Development to price ratio?

[russellbcopeland]

I am developing a new (I think new) business model for software development which I am considering implementing and am looking for some numbers on costs relative to the proce of a product.

I realize there is no hard and fast rule here but what I am looking for is some typical numbers for the following:

(all numbers wanted as % of software price)

development cost
sales commission cost
marketing cost
support cost
production/packaging/ cost (hard materials like box, disks, manuals etc)

Does anybody have any notions of these numbers or a resource that I could use to discover typical values in successful products?

 

[CajunCenturion]

I think you also need to factor in your sales projections with you desired return on investment. The selling cost has as much to do with the size of your intended market and what that market will bear. Further, you should consider how long you're willing to wait before you recoup the investment.

Good Luck
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[russellbcopeland]

True, but the determination of my selling price will have to be derived by an iterave process. Only then will I be able to determine if my model is workable and can possibly provide enough revenue for all needed expenses while maintaining a profit and figure what sales volume/price I may need to meet expenses. I have several different markets and products in mind but how the numbers work out will determine what size market and pricing model I'll be looking for.. Ultimately that will determine which product idea I persue.(Assuming the numbers can work) Fact is my biggest asset is my ability to build a product around whatever need I focus on. My hope is that my business model will allow me to focus on what type of solutions to concentrate on in order to be successful in my endeavor.

I'm really at the beginning of developing this model as I just hatched the idea today. (though the issues that prompted the need for the new model have been there brewing in my head for several years) I'm thinking that looking at typical numbers for successful products will let me know if I am way off base with my projections or not. I still have a ton of research to do on this.

I wish I could say more about what I am working on but if it works.. well.. I'm not ready to let the cat out of the bag until I'm ready to implement it.

 

[johnwm]

Spot on CC!

russelcopeland,
Like most IT guys you're viewing business from the wrong end. It's not about products, they are always 10 a penny! You need to start from the market, and what the market will bear for price. Without that basic info, all will be lost.

1. Develop your market model in terms of volume/month and per year over expected product life cycle.
2. Determine achievable price against life cycle, bearing in mind that if it's any good then your competitors will rapidly follow you into the market.
3. Look at development, production and sales costs
4. Subtract 3 from 1 times 2 - integrate over lifecycle - if answer is positive then you've got a chance!
5. Look at your cost analysis in terms of fixed costs (overhead) and direct costs (cost of sales). Fixed costs will be stuff like development and setup, and any other stuff that stays relativley fixed, whether you sell one or one million. Direct costs will be sales commission, physical item costs and other stuff related to volume of sales.


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[russellbcopeland]

johnwm.. good advice. I am still looking for those numbers though as I think they can help me as a sanity check. It's looking pretty hard to come by real world numbers like that though.

My tendency is to look at the costs and profits over time and vary the volume of sales to see what possible profits I could wind up with given differing market realities.

Understanding the market is really the hard part. I can relatively easily determine what range of sales volumes would generate adequate profit but figuring out if I can get those volumes within any given market is tough.

I suppose I need to read a few books on doing market studies. Know any?

 

[chiph]

johnwm has the right idea -- you need to find out more about your potential market. Unsurprisingly, this is called market research. Rule of thumb seems to be that you should spend as much effort on marketing and (later) sales, as you do on product development.

A good book that illustrates the advantages of doing this is:

Bootstrap: Lessons Learned Building a Successful Company from Scratch
Isbn: 0971187304

Ken Hess is the guy who created Banner Blue Software (makers of Family Tree Maker), later selling it to Broderbund for several million dollars. FTM is now owned by someone else, but I saw it on sale at Best Buy the other day, so it's still under active development.

Chip H.


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If you want to get the best response to a question, please read FAQ222-2244 first