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Re: Looper development and production costs?

that's a good start Doug. you are starting to get the idea, but I think 
your numbers are still on the optimistic side.

I suggest the following adjustments to your assumptions:
- in low volume electronics production, everything costs much more. Parts, 
fabrication, packaging, whatever. Anything you think you know about costs 
from looking at prices of consumer electronics products or PCs is way off 
from reality for electronic musical instruments. Your $150 COGS will be a 
bit too low for what I would expect a next-gen looper to cost to 
manufacture, based on what sort of processing, display, audio components, 
controls, memory, i/o, etc it would have to have. I would guess it between 
$200-$300 if we don't get too fancy.

- In the niches of the musical instrument industry, I would consider 
selling 1000 units in a year to be quite a big success for mid-range rack 
mount stuff. Most things probably won't sell that well. Sustaining that 
several years is not likely. Your 2000 unit/year number would be a smash 
hit, probably beyond the realistic size of the looper market at this time. 
Maybe it will grow that big, but it is not there now.

- sales on esoteric new products can be weird. Musicians are very 
conservative in general, and don't really go for new things. So if you 
introduce a new kind of product you might see good sales at first as all 
the really experimental types get it to try, then a big fall off while 
others wait to see what they think. if it is good sales will grow slowly 
the advance users figure it out and start incorporating it in music that 
others begin to hear. That vast majority won't even think about it at all 
until they see their favorite musician icon using it in a hit song they 
like. That can take years. So after all your R&D expense, you have to be 
ready to ride this out.

- $2M R&D is probably a comfortable number for a normal industry, although 
in the MI industry people usually cut a lot of corners to do things for 
less because they can't afford it. (with the associated risks of taking 
shortcuts coming into play later, usually). You might be able to do this 
for $1M, although most of that would go into salaries for engineers and 
other key people. Add in marketing related R&D, prototyping, lab 
travel, computers, development tools and such things and maybe we call it 
$1.5M. So depending on how complete of a job we do, it may range between 
$1-2M. Basically, you have to realize that a looper is a complicated 
electronic system. Much more so than your average effects processor. It 
takes a lot of difficult engineering, and it's the same cost to develop 
whether you are going to sell 500 or 500,000. In small volume products, a 
lot more of those development costs show up in the price you pay.

So play with those numbers. What kind of prices are realistic for a small 
company trying to make a "modern" looper and remain in business? (by any 
standard measure of corporate size, even Gibson is a small company. In 
fact, the entire musical instrument industry combined is smaller than many 
mid-sized corporations.) How frequently will such a company be able to 
afford to design a new version of it? Every year? two years? 5 years? 
longer? How long does their product have to be able to last in the market? 
Is it possible that line6 is right, in saying it isn't worth it to pay the 
cost of a programmer to add more looper functions to their delay? How big 
of a risk do you think Electrix is taking by betting it all on the 
Repeater, and what is their business prognosis given their pricing?

This is not an easy business. Look at Alesis. A few years ago, they had 
of the hugest hit products ever with the ADAT. Now they are bankrupt! 
are a lot of those stories.


At 08:44 AM 10/10/2001, Doug Cox wrote:
>Since I don't have experience in the audio hardware development field, I
>have to make some broad assumptions.  I'm sure Kim will let me know where
>I'm wrong.
>If $2 million was spent on R&D, including the labor and materials for
>development, testing, market analysis, etc... everything that R&D implies,
>these $s can be put on the balance sheet and amortized over 5-7 years.
>Let's use 5 years for conservatism.  That's $400k per year of amortized
>(non-cash) expense.
>Let's say that following the R&D effort, the organization had an ongoing
>overhead cost of $1M per year.  That's just for executives, 
>haircuts, etc.
>Let's say that the ongoing cost of production is $150 per unit.  That
>includes materials, labor, equipment depreciation, any licensing costs, 
>"Cost of goods sold", as the beanheads call it.  Let's also say that this
>$150 per unit figure assumes that 2000 units are produced and sold every
>$400,000 R&D Amort.
>$1,000,000 Overhead
>= $1.4M general expenses annually
>divded by 2000 units
>= $700 per unit of overhead costs
>+ $150 per unit mfg costs
>= $850 per unit total costs
>If the company wants to earn a 15% return, they'd need to charge $1,000 
>All of this ignores transportation costs, which seems to be an important
>issue in the current EDP scenario.  Although I lumped a lot of things into
>those 2 general expense categories, I may have left out other important
>costs too...
>Is this even close?  How do other complex pieces of audio hardware get
>developed and sold for less?  Obviously, if the same company can spread 
>$1m per year of overhead across multiple product lines, each one gets
>cheaper.  Same is true for some of the manufacturing costs...  Finally,
>economies of scale kick in for wildly popular products - if I can make and
>sell much more than 2000 per year, my costs per unit will drop 
>Hey, you asked... and I assumed you were at least 50% serious.  At least
>Kim, Andy, Matthias, et. al. could use this as a starting discussion 
>and help us understand the costs involved.  Or not :)

Kim Flint                     | Looper's Delight
kflint@loopers-delight.com    | http://www.loopers-delight.com