DIY and the Costs of Doing Business

When you are able to build something yourself, then the cost of buying the same item in a store or directly from its manufacturer may seem excessively high. Some people see it as a rip-off or an indication of unreasonably high profits. While this is obviously true for some items of audiophile obsession, like cables, interconnects, power cords or spikes, etc., this is generally not the case for electronics or loudspeakers. For a manufacturer to stay in business he must generate enough income to pay for manufacturing expenses, overhead and marketing. And he must generate a profit to be able to invest in new product development and to grow the market. To get into business usually has an entry cost in the form of renting a building, buying equipment, material inventory and promotion. It normally takes time to recover the costs of entry until the business breaks even. Profits and break-even will only happen if the business is able to generate a net positive cash flow from the items sold.

When you DIY an item, then most people only consider the cost of construction plans and material. The hours for assembly and test do not count. You carry the risk that your assembly may not work properly, but there is free help on the internet to get things fixed. Thus DIY can be a time to learn new skills and lead to greater things. But please do not take your DIY experience as a measure for what the manufactured item ought to sell for. You are missing far too many cost factors.

When you enthusiastically show off your DIY product to friends and acquaintances, who may not have the time or skills to build their own, then point out the performance of this product and the lasting enjoyment and satisfaction it could provide, if they were to purchase the finished product. What else even competes?   

Let's look, for example, at the DIY cost C_diy of assembling the ORION ASP crossover/equalizer. C_diy is the sum of several contributing cost factors:

C_diy = a₁ x (PD) + a₂ x (DM) + a₃ x (DL) + a₄ x (OH)             [1]

1 - The cost of the product documentation PD for the ORION is $350 including shipping in the US. Since the documentation also covers the cabinet construction let's allocate only a₁ = 0.5 to the ASP.

2 - The cost of direct material DM equals approximately $770* including shipping and some extra capacitors for sorting. Since you do not pay yourself for ordering, incoming inspection and test of parts or inventory keeping, the factor a₂ becomes one. a₂ = 1.

3 - Your cost of direct labor DL  presumably equals zero, since you do not pay yourself nor have anything to do except for assembling the ASP, there is no 'lost opportunity' costs. Estimate at least 10 hours** of your time for assembly and test, more if you make mistakes, have to learn to solder reliably, how to drill mounting holes into sheet metal, how to operate audio test equipment and take valid measurements.

4 - Then there are overhead costs, OH. You may need to buy a soldering station or DVM, maybe even a capacitance meter because you cannot find capacitors of the specified tolerance. But, you can assemble the ASP on the kitchen table and do not pay extra rent. Let's allocate only $100 to OH.

With these numbers the cost of the DIY ASP becomes:

C_diy = 0.5 x ($350) + 1.0 x ($770) + a₃ x ($0) + 1.0 x ($100)  =  $1045           [2]

You may see a business opportunity here for an income stream of $40/hour before taxes, building 25 of them in a year on the kitchen table and using the tools you now own. You save, e.g. 10%, on DM since you buy in larger quantity. The cost of the ASP to a potential buyer would then be:

C_customer = (0.5/25) x ($350) + 0.9 x ($770) + 1.0 x ($40/hr x 10hr) + (1.0/25) x ($100)  =  $1104           [3]

Your upfront expenses would have been:

Expenses = 0.5 x ($350) + 25 x 0.9 x ($770) + a₃ x ($0) + 1.0 x ($100)  =  $17,600           [4]

And your income:

Income = 25 x C_customer - Exp = $27,600 - $17,600 = $10,000 = 25 x ($40/hr x 10hr)          [5]

That is your income after you have sold all 25 ASP and recovered $17,600 in expenses, i.e. $17,600 in negative cash flow. 
The assets that you needed to generate the income were your skill set, $175 for product documentation, $100 for tools and the kitchen table, which was paid for and written off. For most businesses you need to rent or own floor space for assembly and test, and to keep finished goods and packing material inventory. This and other expenses will add significantly to the cost of doing business and to the price of the product.

In the past the ASP has been assembled and tested based on a part-time job operation as just described. Overhead was minimal and not accounted for, nor marketing expenses. This works for a hobby as long as there is another income stream. When the ASP is part of a commercial product that is meant to reach beyond the DIY community, then the costs of doing such business must also be properly allocated to the price of the ASP.  

Today with the demise of brick-and-mortar audio stores, where customers could hear a loudspeaker before buying it, selling speakers has become very difficult. Lately the number of Hi-Fi Shows has been snowballing. The shows present opportunities to see and listen to a wide variety of products and can be overwhelming compared to the audio store of old, where its owner had already made selections for different budgets. It is costly in time, travel and shipments to exhibit at a show. Only the hope that one of the popular audio magazines will favorably report on your product on paper can justify the expenses. But that can also be a bit like playing 'Russian roulette'. Visitors to the show are usually readers of the magazines in which the show organizers advertise. The general public is mostly unaware that a show is happening, because of inadequate regional publicity. So newcomers to audio are missing at the event, never knowing that there is so much more to reproduced sound than what they hear from their ear buds. Then there is the lack of show follow-up, where one could read what happened on the show's website or find links to what visitors and reporters found worthwhile. 

ORION and PLUTO loudspeaker owners represent a significant world-wide base of satisfied and loyal customers of Linkwitz Lab and Wood Artistry. Hopefully their words and enthusiasm will reach audiophiles, who have not yet heard about the loudspeakers. Wood Artistry is ready to sell beautifully crafted products, but an effective marketing strategy still has to be found. Marketing is a major cost factor. Early adopters can only do so much in promoting the product, yet their support is essential. 

PS:
Google 'cost of doing business' if you want to find out more about this subject.

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* The estimated direct material cost DM for two PLUTO-2.1 equalizer/crossover/amplifier modules is $550.
** The estimated assembly and test time DL for two PLUTO-2.1 modules is 12 hours.

DIY construction of the PLUTO-2.1 eq/xo/amp module using the new pcb and readily available components (October 2011).