The "Wash my Ferrari" Problem: A Meditation on Risk
I have seen two predominant forms of risks factored in by the larger incumbents waiting to be disrupted. One is, like the author puts it, the risk due to breakage. Be very mindful of this risk and insure against it if possible or change something to avoid/lower the risk (sorry, we don't wash Luxury cars).<p>The other risk factor is pure CYA. Nobody wants to prepare a costing worksheet for a customer quote where your cost is too low because you didn't factor in the various overheads. Only after the annual financial statements are made will you find out if you lost money on the product or not. Do you want to be the guy who buys at $10 and sells for $20 only to find out before bonus-time that overhead was $90 per unit? So you factor in the cost of capital, inventory hold charges, shipping delays, warehouse pallet transfer cost, foreign exchange currency buffer, and tons of other charges. This makes it appear that your cost is high and so it is only natural to charge more for the product. Boeing isn't going to sell an Arduino + LED light for $100. It will be $500 because of risk of breakage and be $5000 by the time all the CYA risks have been tacked on by six levels of middle-managers.<p>The wonderful thing about CYA risk factors is that they help justify your high prices and if you are able to be lean, they give you a terrific margin. THIS is what you want to disrupt. You can charge less than the incumbents because they are playing it way too safe as nobody wants to lose their neck for selling a product at a loss. But don't charge so low that risk of breakage ends your business. The good thing is that the risk of breakage is not as large as the CYA risks in most every costing sheet that I have seen. YMMV depending on the industry/product.