In my last post, I described why Kickstarter hardware projects can require fairly high funding goals, and yet they do not make the founder rich. What they do is get his design to market and the company started, barely.
In this post I am looking at the scenario of analyzing a much more modest hardware project (low priced backing levels, low funding goal) that is often seen on Kickstarter.
Digispark is the kind of project I am talking about. It is a cool little board that uses the Arduino IDE for programming, and only costs $12 in single quantities, less in multiples. It offers Makers a unique form factor at an attractive price. It is illustrative of the ability of small projects to really take off and get a huge backing. The originator of the project, Erik, is from Portland but I don’t know him and we haven’t talked. I want to be clear, my analysis below is not intended to be an accurate analysis of Digispark. That project is just the framework of what I’m using to hang my example on.
I’m hoping that at people considering a Kickstarter will see this and do the necessary what-if analysis and plan their project such that they can be successful if they barely make their goal, and also if they are fortunate enough to be one of the projects that achieves a huge success.
Minimum funding scenario
So lets say you have already got your hardware prototype designed and at least mostly debugged. You just need to get enough orders through Kickstarter to buy parts at a good volume to get the price down for an initial build which you plan to do yourself using equipment you already have. You look at the price breaks for parts and decide that if you build 500 units, you could get good prices. You carefully calculate that the parts plus the PCBs will cost $4 per unit. 3X parts cost for a price is a rule of thumb you’ve heard, so you set the minimum pledge at $12, but figure the average backer will get the two unit reward for $20. 500 units x $10 each = $5000 minimum goal.
But lets double check the numbers for this minimal funding situation, based on my calculations in KF 101:
2% non funded, 10% to Kickstarter and Amazon. So if the project funds at the minimum level, a few weeks after the project completes you would get a check for $4410.
You will need to build 490 units (because of the 2% that didn’t fund), plus you need to order some additional parts for test and assembly fallout. Let’s say you plan for about 25% assembly and test failures so you order PCB’s and parts for 600 units * $4 = $2400, plus $30 in shipping. Total cost of parts is $2430.
Building and testing over 500 units is going to be a chore! You decide you need a solder paste stencil, some assembly jigs, a test fixture, a better ring light, and more solder. You spend $400 for supplies.
You toil for a few weeks building and testing those units using your trusty hotplate and tweezers. Your back hurts and your eyes are blurry.
Then its time to ship. You promised free shipping. USPS for a small package is just under $2, plus you need boxes and some packing material and labels. Creating 250 shipping labels justifies buying a $75 label printer. $3 *245 paid backers +$75 = $810 for shipping.
Net, $4410 – $2430 - $400 - $810 = $770 net for a couple months of work. There isn’t enough left to launch a business.
The lesson here is that the simple 3X rule of thumb isn’t a great way to set the price on small volume manufacturing of hardware products. Make sure you are covering all your costs, including parts, supplies, shipping, overhead, and a reasonable wage for yourself.
Viral success on Kickstarter
What happens if Adafruit tweets about your project, then Hackaday blogs it, and it even appears on engadget?
Well, then you might end up getting $270,000 pledged by 6000 backers. Let’s say the average backer choses a reward of 5 boards for $45, for an average pledge of $9 per board. You have 30,000 boards to build and ship to 6000 backers.
Over 50X funded! You are rich, right? Let’s re-check the numbers to see if it will add up.
Again Kickstarter/Amazon takes 10% off the top (I’m not going to worry about the 2% non-funding here, lets just say you got $275K pledged originally and $5K didn’t fund). You receive a check for $243K.
Over $200K is a lot of money, and the Kickstarter success shows enough demand for this to become a business. You pay a lawyer to form an LLC, an accountant to set up the books.
You rent a small office space to separate business from home and buy some office furniture.
You hire a part time bookkeeper to make sure the invoices are paid and everything else is accounted for.
The web page you built needs expansion, but you have bigger issues to worry about now, so you pay a developer to add forums and support for online sales, plus hosting costs for a bigger site with increased bandwidth.
These costs accumulate over the months while you struggle with getting parts, finding the right assembly contractor, and ramping up production to fulfill those 30,000 units you owe your Kickstarter backers.
The cost of parts falls to $2.50 per unit due to quantity discounts. That’s good!
For this many boards you are going to have to use a professional assembly contractor. They will get better yields on their automated machines than you and your hotplate, so you cut back to 10% extra parts. Anything left over will be inventory for post-Kickstarter sales anyway.
Oh wait, it turns out that it is hard to find any distributor that stocks 30,000 units of anything. After several weeks of phone calls and emails, expedited shipping, sometimes paying more than the quantity 10K prices, the average cost of your parts rises to $3.00 per unit. You learn about supply chain management and one of the reasons projects get delayed.
Assembly and Test
You physically can’t build over 30,000 units in a reasonable amount of time on your kitchen table. You could outsource to China to save some money on assembly, but that will cost you more time to set up and get working smoothly than working in the US with a company that is at least in your own time zone. An assembly house will charge you tooling and setup charges, plus a fee per board. Test tools and test time are extra. $5K in manufacturing tooling, setup costs, and test fixtures. $2 per board for assembly and $0.50 each to test your 30K+10% simple, low part count electronic devices with no cases.
The cost to ship 5 boards goes up to $4 for a custom printed box with some purchased ecologically friendly packing material. You wouldn’t want to pack and ship 6000 boxes from your house. You hire a fulfillment house to pack and ship your orders for $2 each.
$243K – $25K - $99K – $87.5K – $36K = -$5K
But that number is very sensitive to variations in costs. If you had saved $0.25 per board for parts+assembly+shipping, then your project would have at least broken even.
What looked like an unbelievably great success can turn into a very stressful exercise in negotiating for pennies to try to not loose money on the project.
You need to do your homework on costs and expenses to see what happens if the project just reaches the minimum funding goal, and just as important you should look at what you will do if it goes 10x or 50x above the funding goal.
Make sure your minimum goal is high enough that you can build and deliver the rewards to backers plus have enough left over to cover development and prototyping costs and any equipment and tooling you will need.
Then check how you would scale your project if it goes viral and you have to deliver a lot of rewards. Supply chain costs, outsourcing assembly and test, and fulfillment are not as cheap for large quantities as it can be for a DIY small build. Be careful how you set up the rewards to be sure the funding for the project will scale up enough for the added costs of higher levels of success.