How to budget for Product Development

How much does it cost?

How much does it cost to develop a product? It honestly depends on a huge array of factors. In this post, we’ll discuss them all and attempt to demystify this complicated process and give you a little bit of insider knowledge as to how you can estimate your cost & find the right partner.

Factors that determine product development cost

The simplest way to think about product development cost is that it comes down to two factors: time and materials. However, to really understand all the factors that determine how much time and materials it’ll take to develop a product, it helps to understand the context of the lifecycle of product development.

At Ovyl, we use a human centered design approach which basically just means that we don’t just develop products for ourselves or our customers, we develop them for the real customer’s of the product. It adds an expensive step that also takes a lot of time, but it’s also the most important step we can take to improve the likelihood that a product is successful. All in all, our process looks like this:

  1. conceive of an idea
  2. explore it’s feasibility/viability
  3. generate possible solutions
  4. test those solutions with users
  5. iterate based on what you learned & repeat
  6. refine the details for manufacturing & cost

Now, if you’re thinking that looks like an incomplete list, then you’d be correct. Those are just the steps to develop the product. We also have to develop a brand, a marketing plan, work with manufacturers to get quotes, arrange logistics, and more. Books have been written on each topic, so for this post we’re going to stick with how much it should cost to develop 1-6 above.

To be clear - we’re excluding manufacturing costs here, which often cost about the same if not more than your development cost! We can ballpark those costs early on, but they’re not fully determinable until you get to at least step 5, if not 6.

Development Time & Complexity

The typical project we work on lasts for 6 to 18 months in duration, and takes 400 to 2000+ hours in effort. There are four main aspects to projects we see that affect this range:

  • First, are you skinning an existing product, or does this product require custom development? Sometimes clients come to us with a product idea that can more readily be adapted from an existing manufacturer’s product line. Those customers are better off going straight to a manufacturer, they don’t need a custom development team.
  • Second, is the product mechanical, electrical, or both? If it’s both, it’s going to take more time. This also determines if the next two factors apply.
  • Next, are the mechanical aspects relatively simple or complex? For example, a plastic housing is on the simple side, whereas moving parts that require waterproofing or parts that undergo significant stresses are much more complex.
  • And Lastly, are the electrical aspects relatively simple or complex? For example, controlling a few lights from a battery is simple, whereas collecting data and sending it to the cloud via a cellular signal is much more complex.

A product that is simple mechanically and electrically is probably in the lower range, 400-1000 hours. A product that is complex in one aspect is probably over 1000, and a product complex in both is probably over 2000 hours.

Example Project

Let’s say you have a modestly complex device, both mechanically and electrically. It’s a device which gathers data and sends it to the cloud via wifi, but it’s inside and plugged into the wall, so there are no harsh environmental or challenging battery life concerns. Let’s call that 1000 hours of design time that can be done in about 12 months.

The product already requires the expertise of at least 3 or 4 designers or engineers, and probably one more to lead them. Let’s say it takes 5 people total, with an average salary of $95k. I mean no offense here, but if you’re looking for a single engineer to pull this off from, it’s not going to go well. Your real options are to hire an experienced team in house or at a firm.

If you’re an experienced designer or engineer yourself and have the $475,000 required for one year of salary (excluding hiring costs, benefits, etc) then it may make sense to hire a team. If, however, you can pay a design firm $150 to $250/hour (the rates that top talent tends to demand these days) and skip the setup time, then you could get away with spending more like $200,000.

That may still sound like a lot. This is where I encourage people to take a more strategic approach. We’re talking about risking a decent chunk of money - it pays to mitigate your risks. Here’s how you can do that.

Mitigating Your Financial Risks

I always recommend that no matter which route you choose or which firm you hire, do it like this:

  1. Take your time talking to your prospects. Don’t focus on their level of interest or other superficial markers. Is your product squarely within their expertise, and do they have a good track record? Those are the most important factors.
  2. Start off with an engagement under $10k, or at most $20k. Be willing to sacrifice scope to do this. The goal of this engagement is to have the team identify all of the biggest risks on their side, and describe to you how to mitigate them. They should also be able to show a clear vision of what the final product will look and feel like. At Ovyl, we call this a Strategy Phase, and we do it explicitly to help customers understand their risk, make sound financial plans, communicate this information to investors or stakeholders, and set mutual expectations with all parties involved.
  3. Build a prototype and test it with users. You should be able to get to a testable prototype with half of your total development budget. In this case, be willing to sacrifice quality. It’s not important that you show customers a perfect product. Invite them in to criticize the product and ask them what they want fixed or changed. This process (#4 from above) is the absolute most critical step you can take to keep your money from going to waste!
  4. Listen to your users, champion their opinions, and finish building the product with their input. Now you should feel safe investing the remaining 50% of your budget. Expect the unexpected, but do not settle for poor communication along the way. It takes clear and consistent communication to get to the finish line from this point on.

So, how much did it cost in the end?

I hate to give the classic engineer’s answer, but, it depends.

It’s very rare that you can really spend less than $50k USD to develop any meaningfully unique and useful physical product, but it is possible for simple widgets. You may even be able to have “development” done for free if it’s really just modifying a factor made product, but know that you’ll have to accept all kinds of shortcomings to get that price. But I’ve seen it work out very well for the right product. For most products, you’re probably going to need to invest over $50k, and for very complicated products it can easily get up to $500k+. If you’re developing complicated machines or systems, be prepared to spend over $1M.

Hopefully you can piece together from the information I’ve provided how much it might cost to build your own team or hire an expert firm. You may also have success spending less by piecing together your own team or hiring developers in lower-cost-of-living nations, or by some other means. I always tell people to trust their gut. Hopefully this post gave you some kind of framework for thinking about how much you’ll need to invest, and how you can go about doing it to mitigate your risk along the way.

Dec 21, 2021
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