Ingvar Kamprad, the founder of Ikea, famously said “An idea without a pricetag has no meaning”. He liked the phrase so much he had it painted on the walls of his stores. I must confess to being annoyed the first time I read this statement. It seemed a crass reduction of ideas to simple commerce. Even within the limited realm of product design it seemed to suck the magic out of the creative process.
As we get more and more mature with our Pathfinder product definition framework at StarFish I’m realizing that in fact Ingvar had a great point. He was speaking in a more limited context, yet was in effect saying that the price has to be baked into the product requirements early.
As we do our technical audits at the beginning of new projects you’d think that the problem areas we’d pick up on would be primarily in the technology or usability aspects of the devices we get to work on. In fact I’ve been surprised to learn that the single most common major issue we see is financial. More specifically, the margins will demonstrably not be sufficient to build a successful and valuable company.
For example, last year I spoke to two separate companies with disposables driven business models and discovered that in each case their raw cost of goods was about 50% of their target selling price. By my simplistic rule of thumb that’s about 3-4x too high. Perhaps they confused raw cost of goods with landed cost. Perhaps they underestimated the required gross margin in the medical device industry. In both cases they proceeded with significantly different products at different pricing than they had originally planned.
So when you’re building your next product requirements document please consider your friend Ingvar and make margins a critical element of the plan.