10.5 Economic Viability
Essential idea:
Designers must consider the economic viability of their designs for them to gain a place in the market.
Nature and Aims of Design
Nature of Design
Designers need to consider how the costs of materials, manufacturing processes, scale of production and labour contribute to the retail cost of a product. Strategies for minimizing these costs at the design stage are most effective to ensure that a product is affordable and can gain a financial return.
Aims
Aim 7: The economic viability of a product is paramount for designers if they are to get their product into production. Understanding how to design a product to specification, at lowest cost and to the appropriate quality while giving added value, can determine the relationship between what a product is worth and how much it costs.
Guidance
As DP Design Technology student you should:
Cost-effectiveness
Value for money
Costing versus pricing: fixed costs, variable costs, cost analysis, break-even
Pricing strategies: price-minus strategy, retail price, wholesale price, typical manufacturing price, target costs, return on investment, unit cost, sales volume, financial return
Guidance:
The relationship between what a product is worth and how much it costs
Calculation of prices based on the listed pricing strategies
Concepts and Principles
Key Vocabulary
Cost is the expense of developing and producing a product and bringing it to market.
Price is the amount a customer pays for a product.
Profit Margin is the amount of money earned after all costs, taxes, etc., have been paid.
Cost Effectiveness
Value for Money
Businesses have to spend money to make money. They need to invest in design, production, and distribution, and marketing to bring a product to market. The price of the product must take into consideration these costs while also ensuring a profit margin. By doing an analysis of costs associated with the materials, scale of production, distribution and marketing of a product, business can determine whether a product is financially viable to bring to market.
Cost effectiveness focuses on strategies that minimize the cost of producing a product.
Value for money refers to the relationship between what something is and the value it provides and the cost to purchase it. Ultimately, the consumer decides if the value a product provides is worth the cost purchasing it. This is a subjective judgement and not all consumers will see the same value in a product.
Fixed Costs
Variable Costs
Total Cost
Fixed costs are costs that do not change regardless of the level or production. They are time-based and include rent, salaries, insurance, and warehousing. Fixed costs need to be paid regardless if a product is being produced.
Fixed costs make up one part of the total cost of a product
Variable costs change with the level of production. They are related to volume. These could include, raw materials, energy, wages, and distribution
Variable costs make up the second component of the total cost of a product.
The total cost of a product, calculated by adding together the fixed and variable costs.
Cost Analysis
Break-even Point
Cost analysis is a tool used to determine the feasibility of producing a product. Using various analytical tools, designers and companies can measure the cost of producing a product, and the expected profit it can generate.
The Break-Even Point (BEP) is the point of balance between profit and loss. It represents the number of sales of a product required to cover the total costs (fixed and variable).
The BEP represents the point at sales of a product start to generate profit.
Calculating Product Price and Pricing Strategies
Designers need to consider the economic viability of their product. If the design is not economically viable then the company is unlikely to bring it to market.
Many strategies and tools are used to calculate the product price, and these are often used alongside price setting strategies to determine the price.
Price-setting strategies include:
cost-plus pricing
demand pricing
competitor-based pricing
product line pricing
psychological pricing
Learn more about these in Topic 9.3: Marketing Mix
Price-Minus
Based on market research, manufacturers will determine a maximum price that consumers are willing to pay for a product or service. Based on this constraint, the manufacture designs and produces within these constraints.
Retail Price
The Manufacturers Suggested Retail Price (MSRP) is the price the manufacturer suggest the product to be sold at. This is to standardize pricing across regions. Some retailers may sell below this price in order to attract customers.
Wholesale Price
This is the cost of the product sold by a wholesaler. Wholesalers sell products in large quantities to distributors or retailers. The wholesale price is higher than the manufacturer's price, but lower than the retail price. Typically the wholesale price is twice the manufacturing price.
Typical Manufacturing Price
This is the price the manufacturer sells the product at. This cost include the total cost per unit (including fixed and variable costs) and a profit margin.
Target Costs
In this strategy, the final cost is determined before manufacturing. A profit margin is subtracted to determine the typical manufacturing price. The manufacture then designs and manufactures within this constraint.
Return on Investment (ROI)
Return on investment is the profit made from a product. It is usually expressed as a percentage. The higher the percentage, the greater ROI. It is usually used to compare investments in order to evaluate their efficiency.
Unit Cost
The costs a company incurs to produce, store, and sell one item. Unit costs include fixed and variable costs.
Sales Volume
Sales Volume refers to the number of products sold within a specific time. Sales volume can be organized and tracked according to demographics, region, etc.
Financial Return
Financial return is the profit made from sales for a particular product after subtracting the costs to manufacture, distribute, and market it.
Pricing calculators and resources
Calculators
Invention Calculator: The Invention Calculator is an educational tool to help the individual innovator understand the global market potential and financial implications when exploring the different routes to take a new product idea to market.
Use this link to access the Web version of the Invention Calculator
Manufacturing cost estimator: There are a variety of cost estimators and calculators for different manufacturing processesSuch as casting, molding, and machining
Resources
Examples of different pricing strategies compared
Read an interview about the inventor of the Invention Calculator and what inspired him to develop this tool.
Detailed explanation of how to calculate unit cost for manufacture