Financing new product or service development
How to finance new product or service development, assess various funding options and analyse the costs involved in bringing your product to market
Securing adequate funding is one of the biggest obstacles many entrepreneurs face. If you're launching your business on the back of a new product or service, it's important to build into your financial forecasts a generous margin for contingencies and the unexpected.
It's not worth investing money in a new product or service and then running out before your business has got off the ground. See how to choose the right finance when starting up.
Analysing the costs of new product and service development
Once you've developed and tested your new product or service concept, it will require a detailed business analysis. This step of the process helps to:
- determine the costs involved in the development
- forecast the profits you may make from your product or service
When doing a business analysis, you will want to:
- estimate your product price, including the discounted or minimum sale price
- identify your product's full market potential
- forecast the sales volume and likely profits
- identify your break-even point
- consider the full the lifecycle of your product in the market
A thorough business analysis will help you determine how much money you might need to secure or borrow for your product or service development, and what return on investment is likely to be.
Controling costs in product or service development
It's essential to keep a close eye on costs when you develop new products and services to avoid them spiralling out of control. You should:
- estimate development costs in advance
- monitor spending throughout the development process
- introduce phased investment - eg release funds for each new development stage once the previous one has been successfully completed
There are two main ways to estimate costs:
- a top-down approach where you consider previous comparable projects and use them as a benchmark
- a bottom-up approach where all team members agree the costs they expect to incur with one project manager, who will then estimate the total cost
Remember that your costs could include staffing, materials, technology, product design, market research, prototyping and overhead costs.
It is important to plan any investment and control your costs carefully. Before making investment decisions, consider how much your business stands to gain from the new product or service. Weigh this against any risks you face.