nubs are a lot cheaper (since we won't need two ATMELs for the firmware) and we also try to create a 2-layer base PCB and a small 8-layer CPU module PCB (which should also lower the costs).

    So we should expect something like 250 EUR for the Pyra.

    Production Time Costs is the time the machine (and the people doing the manual soldering for some comonents) needs to populate each PCB.

    The machine at Global Components can populate 400 parts per minute - so the fewer parts we've got, the cheaper it will get.

    With the Pyra, by making use of two PCBs (module and simple main PCB), where we place the complex parts (BGAs) on the way smaller CPU module, the overall production time costs should be a bit cheaper than for the Pandora.

    The Pandora was 40 EUR per unit, so I expect the Pyra to be around 25 - 30 EUR.

    Assembly, testing and packaging

    Each unit needs to be fully assembled, tested and packaged up, so it's ready to be shipped to the customer.

    With the Pandora, this is pretty complex. We're trying to improve that for the Pyra as well (mainly case design changes).

    Also, as the Pyra has a faster SoC, the self-tests should run faster.

    The Pandora cost for this was 10 EUR per unit, I expect 7 - 9 EUR for the Pyra. 

    Failure Rate

    If you calculated everything up to now, you should have about 300 EUR production costs per unit.

    So 1000 Pyras would cost 300,000 EUR. However, there's always a failure rate.

    Global Components guarantees a failure rate of less than 5%. Anything higher is covered by them.

    The real failure rate usually is lower though (with the Pandora, about 2 - 3%).

    These are PCBs that could not be made to work, so they can be thrown away.

    So 50 out of 1000 Pyra PCBs could be broken from the very beginning.

    The parts can't be reused (well, except for LCD, Case, etc. of course), and they also cost production time.

    That's would be about 180 EUR per unit. With 50 units, it would add up to 9000 EUR.

    So in reality, when calculating costs to produce 1000 Pyras, you need to calculate with 309,000 EUR (or 309 EUR per unit).

    3. After-Sales Costs (Support, Repairs, etc.) (monthly varying costs)

    So, unit shipped, customer happy, no more costs?

    That would be great - but unfortunately, things can always break.

    Warranty repairs cost time and money (wages, shipping and part costs).

    Thanks to our experience with the Pandora (and to the fact that my shop is making additional money with other things), these won't be a huge issue for us.

    But you need to expect them - so I'll calculate with 4 - 5 EUR per unit.

    Of course - later in the production, the after-sales cost will go down, as the production process will constantly be improved.

    4. Monthly company costs (fixed costs per month)

    A company has monthly costs as well.

    Wages, room rent, tax counsellor, etc.

    For my shop, this is about 4000 EUR per month.

    Luckily though, these costs are mostly covered by all the sales in my shop already, so it's not a huge concern for us.

    But what if sales go down and I mostly only sell the Pyra anymore?

    Now, as these are costs are monthly costs, they heavily depend on sales.

    If I sell 100 units per month, I would need to add 40 EUR per unit just to keep the shop going.

    If I sell 1000 units per month, it would only be 4 EUR.

    The reality is probably somewhere inbetween.

    There's another concern though:

    The more units I sell, the more people and space I need to hire to be able to ship them and have enough space for the stock.

    That's why I want to grow slowly - what would happen if I have 10,000 sales per month, and after 6 months it suddenly goes down a lot...?

    I still had to pay the rent and wages - and then would probably run out of money at some time.

    Right now, I'm calculating with about 10 EUR per unit.

    5. Marketing Costs (monthly varying costs)

    If sales go down, more marketing is needed.

    Thankfully, this is not really an issue for us - most of the marketing happens due to retro-gaming magazines, reviews and the community itself.

    So it's only about 300 EUR per month at a maximum - something we can easily cover :)

    6. Some money put aside for bad things that can happen (i.e. the touchscreen issue we had with the Pandora)

    Even though the production is running, something bad can always happen.

    Like the recent issue with the touchscreen in a full LCD batch, which did cost us thousands of EUR just for shipping.

    That's why you always need to put a bit aside - to be able to cover that.

    For the Pandora, that was 10 EUR.

    I don't expect that much for the Pyra though. I've taken care that all our companies are sitting in Europe, mostly in Germany.

    So if the touchscreen issue would happen, I'd simply return it to our German distributor and let him deal with the rest.

    So I'm planning with 4 EUR per Pyra.

    7. Profit and distribution (varying costs)

    Last is profit and distribution.

    If you calculated everything together, we should have a rough price of 350 EUR per unit (expecting a total sale of 10,000 units)

    Usually, to be able to work on future projects (successors, improvements, docking station, etc.) you need to make some profit as well.

    Often this is up to 50% for some huge smartphone companies, but I'm calculating with about 15%.

    Or, if it's a company that also sells games and apps, they often don't make profit on the hardware, as they plan to make profit with the games.

    This is not the case for the Pyra though.

    So that would increase the price to 402,50 EUR

    Then there are also distributors (like ThinkGeek, Ithic.com, GetDigital.de, etc.)

    They also want at least 15 - 20% profit (they've got huge shipping costs from Germany to US as well) - which leads to a price of about 500 EUR.

    Of course, they won't be happy if I sell it for a lower price as they do - so I would need to calculate with that price as well.

    In our scenario, we'd have a final price of about 499 EUR.

    However, as we don't know the final development costs, production costs, etc. right now, this is just an estimation.

    But thanks to my experience with the Pandora, we should roughly get that. It shouldn't be a lot higher though.

    Wow... this was a long post.

    I hope you enjoyed reading it and learned something new :)

    Calculating costs certainly is no easy task.

    There are a lot of different ways optimizing the production itself, to save costs. You just need to find the best way (which sounds simpler than it is).

    Also, estimating sales is not easy. Having more sales will lower the production costs a bit, but if your price is low and the sales aren't too good, you make a loss as well.

    But having done that for the Pandora (and my shop in general as well) surely will help us a lot.
     
    Last edited by a moderator: Feb 22, 2014
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  2. fusion_power

    fusion_power Advanced Member

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    If the rumors are right about Microsoft spent 100 Million Dollars just to design the new XBox One Gamepad, you are really cost efficient with the new Pyra! :D   

    However, in times of cheap 3D printers I suggest to use one of them to maybe save some costs for the case design. It's much cheaper first to print some cheap and fast prototypes before wasting money for the real Metal Molds that may have to be altered then like it was done with the Pandora molds so many times. Today, you just print your design and you can instantly check if it works in real. :)

    And I would skip fancy stuff like your mentioned lighted case logo that may look nice but nobody really needs onto an Handheld. It add costs for electronics and a more complex Case Mold and may cause structural issues at the case itself.  I actualy expect a much more durable/robust Pyra case than the one the Pandora had so a illuminated logo just does not fit in this concept somehow.
     
    Last edited by a moderator: Feb 22, 2014
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  3. Granitehead

    Granitehead Advanced Member

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    Please don't do that. Make it 512, or some other funny number, or just stick to plain round numbers like 500.If you want to you could publish something like "500 -5/+10€" here in the forum and I'm sure we have some math geeks here who could figure out something funny for any numbers you choose (I would certainly try).
     
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  4. Natsu

    Natsu Advanced Member

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    :huh: Why? Especially the fact that you are adding cost for the sake of it.
     
    Last edited by a moderator: Feb 22, 2014
  5. Granitehead

    Granitehead Advanced Member

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    Because I associate prices which can be expressed as (m*10^n)-1 for natural n's and m's with companies who think I'm stupid and can be cheated into buying something by making it look cheaper at first glance.
     
    Last edited: Dec 28, 2015
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  6. moxie

    moxie The voice of reason, sense and exasperation Staff Member

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    And because it is fun! :D
     
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  7. fusion_power

    fusion_power Advanced Member

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    Buying your daily stuff in the Supermarkets must be a real pain for you then.  ;)

    In germany basicly everything price releated ends with .99 and I really wished they would drop this for .95 at least so we could get rid of 1 and 2 cent coins like some EU countries already did. But I guess it's not possible to get the .99 out of the heads of an entire nation. ^^"

    512€ sounds at least geeky enough to get the right attention. The next best bit-value would be 256 but of course this price will not happen. Still better than 640 of course.
     
    Last edited by a moderator: Feb 22, 2014
  8. M-HT

    M-HT Very Active Member

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    This doesn't seem right.
     
  9. DaMummy

    DaMummy Soldier Paste

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    two things. 1, so people who are still on the pandora preorder list once pyra is ready for sale, those preorders would get pyra for 300 euro, as that is production cost? and 2, can you do a similar post like this once everything is set up, and you have the actual numbers of whats spent, and not just planned? would be rather informative id say
     
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  10. rohezal

    rohezal Advanced Member

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    Some questions:

    If the pyra costs around 400€ you would make only 50K Euros profit from 10K sales (with 350€ production costs). You had investors you have to give their money back. Is this ok?

    About getDigital, ThinkGeek, ithic: they are mostly in the USA, right? So if the people want to buy directly from you they have to pay shipping and have no service in their country. Also the shipping when something is broken takes far longer. It is ok to be more cheap if you add shipping costs. Nintendo Wii and Wii Us are way more cheaper in the UK and I think the prices in the USA are in Dollar not in Euros (250$ instead of 250€). You can do the same, since most people buy their stuff local or from the same country instead ordering it from an other continent. Most people I know buy their cheap tablets from media markt and not directly from china.

     
    Last edited by a moderator: Feb 22, 2014
  11. Loonie

    Loonie Active Member

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    I believe that's back-to-front.

    Also, I'm getting the wallet ready.
     
    Last edited by a moderator: Feb 22, 2014
  12. rError

    rError Member

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    Great rundown. Thanks, ED!
     
  13. Hồng Thất Công

    Hồng Thất Công Đả Cẩu Bổng Pháp

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    Too complicated! Just charge whatever :) . I'll pay for anything :)
     
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  14. _wb_

    _wb_ Microbe Staff Member

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    Thanks for the very informative post! This should help to clarify to people that you can't just add up the cost of the parts and expect to pay that.

    You forgot the VAT though :)
     
  15. EvilDragon

    EvilDragon Administrator Staff Member

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    Right. Fixed :)

    Nope, that price is the international price (without VAT).

    Only folks buying within Europe have to add VAT.
     
  16. EvilDragon

    EvilDragon Administrator Staff Member

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    Um, no, not quite.

    Don't forget: The Pandora business plan was setup so that all the money would be back on the account once all Pandoras have been sold.

    We're nearly achieving that goal, so we won't need that much money.

    And you make a lot of money from accessories as well, don't forget that :D

    Besides: If production costs are 350 EUR and 50 EUR is the profit, then 10,000 units would be 500,000 EUR profit, not 50,000 ;)

    And finally: The Pyra is the start.

    I hope to be able to produce more devices in the future.

    If the case is good, we don't need to redesign that, which saves a lot of money in the future.

    And if we can create the module-based version (with CPU module), we can release updated models (or only CPU modules for existing customers) without having huge costs as well.
     
    Last edited by a moderator: Feb 22, 2014
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  17. Klumpen

    Klumpen Run away! Run away!

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    19% Mwst. comes on top of it, meh.

    https://www.youtube.com/embed/8vY-4zWKsJM?feature=oembed
     
    Last edited by a moderator: Feb 22, 2014
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  18. klapse

    klapse Central Scrutinizer

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    While developing with European companies does reduce some risks, I worry that the budget reserved for "things that can go wrong" may be too small.
     
  19. Natsu

    Natsu Advanced Member

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    That's silly.
     
  20. jktm140887

    jktm140887 Still Fresh

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    499€+24%VAT=618,76

    I really need to start saving money.
     

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