Tuesday, July 28, 2009

Update on the TripleWide Extender X and Open Source Pricing

One of the most fundamental rules of business I've ever heard is that products need to be priced independent of cost. This is also cited as the most common rookie mistake, the idea of costing out a product and slapping a fixed margin on top.

"You've gotta charge what the market will pay, otherwise, you're leaving money on the table!"
"If you just put a margin on top of cost, then the price wars will begin, and you're just going to keep discounting and discounting until there's no margin left"

The Open Source Hardware Bank has gone against that rule entirely. The price was deliberately assigned as a roughly 15% margin over cost, which was estimated and made apparent upfront. But then again, the goal wasn't to "maximize profits (and take over the world)". It was simply to make a piece of hardware accessible and feasible to build, and to offer a modest reward for everyone who helped make it possible. So it may violate the rules of conventional business, but this paradigm of "Open Source Pricing" works for the sake of turning an idea into reality.

Then what happens when the cost estimates were a little too high to start off? Business rules would say you keep the excess margin, but following the 15% over cost model, the price would be reduced accordingly. So as it turns out, building the TripleWide Extender X was much cheaper than expected (in part because of similarities in production to the DoubleWide, and taking the final assembly in-house to get them out faster). With an original anticipated cost of 31.53, the price was 36.26. And so the "Buy 1, Build 1" cost was 67.79, and folks who helped fund it would have received one TripleWide and a check for 36.26 in return.

As it turned out, the TripleWide X, Illuminato compatible (double rows of headers) cost 24.87 to build, keeping a constant 15% margin would result in a price of 29.26. The real question is then, what happens to the people who have funded one at 31.53, expecting their 15% return after it sold? Well, the difference in cost still goes back to them.

To recap, Buy 1, Build 1 was originally:

36.26 to buy 1
+ 31.53 to build 1

for a total of 67.79.

As it turned out, the cost was lower. So now:

29.26 to buy 1
+ 24.87 to build 1

for a total of 54.13.

Hence, everyone who bought 1, built 1 will get:

1 TripleWide X + 7 (the difference in final price that they overpaid)
+ 29.26 (the final price of the board sold) + 6.65 (the amount they overpaid in cost)

All told, they'll get a check for 42.91 rather than just 36.26, since the savings are passed along. The product was made possible for cheaper than expected, and everyone saves money. It's the business of Open Source Pricing :-)

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