Can you make money with your new product or service idea? That is the big question. You need to determine this as quickly as possible. Without this knowledge you may be in for a very big mistake, especially if you are working on a hardware product. How do you go about figuring this out? How can you know what it costs if it has never been created before? Please read the transcript from the video below to get answers.
Mike Grabham here again. Talking about how to develop your new product or service. Today we’re going to talk about, how your business works and how you make money as a business. So the first thing you need to understand is how much people are willing to pay for your product. Whether it’s a product or service, so you need to figure that out really early on.
Okay I have a product, I have a service. What are people willing to pay for it? If you don’t have any competitors, you don’t have any knowledge, this is a brand new product. Then you have to go out and figure that out. So the way you figure that out is, and I’ve talked about briefly in other videos is, you’ve got to go talk to people. And they have to be strangers. Not your friends and relatives. Go talk to 50, 75, 100 strangers, about your product. And see what they’re going to be willing to pay for it. What are they going to pay for it? Whether it is a product or service, or a piece of hardware, whatever it is, what are they willing to pay for that product.
And if you talk to 100 people on the street, I will guarantee you, you will start to learn what people are willing to pay, and what they’re not willing to pay. So that is how you figure out your pricing for something that’s never been built before. Obviously if you have competitors that are doing different things, then you can use theirs as somewhat of a guideline. So that’s how you figure your pricing out. It’s not necessarily hard, but it does take some time. And you do have to make a lot of effort to make sure you can figure out your pricing.
The second thing about that pricing is, how many people are willing to pay? So let’s just say everybody you talk to says, “I’m willing to pay something for it”. Well that’s great, that’s a great product. But if you don’t have a lot of people willing to pay for it, it’s probably not one of those businesses what they call scalable. Venture capitalists, and investors talk about is it scalable? It’s okay to have a business, that’s not necessarily going to sell millions of product. You can still make a great living selling hundreds of thousands of products. So don’t be too concerned about that mentality. But you have to understand that in your business model and to yourself, what that looks like. So you can be clear on that to plan in the future.
And secondly is how much does your product cost to make? Super important to understand that. Here we go. If it’s a hardware product, fairly simple, you have building of materials, a BOM cost. That’s fairly straight forward. Certain materials cost X, engineering costs X, testing costs Y and shipping. So it’s fairly straight forward what a hardware product costs. You’ve got prototypes, you’ve got molding, and all those things you have to build. But it is pretty straight forward.
So that is a fairly simple, hardware costs. Now if it’s a software, or a service. Software as you know, the up front costs can be fairly high, but once it’s built you can load lots of customers on top of that. Hence why investors and many entrepreneurs like the software business. Because you can build it once and add millions of customers. So that cost is low, sometimes 10%, maybe 5%, sometimes 2%. Just depends on the number of widgets you’re selling.
And then of course services, a little harder to understand. Because you may have people doing a service. That’s again, a little harder. But you can figure that out by just watching people do things, and understanding how long they take to do a certain task. So if they’re cleaning houses, how long does it take to clean a house? And you can start to understand that’s what it’s going to cost. Because you have to pay an employee to clean that house. So you can scale that out and pretty simply understand that. So those costs are super important as you would guess to understand.
But also understand not just the product cost for your business model. It’s also a marketing cost, and operational cost. Marketing cost is what many people maybe just don’t understand, or maybe don’t put enough money into marketing. For hardware, there’s a general rule. And again this is a very general rule. It’s a third, and a third, and a third. If you could build it for a third, and market it for a third, then you’ve probably got enough profit in the operating money in the other third to make it a real business.
With software, as I said, your operating cost is pretty low. So you have a lot of margin in there, so maybe you can spend a little more than a third for your marketing although, when you get to 30% 40% of your marketing costs to spend on that software product, you’re probably not doing it right. There’s probably some marketing issues you’re having.
And then services again, fairly similar to the hardware, a third and a third, and a third. Again these are very general rules, they’re not stuck in concrete. But it does give you a good idea, if you’re spending 50% on your marketing, to get customers you’re probably spending too much on almost any type of business.
Again you’ve got to understand all of that. And operational of course, is operations of you as an employee, your employees, your rent, etc, insurance, etc.
Understand all those costs between, and that’s how you build that business model. So you can understand, can I make a business that makes money out of this concept? Out of this idea? Out of this new product or service? That’s really the basics of that.
Until next time. Thanks a lot for watching. Feel free to share this on Instagram or on Facebook or on LinkedIn, where ever you may share that. I appreciate it. And subscribe to my new YouTube channel. We’re trying to build great products for people and trying to save them time. Trying to save them money. Trying to save them aggravation of creating new products. So thanks a lot, until next time, have an amazing day.