Statistics from the Angel Capital Association say that 300,000 users have become angel investors for new companies in the last two years. Entrepreneurs quickly discover that money is a big factor in whether they can even get their products off the ground.
There are huge money questions to be answered in product development. You have to answer them whether you are just starting your business or whether you are thinking about upgrading your existing line of products.
This guide is going to introduce you to the main money questions you have to answer.
How Much Will the Total Project Cost?
This is the first big number you will have to come up with. It may seem intimidating to decide on the total project cost, but you have to come up with a rough figure. This is both for you and any investors you approach.
At this stage, you will likely stick with basic estimates. This is fine, but you should continue to refine your numbers as you move forward.
What Will Users Pay for the Product?
Obviously, this is important for your advertising, target audience, and project placement. You will likely come up with a price reasonably early. This has a more important role, though.
What users will pay for your product determines how long it will take you to make it into profit. The higher the price the faster you will get there. The lower the price the more product you need to shift.
Are You Similar to Your Competitors?
Generally, you shouldn’t place a similar product at a higher price than your competitors. Only if your product is obviously different should you go down this route. Think about how similar your product is. If it’s similar you will usually want to opt for a similar price.
But if this doesn’t sound like the right path for you, it’s a signal for you to go back to the drawing board and alter your product ideas.
What is the Cost and Margin?
There are two numbers every investor wants to know about when crunching the figures. They want to know how much the product costs to manufacture and get it into the public eye. Then you have to answer what your margins are. How much are you going to sell that product for?
Take a look at Apple as an example. Estimates reveal that the average iPhone costs about $7 to manufacture and ship. They sell each phone for hundreds of dollars every time. Your goal is to keep costs low without compromising on quality.
High margins are what will attract investors. Compare your margins with similar industry figures to work out whether you are doing a good job or not. Remember that some products have such low margins that there’s little point in innovating in said niche.
How Many Products Will You Ship Per Year?
For established companies, this is relatively easy. You already know roughly how much you can sell in a year. Add in an optimistic boost on top and you have a realistic sales figure for the upcoming financial year.
New entrepreneurs will find this much more difficult. One of the biggest reasons why companies don’t get the investment they need is a lack of realistic sales predictions. Be as conservative as possible. Investors aren’t looking for optimism. They are looking for realism.
Predicting this can be difficult. It relies on the interest you have received from various surveys and product testing sessions.
How Many Years Will It Take to Turn Profitable?
Most companies don’t make a profit in the first few years. This is fair enough because it isn’t expected that you will make a profit within the first few years. But you have to think about how long it will take.
Investors who are looking to be in this for the long-term may have no problem if a company takes five years to start paying out, but other investors may want a return within two years. You will have to use the previous figures calculated in order to answer this money question.
Product development is nearly all about answering these money questions. If an idea isn’t financially sustainable, it will fail. In many cases, the answers to these money questions will help you to determine whether to go forward with an idea in the first place.
Answer them honestly and be willing to make any amendments as new information filters through.
How will you begin answering these money questions today?