Freelance Engineering / product pricing

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How do people here price a project ? Obviously one answer would be the most that a company is prepared to pay for it, however, if you are trying to sell a kit to multiple customers, what will generate the most return and what's fair ?

A successful salesman I know (who is still a decent man) said that the game he played was to guess the price the customers had in mind and go just arginally over that. He could then offer a discount, and everyone was happy with the arrangement. Likewise if you went in too cheap, the customer would be suspicious and probably not order.

Another friend who runs a successful engineer business (not from his garage I should add LOL) said that their prices were 3 times the total cost of manufacture, 1/3 to make the product, a 1/3 went to marketing/sales/support and the last 1/3 was the profit. This didn't account for any development costs that needed to be spread over the entire product's life.

Another approach, which I regard as pretty immoral, is trying to get a customer over a barrel. What I mean is that you have a vague specification (or none) and then do a very basic design. The customer is ususally so desperate to get the product that they don't have time to go elsewhere then pay through the nose for 'modifications'. I find that Microsoft springs to mind here.

Anyway as this forum seems full of decent engineers, let's do a survey... if you could buy, say, an LCD display module from Ebay that did exactly what the customer wanted (assuming that there was no need to do any development for simplicity). You instruct the customer how to use the module (so there is a little support there) and they cost $10 each and they buy them in batches of 100 from you. What would people regard as a fair price to sell them for ? How did you come to that figure ?

<º))))><

I am only one lab accident away from becoming a super villain.

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First and foremost you need to at least break even, including the time you spend into the calculation. The usual term for investigating all you need to know, and describing all you need to do, is "business plan". This will include the pricing of your project, but that is only one of many thins you need to settle on.

Start here: http://en.wikipedia.org/wiki/Bus... .

Quote:
What would people regard as a fair price to sell them for ?

You can try to be fair, like in "I will charge so that my expenses and a small profit are covered", but that says nothing or very little about if you actually will sell in the numbers you expect/want.

The crucial point isn't "what would be fair?" but "what is the customer willing to pay?".

To know that it is not sufficient just to know that the displays do precisely what the customers needs. How bad does he need them? Are there alternative suppliers? How hard is it for him to do it himself? Etc...

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That 3x factor seems pretty general, for small-scale production. I thought it was 3x the cost of the parts, though, to get an approximate manufactured price. Then one has to add on the profit.

I actually had one customer over a barrel with an Altera JTAG interface I designed. I put them together myself in a few minutes, and they cost me about £5 to make. I sold them to that customer for £75 each. They only ordered one or two a month, though, if I was lucky.

Leon Heller G1HSM

Last Edited: Tue. Aug 3, 2010 - 10:50 AM
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I usually found that the batch run is the main driver behind costs. Runs above 1K can be priced in a similar fashion as you've posted: PI times the manufacturing cost. In my previous live, er, job, that was the usual pricing method for rough price estimation.

For short runs, there are other factors to take into account, starting with the R+D effort. This is now my current business: short runs that can go up to... 70 - 80, not more. The good thing here is that the 'customer' is the very same company. But costs are damn, prohibitively, high. Lots of time devoted to development, as few prototypes as possible, everything prepared for multiple possibilities, oversizes, etc. For that case, 'the usual fee plus expenses' would be the quotation system. And the PI factor is involved when estimating the time required to do the job. Partial payments at pre-stablished milestones are the best option.

BTW, I was involved in a project that, by involuntarily misquotation and totally wrong planning, things developed in your depicted 'pretty immoral way'. That was not good for lighthearted people. Tension, stress, and many personal issues were involved due the bad planning. Probably this is the main reason why in Spain there is so much pain with technology and R+D companies, that left us as a place where engineering is not well considered.

Guillem.
"Common sense is the least common of the senses" Anonymous.

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I love the fact that you use PI and not just 3, much more technical :)

I know there's loads more factors that need to be considered, like good will from the customer, repeat orders, convenience...

I was hoping that people would be prepared to give a ball park figure (there's no real world situation here it's just for fun). I'll kick it off, the 3x rule would give $30, but that seems a bit high as you are acting as a retailer where profit is only ~30%.

All I have to do is send the customer a datasheet, a little support (say a paragraph), then redeliver (they pay postage costs). Any additional debugging support etc would be charged at (say) $300 a day excluding transport costs if significant. I should say that I don't usually work in $, but that made it more global. I also work full time for a large company who probably charge ten times that amount, but this is freelance/small business rates.

Here's my figure: I would sell them for $15, so $500 a batch profit covers my time, effort, and access to my knowledge.

<º))))><

I am only one lab accident away from becoming a super villain.

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Maybe I should in some ways it's good to be asking what could I get away with from the customer, rather than what's fair. However, I think that if I was charging them $1000 I'd feel like I was ripping someone off and feel like I was a crook. There are a few people out there who try to pull a fast one and do this without any reservations !

@Leon - I think I would have gone for exactly the same figure, £100 seems too much, any less that £50 and it's not worth the hassle, £75 is the compromise. If they are only buying 1 or 2 they need to pay for the disruption and distraction the order causes to your day. If they come back with a large order they are obviously happy with the figure, and there's room for a discount to encourage larger batches / customer good will etc.

<º))))><

I am only one lab accident away from becoming a super villain.

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Quote:

I think that if I was charging them $1000 I'd feel like I was ripping someone off and feel like I was a crook.

Again, if the solution to a problem is worth that much to a customer then there is nothing inherently wrong.

OTOH: If you actually screw a customer and they realize it, then they will not turn to you again so you might loose business and profit in the long run. Also a part of the business plan.

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"Some questions have no answers."[C Baird] "There comes a point where the spoon-feeding has to stop and the independent thinking has to start." [C Lawson] "There are always ways to disagree, without being disagreeable."[E Weddington] "Words represent concepts. Use the wrong words, communicate the wrong concept." [J Morin] "Persistence only goes so far if you set yourself up for failure." [Kartman]

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Logically you are right, there is nothing inherently wrong with a figure of $1000, but strangely I really wouldn't feel good about it; Esp so if they HAD to go with the solution, as I'd feel it was like blackmail. Of course this is why I am in design and not sales. I think that a lot of technically poor engineers manage to survive in business by "praying" on guilible companies rather than doing a decent design for a fair price.

So what would be your price ?

<º))))><

I am only one lab accident away from becoming a super villain.

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Well, if those are your feelings then go with them. Give the stuff away?

Or how about $500. Does that make you feel less awkward? $250? Say stop... $125? $70? $35? $18?

Another idea: Actually try to figure out how many hours you've spent on this. Charge at least $50 per hour as an initial payment, then charge what the hardware actually costs (to the door of the customer!) per piece.

If this is a retail product, and you have no clue as to how many you will sell then you're in trouble again. You need to figure out how much, in $, the solution would be worth to a customer. Then figure out how many you will likely sell. Then calculate if that is worth doing. If you fall short but reasonably close, then maybe something can be done to up the sales and thus generating (more) profit. Advertising?

Iff you are actually trying to start a business that you want to last, then don't forget to set aside a share of the money coming in for keeping the business 'per se' running. New tools and other investments like a new computer once in a while. Phone. You might be young, but starting thinking about the retirement plan early can not be wrong.. Etc..

All this means that the price of an item is to a very small degree determined by the actual value of the stufff that went into it.

Eg if you do those displays (lets assume that they are based on a standard 44780 2x16 character LCD that you can get for $10 in small quantities and $5 in huge quantities). Then if you calculate on selling 100K of them charging $10 might generate a huge profit, but if you calculate on selling 100 of'em it might be a bad deal for you if you'd charge $100.

Asking what is "reasonable" without knowing all these other variables that goes into the equation (the business plan) is rather meaningless.

I'll say this though: If all you're after is being a nice guy then give them away. I'll have two, please.. :wink:

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"Some questions have no answers."[C Baird] "There comes a point where the spoon-feeding has to stop and the independent thinking has to start." [C Lawson] "There are always ways to disagree, without being disagreeable."[E Weddington] "Words represent concepts. Use the wrong words, communicate the wrong concept." [J Morin] "Persistence only goes so far if you set yourself up for failure." [Kartman]

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Given the available info I was just looking for a ball park figure of what engineers would think was reasonable price. There's no right or wrong answer, or need for heavy calculations.

I am guessing somewhere between $13 (rough retail price) and $30 (rough eng pricing) so I suppose that gives about $21.50 ? Which is still more than I would sell them for.

Oh and FYI, I AM a nice guy ;) err... you still don't get the displays though hahaha

It says something about you being a nice guy that they are free and you still only want 2 not 100 or 1000.

<º))))><

I am only one lab accident away from becoming a super villain.

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Quote:

Given the available info I was just looking for a ball park figure of what engineers would think was reasonable price.

Again, a wide band is possible depending on eg number of units sold.

Quote:

$13 (rough retail price)

If that is what you pay for the displays then I'll speculate that it is a price for low quantities. Let's say 100 max.

Next, lets assume that you put 100 hours into the planning and design of the stuff. That is $5000, or $50 per display.

Then I'd just toss in a ball-park estimate of the manufacturing costs per item - $10?

Then add costs for administrating the sales, shipping, re-investments into the business etc etc.

And your cost for buying the "raw" displays.

Now I'm over $70 per piece...

Same calculation, but for 1000 items: $5 for the design. Due to economy of scale the manufacturing falls to $5. I'm down to maybe $30 or $40.

You're really a nice guy! :D

As of January 15, 2018, Site fix-up work has begun! Now do your part and report any bugs or deficiencies here

No guarantees, but if we don't report problems they won't get much of  a chance to be fixed! Details/discussions at link given just above.

 

"Some questions have no answers."[C Baird] "There comes a point where the spoon-feeding has to stop and the independent thinking has to start." [C Lawson] "There are always ways to disagree, without being disagreeable."[E Weddington] "Words represent concepts. Use the wrong words, communicate the wrong concept." [J Morin] "Persistence only goes so far if you set yourself up for failure." [Kartman]

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Dren,

I'll tell you exactly how it works in consumer electronics and the way Amstrad used to price things in the high street when we sold retail product.

To decide if it would be cost effective to make something we actually started with a target retail price and then worked back from there to find out what was available for the BOM cost and whether it was possible to make it for that price. If it later turned out that the BOM could actually be lower we'd either absorb the difference in profit or use it to have a knock on effect in the retail (often dropping the price 6-12 months after release to regenerate sales).

So say we wanted to make a hi-fi, telephone, fax machine, TV, computer or whatever to retail for £299.

First we'd have to consider the Chancellor of the Exchequer. He'd want (at present) 17.5% so the retailer will actually receive £299-17.5% = £246.68. A typical retailer like Dixons wants to make 30-40% profit to bother stocking an item on their shelves so let's say that they want to take 35% of that £246.68 (that is £86.34) That means we sell to the retailer for £246.68 - £86.34 = £160.34.

(luckily for us there's no distributor between Amstrad and Dixons, if there had been (selling through smaller retailers) they'd have taken 10%)

To justify our existence we'd like to make 30% ourselves so of the £160.34 we take 30% (typically) which means we take £48.10 (yes we make just over half what Dixons do). Admittedly some of that "profit" will be our marketing costs (and equally some of Dixons £86 will be their marketing cost - sometimes we'd work together for marketing).

Having taken our £48 we're now left with £160.34-£48.10 = £112.24. That is the "landed" cost of the product.

To land it in the UK from our Far Eastern manufacturer there's usually some form of duty to be paid - the level depends on the product but is typically 4% (lucky old chancellor again). When combined with the shipping cost from the Far East (usually boat, though we used planes for fast delivery at product launch) we'd generally allow 10% for shipping+duty which means the £112.24 is reduced by £11.22 to £101.01. This is known as the FOB (Full On Board) price and is what we pay the factory to procure the components and build the device.

The factory themselves are not philanthropists so they want to make some profit for their efforts. This is known as Labour Overhead and Profit and is typically 8%-10% (there used to be a VHS factory that just made $1 per unit for LOP!). In this case the £101.01 is therefore reduced further to £101.01 - £10.10 = £90.91 and finally this is the Bill Of Materials (BOM) cost. So for a £299 retail unit the BOM is a little under 1/3.

At this point we'd convert the £90.91 to $ as almost all components are bought in the Far East for $US. This is where we can often win/lose according to the current rate. Today the £ is strengthening against the $ and is 1.591 so in this case we'd have $144.64 to spend on components, casing, packaging, manuals, software royalties, licence fees etc. etc.

One thing I have not included in the above is our NRE. The software development (and hardware engineering) are a one-off cost and can range from £50K to £3-4M depending on the product. The tooling for the plastics typically ranges from £250K..£1M. These costs will be amortised across the number of units built and either included in the BOM costs or taken from out proit/marketing budget. If you have £1M of s/w dev costs and £2M of plastic tooling costs then the £3M could be amortised at £30/unit if you built 100,000 though you are in deep weeds if you can only make/sell 20,000 in which case the amortisation becomes £150/unit!!

I realise this is not directly related to your question but some aspects of this may prove useful.

Bottom line is that on the tightest of margins take 30% profit and expect retail to be 3X BOM.

Cliff

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Cheers Cliff, that's really very interesting, thanks for typing it out. It's a nice breakdown with real figures and it supports the rough 3x pricing guide. With such large dev costs and the low price tolerance I personally wouldn't want to get involved in the design of (say) a PC motherboard, esp with my own money on the line (not that I have 3M to invest).

My Q was a hyperthetical situation, there's no engineering/design or even much time spent on the project (err there are no real displays either come to think of it!). All we know is that they want 100off they cost us $10, what would we charge ? I am interested in the range people are coming up with, more figures please.

<º))))><

I am only one lab accident away from becoming a super villain.

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Quote:

All we know is that they want 100off they cost us $10, what would we charge ?

Well if you are just acting as a wholesaler buying something in for $10 and making a reasonably healthy 30% then that would suggest $13 (though obviously covering P&P as an additional cost). But to a certain extent the dictates of Adam Smith come into play and the market will be driven by supply and demand (in a free market economy). If you had some TQFP mega328's right now you could probably sell them for $10 each (for example) and make 200-300% profit simply because that's what supply/demand in the market will bear right now.

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Quote:
hyperthetical

Interesting word - I was suprised to find it exists, as I have to admit I've not encountered it before. Must be spending too much time in the garage...

Four legs good, two legs bad, three legs stable.

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Quote:

err there are no real displays either come to think of it!

I believe we all understood that... :D

As of January 15, 2018, Site fix-up work has begun! Now do your part and report any bugs or deficiencies here

No guarantees, but if we don't report problems they won't get much of  a chance to be fixed! Details/discussions at link given just above.

 

"Some questions have no answers."[C Baird] "There comes a point where the spoon-feeding has to stop and the independent thinking has to start." [C Lawson] "There are always ways to disagree, without being disagreeable."[E Weddington] "Words represent concepts. Use the wrong words, communicate the wrong concept." [J Morin] "Persistence only goes so far if you set yourself up for failure." [Kartman]

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Hyperthetical is exaggerated or overblown situation, which luckily works in context as I meant to type hypothatical (just kidding).

LMAO @ spending too much time in the garage.

I am currently in the process of buying a house that has a spare garage, now if only I could get over my phobia...

<º))))><

I am only one lab accident away from becoming a super villain.

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Who let him out??? or did he escape? :roll:
https://www.avrfreaks.net/index.p...

John Samperi

Ampertronics Pty. Ltd.

www.ampertronics.com.au

* Electronic Design * Custom Products * Contract Assembly

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clawson wrote:

One thing I have not included in the above is our NRE. The software development (and hardware engineering) are a one-off cost and can range from £50K to £3-4M depending on the product. The tooling for the plastics typically ranges from £250K..£1M. These costs will be amortised across the number of units built and either included in the BOM costs or taken from out proit/marketing budget. If you have £1M of s/w dev costs and £2M of plastic tooling costs then the £3M could be amortised at £30/unit if you built 100,000 though you are in deep weeds if you can only make/sell 20,000 in which case the amortisation becomes £150/unit!!

When you're in the low volume game (we do volumes in the order of 1000 per year, some products more, some products less), the NRE is very significant. Especially so, as may low-volume specialist products are very software driven.

Point is, listen to your software engineers before committing to the BOM! If you can save them time (e.g. more flash, faster processor, better sensors, ...) then saving $1 (or even $10) per unit may not be cost-effective.

-- Damien

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Damien, I bet this is the main reason driving ARM's in the low end, with OS's and low prices for such low volumes. Since I'm in an even lower volume business, we do it in a even more radical fashion: no uC at all, everything PC/Windoze based (huh, this sounds like a new terror film...), and the little work I'm doing on uC is only because we need some safety around certain part of the program/data/calibration that we can't leave on the PC.

On later times, our interest, like other engineers in the factory and other factories, had turned into something like Beagleboard and such.

Guillem.
"Common sense is the least common of the senses" Anonymous.

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Since when has upper management ever listened to engineers ?

@Guille: I have also seen this in a company a couple of years ago. In small quantities it's cheaper to buy a PC motherboard + kit and just live with the larger box and power requirements. It seems a bit overkill to me to have simple embedded control handled by a 2GHz processor when a cheap micro could easily handle everything, but you do get a lot from China/Korea for very little money.

Yes I have returned from my time in the wilderness (actually the 'bunker' where we develop the secret projects. It has a security system that wouldn't look out of place in a James Bond movie, it is novel at first but it makes it a pain in the A to just 'pop' out to the canteen. It also has a secure network with absolutely no internet access). We also chose not to use Atmel for the last project, as other devices were more suitable to the tasks, and there were serious concerns about supply and the honesty of the sales team !

Anyone care to venture some figures ? It's been interesting to see the wide range of values people have picked in the office, I'd appreciate some more data before revealing the results.

<º))))><

I am only one lab accident away from becoming a super villain.

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Venture figures...on what?

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OK this is the hyPOthetical situation: A company contact you and they need a display module, you find that you don't need to develop anything as you can buy something suitable 'as is' on Ebay. You email them a few lines telling them how to use it + the datasheet. They want to buy a batch of 100off, and the display costs $10 (they cover all P+P costs)... How much do you charge them per display ?

<º))))><

I am only one lab accident away from becoming a super villain.

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Dren, in our case the PC is there for other reasons, so we only add some small task to it.

A long time ago, in a galaxy far, far away, I've developed one 'simple' product with a M128 (in a cheap 20€ module), a cheap 2x16 LCD, and some HW. In that case, I charged 'the usual fee, plus expenses'. I mean 30€ per labour hour, plus all HW paid by the customer. The bill for one off was about 600€, after some re-negotiation. I should be about 1000€, but that is another history.

If we made a production run, just the PCB's, components and LCD's would cost about 2000€ for 100 units (using M16 instead, though). You have to add any assembly labour, something like another 2000€, and the developing costs, 1000€. This would represent that to have a net income, the 100 units must be sold above 50€ plus taxes to the distributor/company/customer/whatever. The salesmen priced them at 300€. The boss considered the presumably net income (it would be smaller for sure) of 25000€ not worth.

Over here, R+D in electronics is considered an expensive extravaganza. An EE working in this area hardly can expect more than 33K€ brute per year (usually below 30K€, being a 24-26K€ a regular salary for such job). Would you work for such salary, given the current costs of living here (a regular flat is over 250K€)? Management consider this an overpaid engineer. No need for them, so they can increase their own salary in 33K€ brute per year.

With this, I mean that developing costs rise too fast, and they should be charged to the total amount of products sold. Usually, when I was in another busines with regular sales in the range of 1K to 6K units per year, there were always a sales estimation, usually done by some marketing guy and some knowledge of the market and the distributors. This simple (but really hard to determine) figure can indicate too much how to proceed.

Thus you have two estimations here to do: your developing costs in money and time (remember the Pi factor ;)), and the amount of units you think you will sell in two years. Sum the costs of production of those units, and add it up to your developing costs, then divide the result by the amount of units. You can find that easily, for small runs, the developing costs will be bigger than the manufacturing costs. Then you have to add your planned benefit, and all expenses that can go there (taxes, shipment, stock, distributors, discounts). The math and numbers are simple if you use common sense, but you need a 'solid' (if a sales estimation can be anything like 'solid') starting point. The developing costs are not easy to calculate, though.

Guillem.
"Common sense is the least common of the senses" Anonymous.

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Oh, reading your last post, I would charge 25€ for each display, and do all the administrative job by my own means, if the customer pays a part before, say 1000€. 1500€ of net income for two or three days of labour? Were can I sign it?

BTW, what about taxes?

Guillem.
"Common sense is the least common of the senses" Anonymous.

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Thanks for typing that Guillem, it's great to hear about other peoples' experiences.

Pricing projects correctly is a bit of an art in someways. Working for this dept it seems to be backwards, as the budget is allocated first and only then we are given the project ! Luckily they seem to have been pretty generous with projects I've been involved with, but I know that another team here has really come a cropper. They are currently 3x over budget (it's still not complete either)!

It must be incredibly difficult to price a project for your own company. Esp these days as there's massive costs in getting CE/RoSH/EMC etc for low volume products. There's also so much competition from the East for generic items, where the total cost of the unit is less than I would have had to pay for the components alone.

Yes thanks for that tweak, I will remember the PI factor indefinitely - it's going to replace my 3x factor if ever I want to get into developing my own products :)

<º))))><

I am only one lab accident away from becoming a super villain.

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Just a side comment. I'm developing Automated Test Equipment for an electronics manufacturer of the automotive market. For my projects there is always some budget, but money is not a deal regarding my developments (availability and developing time are the main issues here).

Instead, the main headquarters where the mainline products are developed, they work exactly as you say: they start with a budget. There is somebody that makes an estimation of what would go on that product (including CE/RoHS/Automotive tests - EMC, plasctics and enclosure, etc) and how low they can go. Too many maufacturers, and not many customers.

Guillem.
"Common sense is the least common of the senses" Anonymous.

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With the top end military comms equipment, the cost of components seems totally irrelevant to the price of the system. Even when they are making 10K+ there's little point saving a few $ on say the uProc, as no one will thank you for being cunning and saving the money. On the other hand you can bet that these customers will always come back with all sorts of additional features and you will be the one who looks like you have made a poor design choice if you can't add them by just upgrading the software. Still it does mean we have decent 32 bit processors to play with :)

I suppose it's a trust thing, the budget people are saying we trust you with X amount of money please design the best system you can which at least does something like this. It's pretty cutting edge stuff so no one really knows what is practically achievable. The customer feedback writes the final spec once they have played with the inital system for a few months. Personally I like having a specification as everything can be transparent and everyone knows what they are going to get... ah luxuries

<º))))><

I am only one lab accident away from becoming a super villain.

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I am agree with Dren some market are over paid ( military is a good example) but the cost of product depend a lot of parameter and customer / market place.
I make low volum now and I must calcul rigth to not lose money. Yes you have component, production cost, production started! service (garanti --> just shipping can be a quiet expensive problem)
High volum has the same problem, but you can divide some fast cost in a big number and not make a big difference.
To make CE mark cost a lot and another section (military, medecin has very expensive test approved procedyr)
well a last, not electronique but SW, See MicroSoft he make a lot money for SW because people will paid it and it has a special place.
You can find cheaper solution but a lot of us use MS.

Thierry

Thierry Pottier