This question always seems to vex the non-financial folks: how can I sell it cheap? Top management wants to know: are they the low cost producer—or are we—or who is? Manufacturing and purchasing folks want to know: what target do we need to hit on costs, purchase prices, etc.? And in the very beginning, designers need to be well aware of the cost and price targets for which they are designing.
All of these challenges come back to the finance folks to pull together. I will share a proven approach for comparing competitive positions. It may not be perfect, but with some reasonable estimates and diligent competitive intelligence gathering, this is far better than each group assuming what makes them feel (or look) good.
Companies with publicly traded securities must publish financial statements. That is one starting place. What is the typical gross profit margin and operating profit margin of the competitors? What are typical spending levels on sales, marketing, product design and development? What is overall SG&A. as a percent of sales. For some information, industry studies can provide ranges of spending on things like R&D. If you know what kind of sales force competitors have, you can make educated guesses at commission levels or sales costs.
Comparing supply chain make-up will often reveal a lot about logistics costs. Distribution center locations and where sources of supply are located compared to customers lets you estimate freight costs with surprising accuracy.
But the most fun part requires a couple of accurate (weighing) scales of different sizes. Most products are made predominantly of a few raw materials: steel or aluminum, plastic or metal, etc. First weigh the finished product. If you sample an array of similar type, size and complexity products, you’ll find they also weigh about the same amount per pound—unless one uses a totally different design or raw material. Take products apart and weigh component parts. Ask sourcing people to find the costs of the raw materials from which the components are made. Then take some of yours, of which you know the cost, and weigh them. Compare.
For example, die cast grades of zinc or aluminum have a known cost per pound, as do plastic resins, and most raw materials. Components—mechanical, like fasteners or hinges—have well known costs. So do electronic components. Packaging, usually paper, corrugated cardboard and chipboard, is among the easiest to estimate based on known costs, square footage usage, and processing/printing methods.
By taking apart several competitive models and looking for tooling/cavity identifiers, it is often possible to tell how many cavities are in a die or mold. This affects the cost. Armed with this information it is time to get the financial folks deeply involved.
They should lay out detailed cost buildups from the component level all the way to a full income statement (P&L) for your product—and a blank one for the competitor’s. Do a simple product first; learn as you go. Compare the competitor’s parts to yours and estimate their costs. Are they higher or lower than yours? Are the parts heavier or lighter? Is the material same or different? Are the plants located where labor and overhead is lower or higher than yours?
This takes a team of sales, marketing, engineering, purchasing, manufacturing and logistics people, but the financial people, a cost accountant and a financial analyst are the “systems integrators” who pull together comparative cost data for the products.
Benchmarking against known levels of SG&A, and Gross Profit Margin helps in building a product P&L. The final result should be a side-by-side cost comparison that answers, “How can they sell it at that price and make money?” Maybe they aren’t making money. Maybe they don’t know their costs. In time, that will ruin them. Or maybe, some clever designers figured out how to use less material or a less costly material, or process it faster, and/or in a lower cost locale.
As the team works on this, it will grow in expertise. The financial analyst and cost accountant on the team will grow in their awareness of what adds costs—and what reduces them. At the very least, a team like this can get within a few percentage points of a competitor’s product cost. Do a few key products and suddenly the finance folks can estimate how an entire division or business unit P&L might look.
Best of all, I’ve never seen this done when it didn’t result in several cost saving ideas—and a better awareness of how to compete better. It takes some digging, some educated guessing, some competitive intelligence and a couple good scales. The return on the investment is usually big.