Cost estimation
Production strategy
To start out, we will only produce modules that have been ordered by a client. This increases the time between the order and installation, but it guarantees that we only produce what we need and don’t need to store excess modules at the start. If a client cancels their subscription, the modules they rented will be returned and stored, this stockpile will be used to fulfill (part of) the next order. Eventually, this will stabilize to a point where we predominantly use modules that we already had in stock to fulfill an order.
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Since the modules have a long lifespan and generate continuous income from being rented out, the cost of production can be spread out over many installments, resulting in a relatively low cost per month. Depending on how quickly we want a return of investment, we estimate the price per module per month will range from €25 to €60, including overhead. This is based on an upper production cost limit of €1000 per module.
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The main risk with this strategy is that the product needs to be rented out for a minimum number of years to completely return the investment. This risk can be mitigated by incentivising clients to commit to a longer subscription period by, for instance, reducing the price of the service for longer plans.
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If the market demand for the product increases drastically, it can become viable to switch to mass production.
Production cost estimation
The cost of producing the modules is heavily reliant on the production process. We have looked at two production processes: injection moulding and machining.
Injection moulding:
The main cost of injection moulding is the mould. The price of a mould can vary between thousands to over a million euros depending on the characteristics of the mould. Based on the number, complexity and size of the moulds we would need, we very roughly estimated that it would cost €200.000 to create the moulds. This would be the initial investment, so this cost can be divided by the number of products that we create to get an estimate of the production cost per product
Machining
For machining, the bulk of the costs come from renting the machines and labour. To get an estimate of the production cost per product, we took the operating costs of a CNC milling machine, €40/hour, and the average wage of a CNC operator in the US, $18/hour, and estimated that each product should be manufactured in 10 hours, this gives a cost of €580 per product.
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Both of these estimations are extremely rough, they do not take into account material, logistics and many other aspects that will increase the price, but they do give an indication of what ballpark we are playing in.
Next, we looked into what each module may cost. The modules will be part of a subscription, so the production cost can be divided over a number of installments. For this, we assume that the monthly cost of the PSS is directly and linearly tied to the number of modules rented. Additionally, only part of the monthly price can be used to return the production cost, as the rest of the startup also has to be paid for. For the sake of this estimation, only 1/2.6th of the price will be used to compensate for the production cost.
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Below is the cost per month per module for a Return of Investment in 1, 5, and 10 years for three different production costs.
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Based on the previous estimations for production costs, we do not think it’s feasible to produce the product for €500. Based on this, we decided that we want a RoI of 5 to 10 years, which would put the monthly cost per product to somewhere in the range of €21 to €43, and the upper production cost limit to €1000.
To produce the modules for €1000 with injection moulding, we would need to make at least 200 modules. While it is possible that we will have that many modules in use at some point, it is far from guaranteed. Thus, we decided to produce the modules by machining, since it has a lower initial investment, and consequently less risk. €1000 is almost double of the estimated cost, which should be enough to compensate for the costs that were not taken into account in the initial estimation.
References:
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Prototechasia. (z.d.) How much does cnc machining cost
https://prototechasia.com/en/how-much-does-cnc-machining-cost
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Ziprecruiter. (z.d.) CNV milling machine operator salary
https://www.ziprecruiter.com/Salaries/CNC-Milling-Machine-Operator-Salary