Last week we talked about the first step in developing a new product – coming up with a new product idea. Sometimes fun, often the most difficult and frequently a result of a customer expressing a need, step one is only the start of the process. The next step is to build a business case for the new product. In the early days of our business, this is definitely a step that was skipped by my father. Building a proper business case is time consuming and arguably the most boring part of product development. However, it is perhaps the most critical step and skipping it, or giving it a token effort, can potentially lead you down a long and expensive road to failure and shame. Trust me, I know.
The business case involves making a realistic and informed projection about how the new product will perform financially for the company in the future. In an ideal world, you gather market data to determine how many customers will buy the product, how many units you will sell in a given period of time and, based on alternative or competitive products and their pricing, what the market price will be. This tells you your projected revenue. Next you subtract from that what your new product will cost to manufacture and you get a great big gross profit number. Wow, maybe this is fun after all!The business case has to take into account selling costs and this will reduce the actual profits significantly in most cases. Don’t forget there may be large costs to developing and launching the new product. These costs can be very high and are incurred long before there is any revenue from product sales. However, in the business case you should show how these onetime costs will be averaged over the life of the product, or at least a reasonable length of time. In the end, your business case will hopefully outline how the new product represents an excellent return on investment and a real money maker for the business.
Ok, now remember that I said “In an ideal world…” The fact is that we don’t live there, do we? We live in the real world and in the real world it’s not so easy to gather the kind of detailed, timely and accurate information we need to make those revenue and profit projections. In the real world, we must inevitably make assumptions and estimations about the volume demand for the product, the competitive landscape, ongoing sales costs, the manufacturing cost, the development costs, technical support needs and marketing costs for creative, launch and ongoing support. The more you get out and really research your market, the more detailed, timely and accurate your information will be, but you will not be able to avoid having to make assumptions and estimations. A good business case will always be based on a lot of objective data, but at the same time will contain a bunch of educated guesses. You are predicting the future after all.
Looking back, I am amazed at how good my father actually was at doing just that.