How Much Does It Cost to Launch a Product from Concept to Market?
Ty Hagler | 6 Minute Read
How much does it cost to launch a product?
You know, just a ballpark figure?
This is an important question that the Trig team gets asked a lot by prospective clients. I never quite feel that I give as strong of an answer that such a nuanced question deserves. Aside from the flippant answer of $150 bucks… why don’t we start to peel back the onion.
First, what are you aiming to accomplish?
Total Addressable Market
How big is your vision? Is the unmet need truly impactful? If so, it can likely be monetized through an estimation of the total addressable market, or the number of people willing to pay money for the solution to any given problem. Let’s break vision down by orders of magnitude:
The multi-million dollar vision. This is table stakes to play in an entrepreneurial venture. Can you create a monopoly among a niche subset of the population, or is your idea just another fad-to-be with dubious potential?
The billion dollar vision. Commonly called a unicorn by Silicon Valley parlance. Consider though: Are you disrupting the status quo in a given industry like Lyft (boo Uber) has done for taxis or AirBnB has done for hospitality?
The trillion dollar vision. Hello Steve Jobs. It’s not every generation that we meet someone like you. You have the ability to disrupt multiple industries over your career and leave a lasting legacy that impacts society as a whole.
It is important to note that the dollar amount of market size is a lagging indicator of the degree of impact provided by your vision. Revenues follow impact, not the other way around. One does not build a sustainable business through coercion, but through providing customers with real value that improves their lives.
Next, how mature is the market in which you are competing?
I like this question because it helps us think through the degree of impact that strong insights, industrial design, and brand-building will have on sales. New technology solutions in new markets can thrive independent of good user design because customers don’t have an alternative. As the market matures and new competitors enter the market, design increasingly becomes a differentiator.
The more mature a market is, the better your game has to be. If an idea has been done many times, why would a consumer choose you over what’s out there? Don’t be discouraged by this question. Answer it, and then drive that point home in every outreach campaign. Make it a visual focus. Talk about it. You’re out to beat the competition and it absolutely can be done, so tell people how you’re doing it and why your changes matter.
Product Commercialization Success Elements
To achieve your vision, you will need help from a diverse team of people who have the right skills to help pull it off. The more points of view your team brings to the table, the greater your chance for success in creating a product or service with broad appeal that can gather momentum from the very first moment of launch. How you invest in, deploy, and organize that talent significantly increases the likelihood of a successful outcome. Encourage their open, honest feedback.
Market timing is everything, especially for technology-driven products. Seth Godin likes to use the rule of thumb that only half of investors should get the startup concept. You are too early if no one gets the concept and too late if everyone gets it. Speed to market can make all the difference.
Have you built momentum? Earned the trust of an audience of people by providing inspiration, entertainment, and kept promises? Staying engaged via outreach to investors and clients on a regular basis keeps everyone enthusiastic, which fuels motivation, which continues to excite. It’s a cycle.
Are you able to secure a monopoly via patents, trademarks, and branding? An iconic product is unique, memorable, and a representation of cultural values. The marketing that surrounds your iconic product should reflect its importance. The more tightly you can hold your work, the more time you give yourself to own a market before impersonations begin to show up to compete.
Expected Value Calculations
The reality of launching any product or starting any company is that the starting probability of success is VERY low, roughly 1-3% likelihood of survival. If your approach is to benchmark off of what most people do in business - most people fail - you should consider a different approach. Only 4% of businesses ever cross the mark of $1M in annual sales. Instead, you should benchmark off of those fortunate few who got it right. At the moment, I’m personally combing through the winners of the Shopify Build a Business competition for trend spotting new techniques.
Viewed through this lens, each milestone and action taken on your new venture should increase the probability of success from a starting position of 1% likelihood of survival.
Finally, what resources are available to you to achieve your vision?
Lack of resources can be a creative constraint but not necessarily a limiting factor. Don’t be afraid to seek out the tools you need. There are multiple early stage grant and non-dilute funding mechanisms to help you get to the next milestone. Crowdfunding continues to be a strong option for pre-launch funding and market validation. Themed cereal boxes? That’s how AirBnB made cash flow happen. No matter how much or how little can be gathered up, be creative with the resources that you are able to secure.
Large corporate innovation teams make up for lack of speed due to established operations with not having to raise funds. Often the challenge is deciding which idea (among a wealth of options) to pursue. Resources are always a constraint. Delivering a Return on Innovation Investment (ROII) is a scalable metric to evaluate the performance of any innovation team.
The Bottom Line... Ballpark
It is challenging to establish a hard and fast rule for how much it costs to design a product. Ultimately, you should be able to demonstrate a positive financial ROII. For example:
Case Study A:
An established corporate innovation team has identified a market opportunity worth $75M/year in revenues with expected gross margins at 20%, or $15M. Rather than deal with the complexity of NPV, IRR, WACC, etc calculations over a 10-year sales bell curve, I like to look at projected gross margin in the third year of sales as the value of the opportunity, in this case, $15M.
At a 1% confidence level of success, the best use of funds is to raise the probability of success through customer insights to understand the strategy of capturing the opportunity. Spend no more than $150,000 at this stage.
After good insights work confirms an opportunity to a 10% confidence level of success, we can now invest in new product development to create the solution that captures the opportunity. Spend no more than $1.5M in total at this stage. Be sure to validate that the design matches the customer need before proceeding.
A validated new product might now have a 30% confidence level of success, which means you can spend up to $4.5M in manufacturing changes to be ready to supply solutions to the opportunity. Secure purchase orders or other pre-order mechanisms from channel partners before proceeding.
If you have a B2C or direct-to-consumer business model, you might spend $15k-$30k just testing the right mix of digital advertising messages and targeting to understand your sales conversion efficiency. On an ongoing basis, digital advertising can become a revenue positive spend simply by tracking conversion ratios of each campaign.
While my guidance is to spend no more than a multiple of confidence level by gross margin opportunity, that spend has to be pragmatically justified by actions that increase confidence and move the program closer to successful commercialization. If you can accomplish those goals for less money, then you’ll be able to show an even better Return on Innovation Investment.
Case Study B:
An inventor has a product idea that she thinks could be worth $30M/year in revenues with a potential royalty license of 1.5%, or $300k.
She should spend no more than $3k proving out the idea through customer insights while at a 1% confidence level of success.
She might then be able to spend $30k in new product development to get to functioning prototypes and provisional IP protections while raising her chances to a 10% probability of success.
She might also enlist a professional business development agent to help her secure a licensing company to purchase the rights to her IP, likely for a fee plus commission, let’s say $10k.
In total, she should spend no more than $45k to explore her product idea, at a confidence level of 15%, worth $30M/year AND get a commitment from a royalty-friendly company. The likelihood of success goes up significantly if the licensing company has established manufacturing and sales channels that can easily accommodate her idea, but those decisions are largely out of her hands at that stage.
How much does it cost to launch a product?
You can easily spend far more to design the product than it is worth. However, with a good understanding of risk management, situationally appropriate new product design methods, and clear-eyed forecasting, you can make smart investments that will make a positive return across a portfolio of ideas. To help with answering this question, we prepared a handy online calculator: Return on Innovation Calculator. Please give us feedback in the comments below if this is helpful (or not!)