Your $200 iPod nano costs about $90 to make
posted Sep 23rd 2005 9:20AM
We've run these bits before where analysts step in and check out how much money they believe a device costs in parts (and manufacturing) to produce; this time it's iSuppli estimating the cost of goods in making a 2GB nano. And what figure did they happen come up with? $90.18. Yes, we know the retail on that thing is $200. Granted, they could be way off, but by their calculations you're paying a huge portion of that ninety bucks on the integrated circuits, screen, wheel, and flash memory. It's important to point out that iSuppli's figure does not include Apple's cost of business (marketing, operating their dozens of storefronts, employing tens of thousands globally, etc.), however, which they conservatively estimate as being anywhere from 15-20% of the unit's cost, a figure that just doesn't seem quite right to these ears. Then again, a 40% ($80) margin on the nano wouldn't exactly surprise us, either. Maybe we're in the wrong business after all.
It's not unusual to see a 3 to 5 times difference between cost of materials and suggested retail price for high volume electronics when the manufacturer is the market leader. Back in the days when Hayes owned the modem market, we kept a 5:1 component to SRP ratio and through distribution managed a margin of 70%.
You really can't put a number or a % on the cost of doing business. When they sell more units that number will go down.
Oh come on and my care cost 12000 $ to make and they sold it for 35 000 $ ... Since when does a product only cost what the material is worth ? Look
how small the ipod nano really is and tell me its not a great piece of engeneering.
I get kinda sick of things like this. People don't seam to realize that a company like Apple (or Intel with there $40/per chip manufacturing cost) spends a TON of money on R&D. Without this R&D great products like the Nano would never be built. There is a lot more cost to a product then it's build cost and the current generation of product must make enough profit to fund the next generation.
It's the cost of doing business that eats up that margin really quickly
How much does Apple pay for the packaging, shipping, storing and in store promotion and sales of the Nano? how much did that TV spot cost Apple in on-air time and how many print ads did Apple take out in National Magazines?
As for Research and development..heres the breakdown
-Memory (Apple didnt have to do anything, the flash memory was already available to retailers)
-On board OS (They already had this from the iPod photo)
-Thinner components (eg. bulk Not made by Apple)
Essentially their research would have just involved coming up with a smaller circuit board - they already knew there was a market for this, so go figure
its simple. R&D costs money. And apple has to turrn a profit after all, especially on the ipod line. Compare teh design of the pod to that of other offerings, and theer is really no comparison. Plus, add to it apple's marketing push, and theer u have it
The ipod nano isnt much costlier than its competitors either, yet i do not see them offering a 2 gb player at 90$....
You ARE in the right business. Don't ever change. No one could do what you do as good as you do it.
Now, I'm off to get an LG VX8100. I saw it here first.
Keep up the good work.
Lets not even bring up the sports apparel marketers like Nike with their 2 dollar a month sweat shop workers. ... this is NOT news ppl!!
I agree with the R&D comments, it's not cheap and you have to amortize that cost over the first x-number of units at as high a rate as the market will bear. As the technology ages, the prices will go down (see the full-sized iPod for example).
Apple isn't a charity, after all. A company will charge what the market will bear and deserves to profit from its innovations.
So how long until we have gadget printers, Apple cuts out most of the value chain and we can print iPod pico's for $9.99 each?
I say < 15 years.
Nokia+Apple gadget mash ups will be all the rage with the kids.
BP - you certainly can quantify the cost of doing business. In fact, you have to if you want to STAY in business. Some costs are fixed and some are variable - but it is pretty safe to say that a ceratin % was applied to the MSRP (balanced with sales projections) to cover those costs. Many of those costs are shared across the product lines (e.g. Nano sales do not pay for building AC while Powerbooks pay the gas bill).
Do you think you just tumbled the bingo hopper and pulled out a figure?
I'm not surprised by this estimate price, Apple's iPods do so well only because of their advertisements and little details that make the consumer ooh and ahh (aka: 'shinyness') - it's only natural to spend most of the money on those portions of the product - even if we can get a basic color player from another company with more storage for a lesser price....
But no disrespect to Apple of course
Yes, Tony is right. Click on my name to see my historical analysis of price over time for other iPod models. Market factors will drive the price down as the product life cycle matures.
news flash: your $500 copy of office 2003 consists of $2 in materials
Oz,
If it was that easy, why haven't other companies created something so small and functional? No, it might have only taken 9 months to design, but they poured into every detail you could imagine...
Hey, if Apple & the retailer get to divvy up the $110 or so. & the lion share going to Apple 'cause it's their idea & thier marketing & R&D costs, That seems reasonable to me. You wanna talk markup, hmmmmmmm How about Starbucks? gee I wonder how much margin is in that $3.25 cup of coffee? TALK ABOUT MARKUP !
#6, your comments are just plain wrong. The R&D to create a player with such small mechanical tolerances had to be very significant.
The components existed before, yes, but they had to scale them down and squeeze all of that into a nano, not an easy engineering task by any means.
R&D, marketing, engineering, and retail costs aside, lets imagine for a moment that Apple were actually profiting $80/200 per nano. Those of you who think that is unreasonable have never manufactured a product. I put products on the shelves of Lowe's, Home Depot, Walmart, Target, and hundreds of others for my daily living, and I can tell you that 40-50% of retail goes straight to the distributor every time. 20% goes to the name-brand manufacturer (e.g. Black & Decker, GE, etc), and the remaining 30% to the OEMs that actually make the parts. Think about that the next time you pay 19.99 for an electric screwdriver: the actual cost of manufacturing is less than $7, guaranteed.
Their estimate was for PARTS only, I didn't not include LABOR or anything else!
I don't think the point of the article was to say that having a big margin is wrong. The information is just surprising becausing initially some analysts were saying that the margin on the nano must be much smaller than the one Apple enjoyed with the mini - no we see that might not be the case.
Tsk, how dare Apple reap huge financial rewards for selling excellent products at a reasonable price. And Oz is so right; the nano was a piece of cake to engineer. In fact, Jonathan Ive slapped it together while drunk on the toilet in some dive bar in Tijuana. But dudes, seriously, the nano isn't even the biggest racket Apple's got going. You have any idea how much profit they make off of Mac OS X? I mean, those DVDs cost like five cents to put out!!!
Okay, I'm better now. Seriously, though; Apple, like any other company, has a responsibility to its employes and shareholders to stay as financially healthy as possible. They sell their devices at the highest price they think they can get people to pay, just like everyone else who sells products or services. It's just business after all!
These types of articles are just dopey. Who cares what they actually cost to manufacture. It's a free market - you don't like it, buy another music player - you have hundreds of choices - this is not a monopoly. People who point these things out must not have ever worked in any real business.
I think someone misread the linked article. I read it to say the cost in parts only was estimated at $90. The cost including manufacturing was estimated around $120. There was no estimate of the cost to develop, market, and get the thing into consumers' hands. So all of those costs are presumably coming out of the 40% "profit" margin.
I wonder why the early-adopter tax wasn't included in the figure?
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That $90 figure is way too high. The markup from direct material cost to retail is about 8-10X, meaning the direct material cost of a nano is about $20-25, dominated by the flash memory, display and battery. The battery is about $3, the display about $2, and most of the rest is memory.
The article says it costs $8 to build the unit which is BS. Direct labor in the far east for something like this would we well under $1/unit.
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Well.. good for apple... they deserve it... but its not like they just put their earnings in steve jobs pocket... it goes into r&d for the next product we are all gonna want ;)
Um, #25, I'm not sure who you work for or what you make, but I'd like to talk to your suppliers if you're used to getting prices like THAT. 8-10X is definitely true for soft goods and trinkets (little plastic toys, etc), but electronics are almost never that much. Even if they were, this particular product certainly isn't. At least that's not how it was when I designed laptops for HP, and that's not how it is when I design peripherals for Microsoft or power tools for Black & Decker...
No one ever said that Apple's margin on the Nano would be less than the Mini. If that had been the case, Apple wouldn't have made it at all. Samsung agreed to take the margin-hit when they said they'd match Seagate's price on 1-inch drives. Samsung makes very little money on the flash they sell to Apple for the Nano right now, but it got them into a product that's going to push up their manufacturing capacity and allow them to dirve down their per-unit costs. Samsung's still making money selling flash to everyone else, and Apple is still making the same margin as they were on the Mini.
How is this news? They need to make that much to cover all the marketing dollars and other costs for developing this product. The price will go down as competition rises. But as with most new products they have to recoup much of their costs up front.
Cost to produce has no relevance, it's all about what people are willing to pay. That thousands of people are getting what they want at what they're willing to pay means the market is working and there isn't a whole lot more to be said.
I hope Apple makes zillions off this thing, it's a great product.
Pleeeaaase everyone!!! Apple is making tons of money on their iPod business. Read their annual report. Much of the R&D has been learned from the first iPods. They have modified the player somewhat - it's thinner but much of the design is the same.
There is nothing wrong with a company making money. If they make a product and people are willing to pay for it - then great. I'd charge twice as much for it if that would bring more revenue and margin. Apple made a great product and people are willing to fork over $200. Maybe people would pay more but Apple wants to get this in as many hands as possible so that they can also make money off of the sale of the music on iTunes.
And for the record, products do not have to be great to make tons of money on them. People just need to feel that they are better off with the product than without it. After all iPods, Operating Systems (good and bad ones), computers, cars, etc. are not necessities in life. Why not charge a lot for them.
When I was in retail many years ago, it was a given that you sold stuff at 4 times the cost because on top of that you would have overhead, staff salaries, etc. If that's still the case, and why wouldn't it be, Apple is giving us a real bargain.
Most things you buy cost you at least twice as much as they cost to make. This is a business practice known as Keystoning. In fact many items cost four times as much for you to buy as they did to make because the manufacture will keystone its price to retails and they keystone their price to you.
That's really not that bad. I would have expected a much higher markup.
$200 is not that bad if it really cost $90 to make. The way I figure that is only a $20 profit. $90 to recover the cost for the intitial unit, another $90 to make the next unit and $20 to go to the movies and eat dinner with.
It's interesting to see that in the pursuit of making a large profit margin, Apple has decided to place a mark up on these units. All other costs of business aside, such as R&D, marketing, storefronts, etc would you consider that their analysts determined that there would be a high demand for these units and therefore produced a lot at a steady increase of costs per unit?
Thanks, Ken! I appreciate it!
Well, don't forget, when they slap on the apple emblem they inject at least $200 worth of 'Hip and Cool' into it. So you're getting at nearly a $300 value for only $200.
Why does Engadget post stupid stories like this? As an earlier poster said, with your hair-brained logic MS Office shouldn't cost much more than the $2 in materials.
FYI #19
Starbuck's spends more on employee health insurance than on raw materials for its coffee.
google: starbucks coffee health insurance
$90 mfg. cost suprises me. Rule of thumb is the retail price = 3x the cost (at a minumum.) Either Apple doesn't let distributers have much of the pie, or they are taking a very low margin in order to maintain market share until the cost per unit comes down.
overrated AND overpriced!
Can someone send me a link to buy all the parts. I'd like to build one for $90.
Overpriced, surely. Overrated, I don't think so. Sure there are alot of MP3 players out but just think back, It wasn't that long ago I (probably you as well) would carry book's of cd's and a (what seem's now like a monsterous) cd player in a bag or backpack. What would you have paid then to put it all in your tiny jean pocket? Overhyped, Oversold, Overpriced for sure. Overrated for what it does,no way. Also I've never owned a Mac (PC Guy) but, I do own a Nano and a shuffle for my girl.
Hey poster number 43. If you don't like iPods, don't buy it. I dislike the KIA and I don't bother.
So what if they make 40% (which they don't). Do you know what the markup is on clothes??? Try 200-400%+
Where's the R&D cost factor?????
stop whinning
That's not a very high profit margin. When I worked in retail, the store would markup a 300% profit. So even at big 1/2 off sales, they still profit.
I would point out the $90 cost of materials and manufacture, was an estimate, with a HUGE FUDGE FACTOR! They estimated the NAND memory at a below market price, based upon the rumor that Apple got a 40% discount. That's the biggest cost of the nano, the NAND memory. Until we get a definitive answer on the deal Apple struck with Samsung, take these estimates with a big grain of salt.
I would guess that the nano gives Apple a 20% gross margin, just like their other flash iPod, the Shuffle. Apple's total gross margin is around 28%. They release this information every earnings conference call with analysts. The analysts always ask if this percentage is going down next quarter, and if it looks like the margin may slip to 27%, they go apesh*t with their warnings to their investment bank clients. Seeing as I didn't see any warnings after Apple's last earnings conference call, one can only assume that Apple gave guidance to the analysts that margins were inline with expectations and that means, at least 20% on the iPods, and about a 28% average on all their products. Listen to their conference call if you want to learn about their gross margins.
It's hilarious to me that people are trying to make excuses for why their margin might be extremely high. Apple's model requires them to make extremely high margins(relative to others in the industry) on the products they sell, they don't outsell Dell in Computers, so they charge for name and quality, that is the only way they'll make back up the money to stay competitive(whether that is through design or whatnot). Either way it's just business, the Nano appears to be a nice product. They charge what the market will bare, as any responsible business does. 27/28% Profit Margin is high, that will pan out nicely if their revenues go up.
Well.. good for apple... they deserve it... but its not like they just put their earnings in steve jobs pocket... it goes into r&d for the next product we are all gonna want ;)
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Aha! smart enough to see that future products cost r&d money.. stupid enough to think current products needed no r&d spending.
Amazing!
Here's something else to keep in mind... WRT iPod/iTunes Apple makes the majority of it's money off the device and not the music (which is only a few cents per song). They also have a huge expenditure for marketing which they're obviously willing to spend for the halo effect. So they're just doing everything they can to maximize revenue. Following the typical product lifecycle you can expect prices will start to come down in order to capture additional marketshare as sales dwindle.
spammer: larkbark@hotmail.com
So, in comparison, how much is the manufacturer's cost of a seat for Windows XP?
The estimation of margin is way wrong.
Between 90$ and 200$ there is:
- Apple's cost of operation: R&D, marketing
- Apple's profit
- merchand's cost of operation
- merchand's profit
And I don't expect Amazon or Circuit City to pay more than $150 for a $200 iPod nano, leaving the Apple's profit to be around $30 = 15%.
Probably the profit is somewhere between 10% and 20%.
@SomeCat (45): overpriced? Go buy a flash-based DAP from Creative for $250. Let's see what they will sell you.
That's the street price of a Compact Flash of the same size, dude.
Lo importante es que la gente no est?ispuesta a pagar USD200 por el Nano. Las ventas no son lo que esperaban, entonces... ¿en qu?e equivocaron? Una receta b?ca del marketing es la siguiente "¿cu?o est?ispuesto a pagar el cliente por tal producto"? Y poco tiene que ver con lo que cuesta. El art?lo no aporta nada, es horrible.
There need be no correlation between the cost of producing something and it's market price. The estimate may also not be taking the cost of R&D and testing into account.
The bottom line is this. If a person feels that they value a Nano more than the $200 bucks in their pocket, they'll buy a Nano. If they don't, they won't No one is being coerced or cheated.
Chris
http://amateureconblog.blogspot.com/
If you think that's bad, look that the mark-up on clothing and CDs. Electronics generally have a low mark-up, and $110 mark-up on a $90 product isn't too bad at all.
I see alot of people on the internet selling 4GB nanos at $140 per unit in bulk quantaties to independent retailers like people who sell on ebay! Do any of you guys know how much the suppliers sell this ipods to retailers for? Is the suppliers margin very slim? I'm pretty sure they get a cut of the american pie too right? Anybody knows? Are this people that wholesale this things scammers you think? Thanks
for crying out loud people the article states that the estimate doesn't include the cost of business, including marketing. most of the comments i read referred to how ludicrous it was that these factors were not taken into consideration...there was never a misrepresentation that it did!
also, some people are suggesting that there are standard markups for every product on the market, and it is as simple as that...i don't think so. i worked for a merchandise company at a major sporting event, and let's just say that the above suggestions of 400% markups for apparel are way too conservative! i promise you, 1000% markups for clothing and shoes is not unheard of. but people are all to willing to be ripped off, so they can go ahead and charge these obscene prices.
at the other end of the spectrum, farmers are being held to ransom by the supermarkets and are making diminutive profits. once again, people don't care that they're getting ripped off by the retailers. unbelievable.
once word can explain all of these seemingly illogical and irrational facts make sense - marketing (and lots of it). anyway, if we're going to condemn this world to an environmental armageddon, we may as well make the big companies rich while we're at it.