How to Estimate Product Development Costs
Knowing how to estimate product development costs upfront can help you get a good idea of the feasibility of your overall project. When you’re trying to understand the costs of your design, it helps to look at them in stages, modeled after the various funding rounds in the investment cycle. Even if you’re not considering venture capital financing, it still helps you to break down your budget into smaller, more digestible stages.
The three rounds are series A, B, and C. Each stage has a specific set of criteria based on where the project is in the production cycle, whether you’re just developing the design, or whether you’ve moved onto the distribution stage. By understanding all the stages that go into how much product development costs, you’ll be better able to allocate your budget – and, if necessary, seek funding from outside sources.
How To Estimate Product Development Cost In Three Stages
The basic breakdown of the funding rounds in product development go from A to C. Series A is concept and prototype creation. Series B establishes production. Finally, Series C is about the scalability of the business itself and centers on growth and distribution models.
Stage 1: Design Planning
The Series A round of investor funding centers on an idea. At this stage, you might not even have a prototype to show to clients. What you’re selling is an idea, so you need to understand the costs associated with bringing that idea to fruition. You’ll mainly want to answer the following questions:
- What’s the primary goal of the product? Every product has a pain point it’s designed to solve. Clearly outlining yours will help the designer understand your primary goal.
- What’s the verbal description? Some creators come to us with a basic idea, others with a working prototype. We can work with both. At the bare minimum, you should be able to paint a visual picture of your product.
- What is your material preference? Material choice will have a major impact on the end result and product design costs. You should have a general idea of the material components to your project to best understand the development costs.
Ideally, your production partner will have a question and answer session with you to determine all the basic needs for your design. Being able to visualize the product and describe it to others is the primary focus in setting the budget for this step.
Stage 2: Production
The production stage isn’t only about rolling the product out to market. It’s about understanding the needs of your target audience. With that in mind, you need to review the following questions:
- What is the primary need of your product market? Creating a complex, high-quality product won’t matter if your target audiences can’t afford it. Considering the primary need of your market, whether it’s cost, convenience, quality, or something else, will help you better establish production practices.
- What’s your initial manufacturing run? Knowing how many units you need to produce for your test market is a crucial part of a successful rollout. You’ll need enough to introduce your product, but not so many that you’ll have a backlog of outdated items if you decide to revise the design.
- What’s your per-unit cost? How much it costs to make every unit can change drastically based on your timing, materials, and design. Focusing on the per-unit price at first can help you understand the challenges you may face when it’s time to scale your project.
Tooling can be one of the most expensive and overlooked parts of a project. You’ll need special equipment to recreate your design, like molds, cut-outs, and other customized instruments. Those costs need to be evaluated at this point to help you scale up for manufacturing later.
Stage 3: Distribution
When you reach stage three, you have a fully fleshed-out concept and production plan, but probably not as many robust distribution channels. In the beginning, you may choose to sell your products directly. By stage three, you will likely be too large to manage the task and will need to work with retailers and other third parties. When estimating costs for this stage, you should consider a few key questions.
- What are your primary and secondary geographical market regions? While the internet allows for a globalized economy, when a business grows, it’s smart to make strategic decisions about primary markets. It’s also important if creating a product that requires region-specific regulation adherence.
- Do you have specialized shipping needs? If you have a delicate product or one that’s particularly heavy, you may need to add in costs for things like plastic pallets, climate-controlled storage, and other specialized handling needs. If international shipping is a factor, you’ll need to review customs fees and regional shipping regulations.
- Do you envision adding more products to your line? At this stage, you may have thought of new ideas or applications for your original concept. Here you may want to look into potential markets and demand for new ideas. Then, if you do decide to move forward, the process starts all over again.
These expenses typically occur once you’re ready to scale up your business, so it’s safe to leave off estimating them for later. However, they will become critical expenses you’ll need to consider if you want to introduce your product to the mass market.
Managing the Cost of Product Development
The cost of product development alone usually runs between $10,000 and $30,000, but that figure can fluctuate quite a bit depending on the scale of the project. By breaking down your expenses by each investment stage, you’ll be better prepared to fund your project without surprise expenses. Investment stages act as an excellent guide if you’re concerned about how to estimate product development costs.
PRL’s engineers have dozens of manufacturing options available to help you solve any challenge facing your product: CNC machining, custom tooling, 3D printing, thermoplastic molding, reverse engineering, and more. No matter what stage your product is currently at, we can create it and optimize it for manufacturing.