A client has a small electric motor that would fail after using it for 3-4 years. They asked us to supply them with an alternative for the market. The trading price of the motor was £68-£72, and the retail price was £98. To determine the profitability of the product, we examined it and came up with the following three questions:

1. What sale price are we targeting?
2. What is the market’s size, and is there a demand for the product?
3. How much should it cost us to produce the product?

Notice that I asked about the sale price we’re targeting before inquiring about production costs. It would be more logical to ask about production costs first and then use that information to determine the sale price. Usually, that is the recommended way of doing it, but I employ a customer-centric strategy. I think in terms of how cheaper I can make it for the client or how much money I can save them. The production side of things is where the smart money would come from.

At its lowest price, the motor was selling at £68. A company in Spain produced the product, and another one in Brazil manufactured it. I needed to figure out the price the market would be happy to pay to:

1. Give the product a try
2. Make a substantial order
3. Potentially ignore minor variation

I discovered a sufficient price reduction that would satisfy customers is in the range of 25 per cent and 50 per cent. Of course, these figures factor in the production costs as well. When customers receive a quote, seeing their savings in pound amounts instead of percentages is more palatable. For instance, telling them that they’re going to save £25 sounds much better than 15 per cent. That way, the customer can understand their profits in natural language and terms.

When the consumer puts up the item for sale or uses it themselves, it will become more apparent that they have profited or saved £25. I believe only accountants should deal in percentages.

With this in mind, the best price for marketing the small electric motor would be between £35 and £47. Here, the customer’s per-unit savings are between £21 and £33, allowing them to reduce their costs by £2500 whenever they order a hundred units. Finalization of the price typically happens when the products are delivered, and market demand is analyzed in real-time.

I projected that the first order would be around 500-1000 based on market research that allowed me to estimate how many companies would be potential customers. I had to ensure relatively high-profit margins, considering the number of units will be on the low side. The gross revenue would be somewhere between £500 and £2000 If I added £1-£2 to each unit. This work is enough to compensate for the work put in, the effort put into sales, and the amount of risk taken.

A manufacturer, whom I’ve made orders from before, sent us a quote of $16 per unit. It wasn’t a bad start. However, a contact of mine, who produced plastics, introduced me to a different manufacturer. They sent me a quote for $6.50 per unit, but I had to order 1,000 units at the minimum.

We got a sample from the manufacturer for approval eight weeks after we sent the specifications, tools were made, and testing was complete. Another eight weeks went by, and the motor finally got delivered. We were so happy because the motor was high-quality. The quality convinced us to put the market price at £45. At this price, it meant that our gross profit would be £45,000 per 1000 units after deducting the freight and tax costs.

At face value, these types of margins might seem unbelievable. However, over the three decades (I’ve done this process hundreds of times), I’ve experienced these results many times. You might be wondering about the reasoning behind the high price, but the answer is simple: the supply chain. There are many links in my system, and I use them regularly. These include factories, shipping companies, warehouses, distributors, wholesalers, supply stores, sales agents, and (occasional) retails.

When the product reaches any of these links, they add their costs on top of it. Their addition increases each unit’s price by 25 per cent and 50 per cent. So, by the time the product reaches the consumer from the manufacturer, the costs go up 5-7 times.

That was just an example, but it demonstrates how companies can save significantly and increase their profit margins if their products went from the manufacturer and directly into the consumer’s hands.