Calculating New Product Cost

💥 In this article, we will examine one of the biggest challenges in hardware development projects, calculating new product cost. In general, many businesses can't achieve a profit-loss balance because they can't accurately calculate the actual product cost. When the business launches a new product, it can't profit from the product for which it lost cost control.

🧠 Calculating the new product cost is one of the essential and most critical activities of a product development project. Because, when you complete the project, you aim to have a competitive product cost, to sell in the market and to generate an income thanks to the product. Even before starting the project, if you manage to make reliable estimates, you will avoid making wasteful investments if the project will not make you money. Thus, the new product cost is in itself one of the main risk vulnerabilities of the project.

The two concepts that most development teams confuse are the cost of the product and its investment. The cost of the product consists of repetitive inputs for each product produced. The investment in the product, on the other hand, consists of the non-repeatable elements that you spend to develop. For example, for every product you produce, there is a material that you have to buy again, but you do not redesign the product every time you produce it.

The inputs that make up the cost of the new product can be summarized as follows:

• Material cost,

• Production cost,

• Warranty cost,

• Distribution cost,

• License cost.

The difficulties of calculating the new product cost can be summarized basically as follows:

• The uncertainty created by not having a similar product that can serve as a reference for the new product at the beginning of the project,

• To calculate the cost of the features to be developed in the new product for the first time,

• The interaction of the features to be developed in the new product with the previous features,

• The features to be developed in the new product require a technology that is not available at the beginning of the project.

The factors listed above require the ability to handle uncertainties in the most appropriate way, make some assumptions, and experience based on the past in order to calculate the cost of the new product. The new product cost calculation is a living cost model that is validated by being updated over and over again according to the increasing maturity level at certain defined stages, and the deviation range gets narrower as the project progresses, rather than being a value that is revealed only in a single moment of the project. Thus, it is possible to calculate the new product cost gradually more realistically as the maturity level of the project develops. In the visual below, you can see the reflection of the product cost in the estimation and realization window, which narrows as the project progresses, in a product development project that progresses in the incremental development process.

What happens as the maturity level of the project progresses? From here, things start to get even more complicated. The product concept emerges and you may find that the product costs you initially estimated based on certain assumptions begin to deviate. As the concept became clear, new assumptions were added to the equation and some old assumptions became invalid. By analyzing the effects of these, you can reflect them on your cost model and renew your new product cost estimation at the concept stage. Your new numbers should be in a narrower range and closer to the saleable product than before.

When the product design is revealed and the product validation phase is completed, you will have more information about all previously estimated or anticipated cost items during each stage, and you will see that the previous assumptions are replaced by new ones at each stage. The size of the development scope of the new product is proportional to the number of inputs in your cost model that you need to update and keep alive. The more variables you have to keep track of, the more update work you have to do. This is the point where projects often fail. Because the teams responsible for calculating costs often fail to make a preliminary preparation where they can systematically update their assumptions and inputs in the cost model. This situation paves the way for the loss of control over the product cost and thus new surprises after the project reaches a certain level of maturity. Experience shows that in most cases, a product whose cost is lost becomes expensive. It is tremendously difficult to cheapen the product compared to making it more costly. Since the product is a monetization tool, all stakeholders who come into contact with it aim to make more money from it in some way, most notably the parts suppliers.

Your new product, the cost of which you are trying to calculate, is now ready for sale when it completes the industrialization phase. If you lose control of your cost model, it is inevitable that you will be in for a nasty surprise when you reach the sales stage. Your calculations, which mostly go with the deviations and margins of error in the estimates, are side by side with the actual cost of the product that is out of production when the project comes to an end. At this stage, as in the funnel model, it is aimed to reach the lowest possible deviation between the actual and the estimates. Achieving this is only possible if you can establish the most realistic cost model. At each stage you leave behind during the project, what you missed can be added up, making a bigger difference than expected when the project is finished.

🎯 The difficulty level of the process described so far is directly dependent on the complexity of the product, the effectiveness of the process assets, and the competence of the team. As long as you manage to manage these three variables, you can also calculate the product cost in the most realistic way. Giving the product cost the importance it deserves, which is a direct variable in the success of the project, will be a huge success factor for all new product development teams.

🌀 How do you calculate your new product costs throughout the project?

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