Don't Get Fancy On A Product That Won't Sell A Million Units

2022-08-12 original Engineering

Development never goes smoothly.

Specs change mid-development, deadlines close in with no resolution in sight, tooling has to be remade, patent licensing negotiations fall apart — all kinds of obstacles get in the way. For what it’s worth, I’ve even had the experience of “the factory caught fire and burned the parts.”

Many of the people involved have real commitment to getting a product out. So they’re not about to give up over some minor problem or issue. But when you actually stop and think calmly, you often find you’ve pushed things to the point of “did we really need to go this far?” I have plenty of firsthand experience with this myself. So, partly as a note to self, I want to lay out here how to apply the “brakes.”

Let’s start with the easy-to-understand case of one-off expenses. Things like remaking tooling, remaking a PCB, fees for resubmitting a regulatory certification test, or losses from pre-ordered parts that become obsolete after a component change. For these, you can simply divide the loss by the planned shipment volume to see how big an impact it really has. Say remaking the tooling costs $7,600, and the product’s planned shipment volume is 10,000 units — that raises the per-unit cost by $0.76. In reality you’d also need to factor in the time lost from the tooling fix, the resulting opportunity cost, and labor-month rates, but I’ll leave those out here for simplicity. Suppose the problem requiring the tooling fix was that a small part on the product’s surface showed a faint fuzziness. Was spending $7,600 on this fix really justified? Surely it would have been cheaper to just polish the finished part than to raise the per-unit cost by $0.76.

Here’s another example: wireless performance requirements differ by country. Suppose a product passes Japan’s standard but fails Europe’s in some respect. Is spending $15,200 to fix that the right call? The correct approach is to decide based on sales forecasts for how many units will sell in Europe. Depending on the product’s overall cost structure, does it really make sense to sell in Europe at the expense of squeezing the profit margin?

When you handle each fix and each additional expense this way — dividing by unit volume and adding it into the cost — you’ll sometimes suddenly notice an inconsistency. “There’s no benefit to spending any more on this. In fact, it’s a net loss.”

That said, I’ve been involved in developing products where you don’t really need to think this way very much. One was a product that sold a million units. The other was a flagship high-end product.

A product that sells a million units can fairly be called a solid hit. It’s a stable product, it spawns a line of variants, and you can expect it to keep contributing to revenue next year and the year after. So in the logic above, the “unit volume” figure can be assumed to be extremely large. In other words: whether we lose a few million yen here matters far less than making sure we ship the product properly and secure this year’s revenue — and next year’s, and the year after’s.

When I was actually involved with this product, I went on plenty of overseas business trips as needed, and when issues came up on the part handled by a venture company in India, we flew them to Japan, put the joint Japan-India project team in a room together, and worked intensively on development.

This was also the series where I committed the major blunder of “reworking the entire first production lot,” but even as a junior engineer at the time, I understood clearly that in situations like this, the top priority isn’t cost — it’s sticking to the schedule and getting the product to market. Even if you lose $76,000, dividing that across the lifetime unit volume of the related models brings the impact on per-unit cost down to only a few cents. As an aside, I’ve heard that the first production lot of the PlayStation 2 likely failed unwanted-radiation testing, and shipped with radio-wave absorbers and metal sheets plastered all over the inside of the enclosure. It’s easy to imagine that this, too, was the result of prioritizing the release schedule above all else.

When I was involved in developing the high-end flagship product, the development team was large. I think it was the largest team I’ve ever been part of. In a large team, labor costs usually make up a very large share of total spending. According to the National Tax Agency, the average salary for a regular employee in Japan is about $38,000, so let’s use that figure and assume a team of about 100 people running for a year. That alone comes to $3.8 million. But labor costs aren’t just salaries — there are various allowances and benefits, expenses for indirect departments that aren’t development roles, and the space people need to work in along with the facility maintenance that comes with it. Adding people brings a whole range of hidden costs behind the scenes. As a rule of thumb, the common wisdom is that multiplying by roughly 3x gets you close to the real figure. That comes to $11.4 million.

A high-end flagship generally doesn’t sell in huge volumes. Instead, it tends to sell steadily over a long period, so let’s say it sells 50,000 units total over 5 years. Dividing $11.4 million by 50,000 units comes to a startling $228 per unit. That’s a surprising number, but there’s no need to panic — we need to think calmly here. The real question is: what price will this product actually sell for?

Even within “high-end,” price levels vary enormously depending on the category. Within the range of electronics I know well, the areas where high-end prices most often diverge sharply from the general market rate are medical devices and luxury/hobbyist goods like audio equipment. Medical devices vary a lot by type and have a somewhat complex cost structure, so let’s think about the more straightforward case of audio equipment. Take CD players, for example — you might think nobody uses them anymore in this day and age, but they’re still used in enthusiast circles. And it’s common to see ones priced above $7,600. It’s not at all unusual for a full audio system including speakers to form a home theater system priced above $76,000. Coming back to that $228 figure from before, without doing detailed math you can immediately see it’s not a big deal. In other words, the whole point here is how relentlessly you pursue every detail to build something that satisfies the customer. It doesn’t matter how many people it takes, or how much it costs (though that’s putting it a bit dramatically).

We’ve looked at two extreme cases, but both are largely exceptions. For most product development, you have to keep asking yourself: is this really something worth going this far for? There’s no end to how much you could push to improve performance. Wanting to meet as many requests from users and stakeholders as possible is a perfectly reasonable instinct. It’s also entirely understandable to feel frustrated at shipping with even a small bug left unresolved.

But as long as you’re doing product development and sales as a business, there is clearly a line where you have to strike a balance. If you want to push beyond that line for even more performance or quality, you need to have a properly reasoned answer ready for the question: “So, will this sell a million units?” or “So, will this sell for $7,600?”

The content of this post is an excerpt (original text) from the following book. If you’re interested, please pick up a copy.

The Shape of a Happy IoT Startup

Originally published in Japanese at https://clazytech.com/2022/08/1062/. Translated with LLM assistance and reviewed before publication.