Revenue and profit models for Electronic device sales

The Sales model

AirBorn Electronics provides design services for electronic products. When you design a new product, a most important step is identifying just how you are going to sell it. You really need to justify building the product the either to yourself, your management, or your financial backers. We hope we can help with these suggestions...

While the natural way to list things is to Describe your project, then Describe how it will be sold, successful projects are invariably originally conceived by first recognizing the market need that the project will satisfy, then finding the particular market the project will service, then working out how to sell into that market. These elements often then dictate the project features.

Describe your projects market

Your project may sell to a particular group of people: Air conditioning installation companies
Your project may sell to an established client base: Accessory for the existing rainmaster system
Your project may satisfy your own requirements: Custom Plant for existing factory, no likely external sales
Your project probably has a particular market position: Low cost, sold through Locksmiths

Describe the market need your product fulfils

Examples

Provides the only method of expanding the rainmaster system. About 33% of rainmaster system users would probably also purchase additional inputs capability.
Provides a more cost effective method of neutralizing odours - an existing market.
Al Roller controller. Existing manual method is leading to substantial material wastage and tolerancing problems. Automatic control is a requirement for ISO9000 approval.

Describe your sales model

The traditional way - Make something, then sell it.

Outsource production - this doesn't need a seperate category, these days you really have to outsource manufacture at some point. It is not hard to manage, the best way is to start with as much outsourced manufacturing as can easily be arranged. If you find the prices that you are paying are too high, find an alternative manufacturer - or manufacture yourself. Most successful business relationships revolve around letting your suppliers make money - but making sure your own company does the same, and preferably on a similar timescale. If you have the design work completed in Australia you will generally get good quality, well documented work, and you will own the design. That allows you to pick another company to outsource to with only a few weeks downtime. If you have the outsourcing manufacturer do the design work - and in the authors experience they will push very hard for that - then you will never own your product. They will.

Sell the Refills

You can also make something then 'sell the refills' - this is the sales model used for most low cost PC printers - and could, for instance, be used by our air freshener example. Being conservative, it makes sense to try and cover your manufacturing and overhead costs on the unit sale, with perhaps a small profit. If you make most of your money on the refills, you have a continuous income stream, the most desirable situation.

There are variants on this model - you can make something at a base price and then sell the additional features at a better markup. When you hire a car, the car hire company is likely to make more margin on the insurance they sell you as you pick up the car than the rental itself. You can also sell spare parts or aftermarket accessories at a better markup - most larger companies sell spare parts based on what the market will bear, not based on the actual cost of the item. Even if it is not your primary sales model, you should find some way to leverage this technique.

Licensing

Licensing - a tricky one most easily handled by a large organisation. It is harder to sell, harder to police, but potentially lucrative with little downside risk. Be wary of developing a product where your potential customers are much larger in business size than yourself, unless you have substantial entrepreneurial flair, excellent sales and negotiation techniques, and a piranha of a lawyer where you have sufficient funding to match. In years gone by, the classic example was to try and sell something to a car manufacturer - you just could not expect to profit from it. You had to sell 'aftermarket' and try to move quickly, but if the gadget was really effective sooner or later you could expect it to become the 'new feature' on next years model of car, - without you getting paid for it

I would suggest that exactly the same situation now applies to Toys and mobile phones - you just cannot hope to sell to the market encumbents without deep pockets for expensive legal services. You will notice I have not used the word patent at all until now - you could say a patent without a lawyer is like a gun without bullets. Ofcourse you need the patent, but unless $2000 an hour does not scare you (the going rate for a top patent protection lawyer in Sydney), you might consider easier ways to your living. Try to find the exceptions - for instance it might be next to impossible to profit from your idea to, say, make a barcode scanner for a mobile phone - but it may be quite straightforward to produce an aftermaket iphone app that could do that function.

Crowd sourcing

A number of clever companies crowd source their new product. The product is described on line and "pledges" are made by buyers - really advance purchases - and this finances the production run. It is tempting to also finance the development with the same mechanism, however electronics development has a history of overruns - it always seems to take longer and cost more than you budget for (Hofstadter's Law). With crowd sourcing the supplier has normally contracted to a delivery date, and also contracts to a fixed price for the offer - when an overrun occurs the cost has to come out of the suppliers pocket, and the overrun is likely to be accompanied by a time overrun as well, which could mean irate customers. Crowd sourcing can raise a lot of money very quickly, however - and the originator of the design ends up still being the final owner of the design and they receive any and all future profits.

Subscription model

This is the best breadwinner right now - become a service company. Normally the product is a delivery mechanism for the service - and the subscription allows continued access to the service. Again, mobile phones are an excellent example - I mean you don't honestly think those phone calls cost the telecom companies anything to provide, do you? Their costs plateaued soon after the mast went up in the air. There are many, many opportunities in this field. You do need to carefully analyse the psychology of your market to set the pricing. More especially with a younger market it can pay to keep the upfront costs low, and make the offer enticing. Overall, the secret is to make the costs affordable, then find some way, any way, to get the people to sign up. Surprisingly, once they are signed up, there is often reticence to un-sign, if the cost is 'low enough not to worry about'. The cost just keeps being debited to the account.

The writer has issue with the practices of some companies using the subscription model, however those practices are very relevant to profits, so I feel an obligation to share those of which I am aware. The point is, the subsciption model can be very lucrative in unforseen ways. One method is 'Bait and Switch' - the supplier offers an excellent deal, then at some point in time makes the enticing offer unavailable, replacing it with an offer more profitable to the supplier. Surprisingly, many stay, dependent on when and how the switch is made.

A standard technique is the pricing of extras. It works both ways - for instance a telecom company might headline their offer with "Call for as long as you like - pay only for 1 hour" - but in reality the average call is 3 minutes long, so the impact on their profit is low. Conversely, many ISPs offer internet access, up to X Gigabytes, for a monthly subscription of, say $30. However, beyond that, 2X gigabytes may cost $112, and 10X $850. In reality most useage will be far below the X gigabytes, but when clients do go higher, they often go a lot higher (perhaps most normally through malware or naive downloading). In both cases the supplier has more knowledge of customer behaviour than the average customer themselves, and has carefully crafted their pricing offer to be less transparent, but more enticing.

The key driver of customer satisfaction in service industries is customer support - if you resolve problems quickly and efficiently you gain customer loyalty, even despite your pricing.

Differential pricing

Many products are sold in different markets for different prices. The most standard differentiation is a 'home' and 'professional' market for a product or service. Really, most products have two markets in this fashion, and the professional sector - or those who aspire to be in the professional sector - are prepared to pay more for the item. Personally I find it a little tacky when companies put both services (or products) side by side on their websites - you could say it is better to have an entirely seperate website for the grades, or at least different areas under the parent company website.

When differentiated into grades like this - whether home and professional or bronze, silver, gold - the vendor would normally have differing levels of after-sales and pre-sales support as well as different product features and different branding. The whole point is that the markets are different, and you need to tailor the offering to suit the particular market. Rather than thinking of the Gold product as a way to make more profit by selling the same thing at a higher price, reverse the logic and see it as a way to capture an additional market that you would not otherwise have access to. Spend the additional dollars the customers are paying on services and elements which add value for that market segment.

ROI and Factoring the paper

As part of your project you need to calculate the Return-On-Investment. The figures for this calculation will change as the project proceeds, so you will need to keep reevaluating the numbers. Basically, ROI is how long it takes before you have sold enough units for the profit to pay back all the start up cost, including the design.

Return on investment is calculated in years - although you would use months for accuracy. What constitutes an acceptable ROI depends on individual values, but certainly an ROI of not much more than a year is very good, and would normally suggest the project is a star. An ROI of more than 10 years would normally be avoided by most commercial companies unless the project was infrastructure. The only straightforward example I can think of where a product development cost with an ROI of more than 10 years is actively pursued would be the development of aircraft.

Calculating ROI near the start of a project may allow you to uncover different sales techniques to improve the outlook. Most new product sales ramp up over a period of time, but the money is needed quickly to finance the next round of purchases. If product sales growth can be well predicted, factoring the paper (selling your invoices at a small discount to a collection firm in exchange for cash) may improve cash flow enough to make the project worthwhile. Having said that, if the business has insufficient cash to run for a few months of low sales it is probably a bit close to the edge in any case.

Estimate the production volume

Estimate a budgetary sales price
Estimate the market volume in units per year (see our section on economies of scale)
Estimate the likely market share at the budgetary sales price
Estimate the lifetime of the market
Estimated production volume = (market volume ) multiplied by (market share) for (lifetime) years ...be aware this normally ramps up then slowly down