Product Pricing: the Five Guys method
Updated: Apr 8, 2021
So you want to sell a product for $50 on the store shelf. Financial models will indicate that you should try to make it for ~$12.50 (25% of retail)
That number (COGS: Cost of Goods Sold) includes all pieces, software, firmware, assembly labor, packaging, etc.
Where does the rest of the retail price go?
Marketing, Distribution, Warehouse, Shipping, Taxes, Profit, etc
Everyone takes a cut!
If we're designing a toy or game for the $30 Holiday price point, then we're basically limiting ourselves to building a $7.50 toy to make it profitable for everyone involved.
Designing a $7.50 toy is difficult, because our plastics and assembly could quickly add up to $3-4, even at volume.
We also have to account for a box/package unless we're selling something that doesn't need it.
If we want add a microprocessor and some sensors and LED blinky eyes, the cost is creeping up. Say we have a two electronic motors inside the device. Can we get by with one? Can we replace a motor with a solenoid? Can we replace an expensive motor with a cheaper motor (by changing the linkage and reducing the motor load)
We quickly find ourselves painted into a corner where we can't add any additional parts or complexity without limiting out our BOM cost
Our product likely won't be placed in the $29.99 shelf if we can't hit this price so we end up making concessions.
We remove a motor and limit motion in one direction.
Or we reduce the number of components in the body by combining parts and reducing labor.
Most of these decisions are based on manufacturing models and assumptions.
The reasoning is sound, but sometimes the tradeoffs limit the functionality of the design.
Let's say you're making backpacks and you have to use lower cost fabric to meet the price point.
You might sell more units at the lower cost, but is it worth it?
The quality control and cost of returns/warranty claims will offset that cost reduction. Might be better to define the quality of fabric and accept that you'll have a bit lower sales.
Who knows, the models could be wrong.
They were wrong for Five Guys.
Someone told the founder that he'd never sell burgers at 7X the cost of McDonalds.
Five Guys decides what level of quality ingredients will be included in the burgers, then sets the price. They want to keep the food cost under 30% of the sales price.
I'm always curious about drawing parallels to the product design process, I started thinking.
Instead of trying to cut cost out of my design, we just need to sell more value.
If we can increase the value to the end customer, we can increase functionality (and cost to user)
Here's a link to a HIBT episode about Five Guys, if you're interested:
Listen particularly to the two minute segment from 11:30 - 14:30 where they talk about selecting all the components, and then setting the price.
Make it an excellent week!
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