marketing an open source version of an existing product

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stbtrax
 
Posts: 20
Joined: Mon May 03, 2010 8:40 pm

marketing an open source version of an existing product

Post by stbtrax »

I am debating starting to produce an open source version of an existing hobbyist product which I think is overpriced.
The current product is made by three main hobbyists, all are closed source and extremely expensive (500% parts cost). My version will not add fundamentally anything new except for being open source and low cost. I don't think this is ripping off/overly derivative since the product is just an implementation of an open protocol, but I will be using some of the main ICs they use.
Do you guys see any potential pitfalls in this? Also how can I market it to seem more like a beneficial competitor than some sort of cheap rip off? Maybe I am being too paranoid about marketing it at a much lower cost.
Thanks

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chatham
 
Posts: 144
Joined: Thu Feb 04, 2010 2:30 am

Re: marketing an open source version of an existing product

Post by chatham »

The two big things you need to ask yourself -

1. Do they have a patent? This is the big one, and if they do, there's not much you can do - if you make what they make, and they find out, they can legally mess your day up. It won't matter what ICs you use if they have a patent covering the device.

2. Do they have a big, loyal community? If so, you might still have trouble getting your foot in the door. Look at Arduino - there are places selling Arduino clones for 2/3 the price of an Arduino, but the Arduino team still is selling just fine. So depending on the user base, if the price so far hasn't really been an issue for them, then you might have trouble making sales, and probably won't be making any friends with the primary developers. Also, they might go and open source the whole shebang in response to your project, which might reduce the little bit of non-price based advantage you have.

Another thing to think about is if there is any real money to be made competing. I mean, you should basically be pricing at about 300% of parts anyways, and while that's a pretty big discount, does your parts cost also include labor/assembly? My experience so far is that there are a lot of tiny little costs that add up. And if they product is niche/low volume, you still might not make enough to "live the dream".

By all means, if there's no patent (easily searchable), I'd say go for it - just don't quit your day job. But if 3 dudes (or ladies) are able to support themselves on it, and they haven't patented their stuff, I'd be a bit surprised, but there would seem to be a decent market for it. Also, it's not clear - are there 3 different projects by 3 different people, or 3 people working on one project? If it's 3 different projects, there might be some hope, but the fact that they're all pricing around the same %500 multiple makes me wonder if there is some non-obvious cost that keeps them from price competing.

Any hints as to what project this is? Or at least how much they are selling it for?

stbtrax
 
Posts: 20
Joined: Mon May 03, 2010 8:40 pm

Re: marketing an open source version of an existing product

Post by stbtrax »

Alan, thank you for the insight. sorry for the slow response.

1. Don't believe anyone has a patent.
2. There is a quasi-community but it seems more of like a support community--people posting problems and getting set-up help.
But, the creators of the other products seem to be held in high regards. I will consider differentiating the product in more ways than just being open source.
Another problem the existing competitors have is that they seem to not have the product in stock, or have a simple webcart system. You have to contact them by email to purchase the product. I am thinking if I can keep a lot in stock(by outsourcing manufacturing) and setup a convenient webcart system this will let me get customers who aren't as patient.
The 300% does not include labor, I will reconsider with that added.
The three projects I think all started from the same project and the original creators kind of split off. I think the pricing is somewhat of a gentlemen's agreement among them. The newer products each price themselves about 5% lower than their predecessor.
Sorry I want to tell you what it is, but I really want to have stock available ready to ship before the competitors can react by open sourcing or dropping their price. I will definitely post an update though on how things go.

another concern I have is how many to make for an initial run. The parts are relatively expensive so I don't want to keep much excess stock ,then again I don't know how deterred customers are if the item wont ship soon.

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westfw
 
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Re: marketing an open source version of an existing product

Post by westfw »

Not to discourage you, but "500% of parts cost" is pretty typical for "niche electronics", and not really "extremely expensive."

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chuckm
 
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Re: marketing an open source version of an existing product

Post by chuckm »

stbtrax wrote:... and extremely expensive (500% parts cost). My version will not add fundamentally anything new except for being open source and low cost. I don't think this is ripping off/overly derivative since the product is just an implementation of an open protocol, but I will be using some of the main ICs they use.
Do you guys see any potential pitfalls in this? Also how can I market it to seem more like a beneficial competitor than some sort of cheap rip off? Maybe I am being too paranoid about marketing it at a much lower cost.
I see a huge pitfall in this, especially if a lot of people like and use this product, to you.

Lets say the widget they are selling for "5x components" is selling for $100, and you're going to make an open source version and sell it for $20. Now lets say you are successful and all the folks buying the expensive ones start buying your cheap ones.

Now lets say your email inbox starts filling up with email of the form "I built your version of the widget and it doesn't work, why not?" (trust me you will get a lot of these) Lets say it takes you 30 seconds to read the email, blast off a response that says "can you be more specific about what doesn't work?" Look at Volkemann and I were discussing issues with the Datalogger shield over in the shields section and put in a solid 2 - 3 hours pondering over different ways that the shield might be broken and how to deduce which it was. Multiply that by 100, or 200.

Here's the deal. You make one sale at $20 and you eek out some small profit. Perhaps you are totally naive and you actually make no profit at all. Now that "bomb" is sitting out in the world where the person who bought it has some reasonable expectation that you will answer questions about it, if not outright help support them, in making it work for their application. That person may have the education of a 6th grader (they might literally BE a 6th grader (12 yrs old for you international readers)) and you've just given them some notional promise of support.

Depending on your customer base, as little as 1% but as many as 30 - 40% of your customers will demand some use of your time. Lets say its 1/10 of your customers who send you an email asking a question, and you spend a median time of 10 minutes composing a response to those customers. (note that composing this note has taken slightly more than 10 minutes of my time). So lets say you make $1 "profit" on each widget you sell for $20. You sell 100 widgets, you make $100 "profit" and 10% of the customers need you to talk to them about it where you spend a median 10 minutes on each customer. So you spend 100 minutes composing / answering email. During those 100 minutes (10 customers * 10 minutes median each) you are selling no product, designing no product, and basically giving your time to your customers so if you take your profit, and divide by the time spent in "support" you take what you consider to be a "good wage" and subtract that from your profit. We'll assume you don't care about insurance or rent or all that stuff and this is like a job mowing lawns in the summer to you, perhaps you live with your parents, and so lets say on a good day you value your time at $20/hr. You've just burned 1/3 of your "profit" supporting the 10% of the customers who had questions. Now comes the scary part.

What ever this widget is, it probably has a lifetime measured in years rather than in days, and the chance that someone will call you or email you asking for support is actually a probability distribution over time. When you do the math the probability is that you will do at least one support request for every unit you sell. (sure some customers will never call but some will call back 2, 3 even 10 times). 100 customers, 10 minutes each, 1000 minutes of support time. $100 of "profit" paying for your time to support those customers its $100/1000 minutes or 10 cents a minute, so you're support "salary" is about 6$/hr.

What does that mean? It means that if you had stayed out of the market and instead worked for in-n-out burger (a fast food place I *love* btw) for the summer, you could have made more than your $100 in profit, not had an overhanging customer support burden (your reputation is intact) and had a bunch of free time during the year to make additional contributions to the open source / hardware community. ;-)

Bottom line here, is that you have to consider all of these costs when you sell a product and account for them, this is why something that "costs" only a few dollars to make is often sold in the retail market for much more than that, because the retailer has done the above calculation. Folks who don't believe in economics and price at what they think is "more fair" get very perplexed when their business is growing year over year and they are going broke faster and faster.

That being said, if you read my "how to make jumpers" post over in the Arduino section you will know that when something is priced more than I'm willing to pay I figure out how to make one myself. And if its simple I'll share that knowledge with others, and if someone just doesn't get it and emails me that they just can't make it work, then I refer to them to the commercial version.

--Chuck

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johngineer
 
Posts: 105
Joined: Fri Aug 14, 2009 6:05 pm

Re: marketing an open source version of an existing product

Post by johngineer »

westfw wrote:Not to discourage you, but "500% of parts cost" is pretty typical for "niche electronics", and not really "extremely expensive."
Agreed. 500% is not at all extreme for anything other than mass-marketed products. In fact, 5x cost as a final price point is a good rule of thumb for most things.

mikeselectricstuff
 
Posts: 164
Joined: Fri Jun 11, 2010 9:21 pm

Re: marketing an open source version of an existing product

Post by mikeselectricstuff »

I know it can be hard to figure out a price point, but I've always thought the 'cost x n' model is flawed, especially if taken too literally. If I spend time optimising something for minimum cost, that increases the time spent but reduces the profit.
Similarly if the price of a part suddenly rises, or the product uses a particularly expensive component, does that justify adding the multipled amount to the end-user cost?
These things should probably regarded more as very rough guidelines than hard rules, and of course volume makes a huge difference as there are always significant one-off costs.
The short answer is that there is no short answer....

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lyndon
 
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Re: marketing an open source version of an existing product

Post by lyndon »

The first place I worked at after college (a tiny, now long dead, electronics manufacturer) used 5x parts cost as a rule of thumb. That allowed us to buy inventory, pay for marketing (this was in the late 80's/early 90's when a 2 page B&W spread in Byte only cost $25,000/month), pay salaries, overhead, etc...

But that was only the starting point. We would then research the competition and see what the market would bear. Since our niche was selling simpler versions of expensive, complex hardware and holding stock of everything in an era where many boards were "build to order," we wanted to be able to sell for at least 40% below the market leaders. So we'd adjust up or down depending on market prices, cost of manufacture (some boards with really cheap parts are difficult to assemble), how quickly the product might sell (don't want to keep too much inventory around), and so on. In one case ISTR that the cost of printing the user manual had a significant bearing on the product price.

Bottom line is you really shouldn't price solely depending on what something costs you to build. Price on what the market will pay. You may think 500% markup is extremely expensive. I might find a corporate customer who would think 1000% markup is cheap if the product does exactly what they need and I provide superb support.

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