Determining costs for your possible licensee, to prove your invention will sell

The lowest-cost tooling produces the highest-cost parts. The highest-cost tooling produces the lowest-cost parts.

BY JACK LANDER

If you’ve watched “Shark Tank,” you know that the first question asked by the sharks is, “How many have you sold?”

Even if you aren’t seeking an angel investor, a.k.a. a shark, your prospective licensees will be far more willing to read your sell sheet and engage in conversation if you have some sales under your belt. So let’s say you agree to produce a pilot run—a short production run to test your sales in an appropriate market channel.

The first step is to select the manufacturing process for each component. The principle involved is: The vast majority of manufacturing processes come with a range of tooling choices. The lowest-cost tooling produces the highest-cost parts. The highest-cost tooling produces the lowest-cost parts.

You should utilize this principle to reduce your costs for the pilot run, and to determine the ballpark cost of volume production that your prospective licensee will encounter.

Starting the math

Let’s start with the most important principle: tooling cost vs. part cost.

For example, most of us are familiar with a 90-degree angle bracket used for many purposes, such as mending a wayward table leg. Such a simple part can come from a spectrum of tooling:

  • Your work with a hacksaw, vise, hand drill and hammer
  • Help from a short-run prototype service provider
  • Utilizing a stamping service provider (an automatic hole punching, cutting off, and bending die)

The same holds true for a plastic injection molded part:

  • 3D printing (material addition)
  • Machining (material removal)
  • A single-cavity injection mold made from aluminum
  • A single-cavity injection mold made from steel
  • A multiple-cavity injection mold made from steel

3D printing requires a digital program to drive the printer. That program is made by amending your digital 3D drawing of the part.

The fee for amending the drawings is generally less than $100. If you have your own printer or access to one, you can amend the drawing yourself.

Let’s say that your cost of amending your drawings is $75, and the cost per printed part is $3.25. You anticipate needing 100 parts for your trial, so your total cost will be $400.

This assumes that your invention is complete with the making of a single component. If you have other components, you’ll have to apply the same calculation. Those parts may require methods other than 3D printing, but the principle applies unless the parts are bought “off the shelf.”

Machining costs

Machining is sometimes less expensive than 3D printing. It depends on the size and complexity of the part.

A significant advantage of machining may be that once the machine is set up, the finished parts are released automatically. Printed parts may have to be removed manually and the process started again for each part made.

Price comparison of the two methods is the only exact way to know which of the processes is the more economical.

Assume that your market channel is QVC or some other TV direct seller. It will probably place your product in a middle-of-the-night time slot to test response and ask for, say, a 5,000-piece inventory. Your cost will be $16,350 for your main component alone—and you’ll be stuck with a mold that you may never use again, and a lot of inventory, if QVC decides that you didn’t sell enough for it to take on the product.

But before you commit to producing 5,000 parts by the essentially short-run processes of 3D printing or machining, you get a couple of quotes for a single-cavity mold made of aluminum.

An aluminum mold is significantly less expensive than a steel mold, because it is so much faster to machine. But its useful life may be only a third of a steel mold’s.

Let’s say 300,000 parts for aluminum and a million parts for steel. Most of the time you’re better off with the aluminum mold until you can forecast lifetime sales of your product.

Suppose the molder’s price is $12,000 for the mold and 40 cents for each part if you purchase no less than 3,000 parts with each order. So, your total cost for 5,000 parts is $2,000. Thus, your total cost is $14,000, compared with $16,350 for printed parts.

Obviously, this is the way to go. But even if the mold option was more expensive by a couple of thousand dollars, the incremental cost is probably worth the investment because you’ll have to mold for future production.

However, your cost per part should not be based on your total cost of $14,000. Your cost per part is 40 cents plus the lifetime cost of your mold. If the mold is predicted to be good for 300,000 parts, $12,000/300,000 = .04, so your cost per part is 44 cents.

Cavity mold costs

Assuming you still plan to license, you should have a fair idea of how much your prospect will have to invest in tooling and the cost of the parts it will produce. Such knowledge enables you to convincingly answer a potential licensee’s concern about the product’s cost, which ultimately determines his or her profit.

So, while you’re asking for a price quote on your aluminum mold, discuss a multi-cavity steel mold cost as well. A cavity is just the hollow part of the mold from which your part emerges after it solidifies.

A four-cavity mold is fairly common. But depending on the shape of your part—let’s say it’s long and narrow—a six-cavity mold may work to advantage. (I once ordered a 100-cavity mold for a small part about the size of the eraser at the top of a pencil.) The point is to be able to discuss your potential licensee’s cost per part based on the kind of mold he or she will probably use.

The obvious advantage of several cavities is that the molding cycle time is substantially the same, whether one part or 16 is molded with each mold cycle. Thus, the mold cycle time part of the cost per piece is reduced to 1/16th.

So, if the plastic cost is 10 cents per part, and the molding cycle time is 30 cents, the cost per piece will be 30/16 = approximately 1.9 cents, plus the plastic cost, and the total cost per part, to equal 11.9 cents. But remember, you should add in the amortized cost of the mold so that you don’t fool yourself when you calculate selling price and profit.

If the molder quotes $55,000 for the mold and it is good for a million parts, the cost per piece is .055. So, you will pay the molder 11.9 cents per part—but your cost, including the mold, is 11.9 plus .055 = 17.4 cents.

Don’t forget setup expenses

There is one more cost you should know about, although you don’t have to include it in your part’s cost. The molder will do that for you. That cost is setup.

If you’re going to bake a cake, you need to get out the mixing bowl, the baking pan and all ingredients. When your cake is out of the oven, you take all of the same steps to frost it. And finally, when the cake is frosted and ready to cut, you have to wash the pans and dishes and put them away.

That’s called setup. Your molder has to purge the mold so your bright yellow plastic isn’t contaminated by the mud-colored plastic he used on the last job, then install your mold, and run several wasted parts to be sure the heat and time formula he or she uses is producing acceptable parts.

All of this time may add up to a couple of hundred dollars, more or less. That cost is spread across (allocated to) the quantity the molder will run. This is why quoted prices drop as quantity goes up.

Traditionally, the molder doesn’t charge you for setup as a separate line item. He or she will quote you a lower price per piece depending on the quantities you may buy—1,000, 5,000, 10,000, etc.

In review

To summarize, the compiling of total direct costs (no overhead included), requires patience and the common-sense knowledge of the various kinds of cost that make up that total:

  • Which type of process? (Machine the part, print it with a 3D printer, mold it, etc.)
  • Which option within the selected process will you use? (3D printing, aluminum mold, multi-cavity mold, etc.)
  • How much does the material (e.g., plastic) used for each part cost?
  • How much does the cycle time of the process cost?
  • How many cavities in the mold? (Your choice. Get quotes on one and four if you are uncertain.)
  • How much of the mold cost is allocated to each part (mold cost divided by number of parts made before the mold has to be replaced?
  • Are you willing to lose money to test your product’s marketability? Your selling price is based on your customer’s perceived value vs. net market price, not some multiple of your cost. In most cases, you’ll have to sell your product for less than your cost.

Even if you are roughly estimating cost per part, the above cost factors are real. Don’t neglect any of them.

I never said it would be easy.