Product Development Costs
Hi Everyone,
I recently took a job with a company that had a full R&D department but currently the food technologist position is open. So we aren't developing anything at the moment. We make seasoning blends primarily for the meat industry. I was wondering does anyone know what the going rates are for product development fees? I found it crazy that my company is not charging customers anything for developing custom blends. It seems that the customers get their blend developed and then some of them only order it once per year but it may have taken months of work to get it right. And if they end of not ordering then we just lost a customer and again aren't getting anything for the time we spent. I want to propose that we start some kind of fee to ensure we are getting some compensation whether the blend reaches commercialization or not but I'm having trouble finding anything. Any help is appreciated!
Unfortunately, I don't because my experiences in the food industry suffered from the same situation.
Have you ever put together a cost analysis for labor and resources on a typical development project? I'm not certain if you are a manager, but if you are, then you are probably privy to the R&D employee salaries, and should be able to make some labor estimates and expense estimates as well.
Product development costs are all over the board, but normally based on labor time, supplies used, testing (if lab involved) needed, etc. Many companies that develop on a no fee basis keep the "recipe" and have options to sell that "recipe" to others under varying circumstances.
It is most certainly not an anomily that a company does not charge a customer for the development process straight up, some companies (and you may or may not be aware if your company does this) build these costs into what the customer pays.
It depends on so many factors - it is impossible to pinpoint exact costs, for example we have a client that routinely uses an independent product development company and pays on average about $50,000 per consult, the recipe is signed over to our client.
I think you'll find that it varies enormously.
Once upon a time we were a small company and took on pretty much any development that came our way. Some of these went on to sell good volumes for years, others led to one production batch and then the customer (often a new startup who couldn't get assistance from someone larger) folded or vanished. This approach is a bit like rolling a dice - sometimes you'll get lucky, other times you won't. Really the only way to assess it is: is the overall activity/income that it generates covering the costs to your business and generating a profit?
One potential advantage is that you can get lucky and back someone small who wouldn't be picked up by a larger business, and then have their loyal custom if they are the right product / right time and it takes off significantly. I'd genuinely attribute some of my employer's growth in the early years to getting lucky with a couple of these, but it is of course a total gamble and may get you nowhere. As commercial justification for an approach it's probably a bit tenuous - certainly if I was a shareholder/investor then it wouldn't fill me with confidence ;)
As the business became larger we moved on to charging for some development - larger accounts still got free development work, but smaller customers had to pay a "day rate" (which covered our costs and generated a modest profit), with extra fees if they also wanted to have e.g. taste panel sessions hosted in our NPD facilities etc. Want to mess about tweaking your recipe endlessly? It's no problem as we will keep charging you for doing so. Only actually buy a small amount of the final product? Again not an issue as we've made some income from the development process itself (as long as it isn't taking up time that could be used more profitably elsewhere).
This approach can strike a pretty good balance - as long as the fees aren't exorbitant then you'll still pick up smaller new clients that can grow into something bigger, your own costs are covered either way, and you can still provide the "free" service where you have a reasonable degree of confidence that it's going somewhere.
Nowadays we're part of a much larger organisation and don't charge, but instead simply say no unless you're on a list of prequalified clients we think are worth our time - usually based on turnover with us, or potential turnover given the scale of their established business in other sectors of the industry.
This obviously means that we're generally only using our time for something that has a better probability of success, with a client who'll be spending enough for it to not matter that only e.g. 30% of their projects actually progress to launch.
But I think you've got to be in a fairly confident financial position to use this approach, as it is effectively turning an amount of business away. It possibly also risks alienating clients for whom you'd previously have done work but now won't - overall it has a bit of an arrogant corporate vibe to it, but there is perhaps a place for that in parts of the industry, as some clients expect that almost as a sign of credibility. If your customers are large multinationals then this approach will probably be the one to favour, but otherwise it wouldn't be my personal preference.
If your business is neither tiny nor enormous then I think the middle option strikes a reasonable balance, and indeed in the UK at least I've noticed quite an increase in the number of independent product development consultants doing paid-for NPD for startups and small to medium sized brands, so whilst some of your colleagues may feel awkward about charging for the service, there is an increasing likelihood that your customer would have to pay for it if they went elsewhere anyway.
QAGB and Glenn have both made very good points - obviously you'll need to do the analysis to work out what it actually costs you at present, and how much it makes for you. Defining who actually owns the recipe is also relevant, as that can have value in its own right. Again you can make more of your costs back via this route, as if a client wants exclusivity then that has a cost to your business (in the value of sales you can't get from using the recipe elsewhere) so it is entirely reasonable to look to recoup that either via development costs, a licensing arrangement, or as an extra cost calculated into the sell price of the product.
Thank you both! I have always worked for co-packers in the past so customers always brought us final formulas. We stayed out of the development world. I am looking at things internally from a labor and cost point but just wanted to see what the rest of the world was doing. My company has a "we have done it this way for 30 years" mentality so I like to try and reach outside to show what others are doing. And I was trying to figure out what factors to consider. As always thanks for the advice!
Thank you both! I have always worked for co-packers in the past so customers always brought us final formulas. We stayed out of the development world. I am looking at things internally from a labor and cost point but just wanted to see what the rest of the world was doing. My company has a "we have done it this way for 30 years" mentality so I like to try and reach outside to show what others are doing. And I was trying to figure out what factors to consider. As always thanks for the advice!
Yep - know this mentality well.
Product development as pHruit mentioned is often largely based on company size, and also complexity. As SQFConsultant mentioned, some companies build in development costs in customer fees as well. It just depends on your business type and policies. If you're considering a small project, and well within your wheelhouse, I wouldn't necessarily think this would incur a charge. If it is a large project, but within your wheelhouse, you might charge depending upon the account (volume, loyalty, and complexities considered). If it is a project that is not currently within your scope and requires tons of R&D, this would be the kind of project where costs should really be associated. However, we all know the customers that want to change their blends every 5 minutes, so those should be taken into account as well. Customers don't always realize that what they think is a small "tweak" causes lots of change management discussions.