BUT CAN YOU MAKE MONEY?

Looking at a Variety of Factors Before Launching a New Product is Smart Business. But the Bottom Line is--Can You Make a Profit?

By James F. Riordan

When all is said and done, what you really want to know is whether your new product can turn a profit. The real world definition of net profit is the amount of money left in your hand after paying:

1. Direct Costs--Those directly attributed to the specific product, including labor, materials, etc.

2. Indirect Costs--Those shared with other products if you're making and selling more than one product in the same facility. Administrative and overhead costs are examples of expenses which are frequently shared in this situation.

3. Capital Costs--Interest and equity payments, equipment.

4. Taxes, licenses, reserves.

Winning products are those which will NET you more money than you could make from a Certificate of Deposit or other investment. Profit can be expressed in dollars or as a percentage of sales. Either way it must provide a worthwhile return on total investment. The ideal product will be one which will cover all costs, and provide enough profit to be considered an attractive "rate of return."

Defining "attractive rate of return" is like trying to define the word "fast." I have found from years of motorcycle and ski racing that one man's "fast" is another man's "slow." An amount which is "attractive" to one investor may well be below minimums for another investor. As a very general and broad rule of thumb, the new product developer could use 15 percent annual return as a MINIMUM acceptable annual rate of return.

If you have not done so already, make up a "cost-of-goods-sold" form. List each part and how much the part will cost in quantities of 100, 500, 1000, 5,000, 10,000, etc. List the labor cost to fabricate and assemble each part or component. Add up the total cost to make one complete unit based on each quantity breakdown.

Note: If you are an individual product developer or inventor, Always use the lowest quantity you will produce as you base cost per unit. Don't ever use your cost-per-unit at high quantities as your base price for the cost-of-goods-sold, since you will only be fooling yourself. It may be many moons before you will have enough orders in hand to justify a large volume purchase.

Add in your own profit markup (anywhere from 30 to 100 percent of your cost of goods sold). Add another 20-30 percent to cover rep's and distribution, then double that figure to arrive at an approximate retail price to the end user. As a general rule, if this final figure is the same or below the perceived value to the consumer, the product has good potential for profitability.

It is often easy to determine manufacturing costs and profit margins, but it is very hard to predict, with accuracy, what a product's perceived value will be in the eyes of the target audience. If the customer perceives the value to be greater than the price, it's easy to raise the price. However, if the customer perceives the value to be less than the price you're asking, it can mean instant death for the product. The evaluator and the developer need to constantly monitor the perceived value from the different perspectives of the end-user and each of the middlemen in the channels of distribution, to be sure the perceived value of the product is always great enough to keep the product profitable for all parties.

Once you have arrived at a net profit figure, refigure your net profit as if you were forced to pay a "licensing fee" of five to 10 percent of net sales. You need to know NOW whether you could pay a royalty fee to another party and still remain profitable or whether you would be wiser to "cease and desist" upon notification that another party was granted a prior patent.

The above article was taken from James F. Riordan's classic book, HOW TO EVALUATE THE POTENTIAL FOR SUCCESS OF A NEW PRODUCT OR TECHNOLOGY. Riordan's highly-acclaimed, 36-point system is a valuable tool for inventors, product evaluators or anyone interested in the invention process. Each section is followed by a comprehensive questionnaire that can be used to evaluate your product.

The highly-recommended book can be ordered through the Dream Merchant, 2309 Torrance Blvd., Suite 104, Torrance, CA 90501. The phone number is (310) 328-1925.

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