R&D Q’s: How much should I spend on Design?


Last week I wrote about monetization strategies for product design. Today, we're going to talk about how much to budget for design work.

TLDR: As a starting point, I recommend budgeting ~10% of gross revenue. (But make sure you *have* a development budget, or this could runaway)How to estimate a budget for a new product? ​ Let's say we have a product/toy that will sell for $50 MSRP* (*Manufacturer Suggested Retail Price)

Imagine an initial production order of 24,000 pieces FYI: There are 10,000 Walmarts and 2,000 Targets worldwide, so a 24k piece order is a small order.

The total revenue from the 24,000 piece order would be $1.2M

Retailers typically have a 5% markup, so they would buy from Distributors for $1.1M Distributors take a 30% cut, so they buy the product in bulk from OEM for $750k OEM needs to make a profit, say 20%, so they sell it to Distributors for $600k This sets the manufacturing budget for the product, at $600k, or 50% of the top-line revenue..

There are many one-time costs that occur as part of manufacturing, including design and tooling.

The cost to produce the 24,000 pieces should be around ~$300,000 This gives a per-part target cost of $12.50. This leaves $300k for design, tooling, etc (assuming a one-time amortization schedule)

How much should I spend on Design? ​ I would budget $120k for production design, or 10% of the wholesale revenue. Less for early concept development.

Here's a few examples of project cost targets:

Consumer Electronics/Toys R&D Phase Cost (Expected Design Cost)

  • Feasibility - $100-500

(design: $10-50, hack-n-smash design solution)

  • Functional/Market Test - $1k-5k

(design: $100-500, freelancer)

  • Alpha Prototype - $10k-50k

(design: $1,000-5,000, freelancer, agency)

  • Production Ready Design - $100k-500k

(design: $10,000-$50,000, agency)

  • Total Investment: ~$350k Revenue from sales: $3MM

Medical Device R&D Phase - Cost (Expected Design Cost)

  • Feasibility - $1-5k

(design: $100-500, freelancer)

  • Functional/Market Test - $10k-50k

(design: $1,000-5,000, freelancer, agency)

  • Alpha Prototype/Clinical Test - $100k-500k

(design: $10,000-50,000, freelancer, agency)

  • Production Ready Design - $1M-5M

(design: $100,000-$500,000, agency)

  • Total Investment: ~$6M Revenue from sales: $160MM


These examples don't take into account alternate monetization models, such as licensing. The models show investments increasing as the product becomes more production-ready.

Each round of development feeds the next round. We don’t typically go out and raise money for Production right away.

Have a great day!


Stick around, next, I’ll discuss how many prototypes we should build to validate an idea.


 

Signup here to get this newsletter in your inbox:


6 views0 comments

Recent Posts

See All