Kickstarter Margins

I’ve been looking at failed kickstarters and a recurrent theme seems to be one of playing the big boys game with a beer budget. I get that everyone wants to come out with the latest widget and sell it for $99.99 in order to capture market share. Such can work wonders if your volume is really high… but what if it isn’t? What if your kickstarter maxes out with a couple thousand backers? What if your price point is $200 (double msrp, being these folks get in on things from the get go, and you throw in some swag to sweeten the deal).

At the end of the kickstarter, you have $400K to work with… but how far can that really go?

With an MSRP of $99.99, your direct costs related to manufacturing (BOM+manufacturing labor+amortization of tooling, fixtures, etc across 2000 units) has to be $30 or less, ideally a lot more like $15 for lower volumes. Alas, since your kickstarter has a price point of $200, you have double those figures to work with… in other words, a target (BOM+manufacturing labor+amortization) with an absolute maximum of $60, with a $30 target providing a much safer cushion.

And here is where the problem lies, a (BOM +manufacturing labor+amortization) figure of $30 doesn’t get one very far. In fact most smaller products when costed out at Mouser or Digikey at 1K prices are going to be more than $30 alone, to say nothing of the costs of labor or amortization.

This is where folks get into trouble…

1. We don’t need to make a profit off kickstarter, as long as we break even, we will be happy. After all, once we start selling 50K of these a year, money will be rolling in… so its ok, if the margin drops from 6.6… after all, the big boys will let it roll all the way down to less than two. The problem with this thinking, is that the big boys have millions to back up non-recurrent engineering, development and fubar. Kickstarter folks, unless independently wealthy don’t… for every decrease in margin, the development budget shrinks.

2. Our offshore vendor says they can turn key this for $60 as they can leverage the scale of their large volume customers, and or procure parts at bargain basement prices through their vendor network. This can and has worked wonders… but what happens when the large OEM you are leveraged off of changes course? Do you have the resources to do a major redesign midstream, and/or delay some of your customers delivery for months while such is ongoing. What about having to go to the gray market for critical components?

3. A 6.6 multiplier seems really greedy… and it does, until you get in a shipment off the boat with a 80% failure rate and the vendor doesn’t stand behind it. Your customer doesn’t care about that, all they want is a product that meets spec at the time you promised. Do you have the resources needed to rework the units on shore, and/or rip up and redo from the get go.

4. When investors see our sales, we will be able to raise the funds necessary to make a go of this. In some situations, this can work and may be the only saving grace of a given kickstarter project… but they will step in only if the numbers make sense. (Ie, an investor will take a dim view of you giving away $200 with each unit you sell, unless its only a tiny and easily fixed step to profitability). In addition, when you add in investors, you loose control. What might have been a focus on idealistic sharing with the community becomes a potential competitive threat once investors step into the fray.

Such is why bargain basement hardware development, low multipliers and a low target msrp set the stage for failure. It takes a ton of resources to do this, even with highly experienced individuals running the show. There is always a murphy waiting around the corner to bite, often in a huge and unpredictable fashion.

So whats the answer?

Low msrps and lower margins are probably ok if you are already in low levels of production, ie, you can already build hundreds a year by hand, sell them, and break even, you just need high volume production tooling to truly make a profit. However, this is not the time for scope creep. Do that only after your revenue stream is positive and solid… too many things die on the vine as its only a tiny mod, and we will sell a ton more, and end up selling none.

If your volumes are low, and/or you are testing the market, let the MSRP and kickstarter rewards remain high to protect both you and your customers. Once volume production kicks in, you can always drop prices and/or provide freebie upgrades to existing customers who paid 3x or more the volume msrp. Obviously there is an issue of competition and or pricing oneself out of the market… but better to do that than loose your as well as your customers shirt.

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