how to calculate the cost of being late to market
DESCRIPTION
Most people know that shipping your product late costs you money but few know how to calculate how much money is really lost. A live calculator is available at http://www.initialstate.com/LateCalcTRANSCRIPT
How to Calculate the Cost of Being Late toMarket
$ Most people realize it costs money when your new product ships late
? Few know how to calculate how much money is actually lost
y-axis is your cash flow coming in or going out
x-axis is
Cash Flow Over Time $
time
During development, you spend money
R&D Spend $
time
Total development spend = the # of months until your launch date * dev costs per month
Once you launch your product, revenue starts to ramp up and you start making $$
Market Intro $
time
The slope of this curve is dictated by the time it takes to ramp up to max revenue (supply chain, marketing, sales)
At some point, your product matures to
max revenue
Market Maturity $
time
At maturity, your market share and revenue are maxed out
Revenue ramps down as the
product lifecycle nears
its end
Market Exit $
time
The revenue lifecycle starts at launch date and ends at market exit
This chunk of $ minus
this expense minus
other overhead
Profit = $
time
What Happens When You Are Late-To-Market?
You can’t fix all of the bugs in time. You can’t get all of the features built in time.
You need to add a feature. You have a supplier problem.
The time and money spent on
development increases
You Are Late $
time
You delay the point when you start making money and extend the spend on dev
Your max revenue per
month is 2% to 6% less for
each month you are late!!
Uh-oh $
time
You get a max revenue penalty for being late. You lost market share, customers lost interest, customers
went to your competitors, etc.
This penalty % is industry and
timing dependent
Uh-oh $
time
An optimistic approximation is a 2% penalty per month late. If you miss a key date (like Nintendo missing Xmas), the penalty can be much higher.
The market exit date does not change
much or at all
Compacted Lifecycle $
time
Your competition and market conditions force the end of life date for your product to remain virtually unchanged (you have to refresh your product line).
Total revenue decreases
Compacted Profits $
time
Total expense increases
Example – 3 Month Delay
26.9% Decrease in Profit! $1.29M Lost
18 Months – Target Launch Date 3 Months – Ramp to Capture Max Revenue 24 Months – Revenue Life Cycle $10M – Max Revenue Per Year $2M – Development Costs Per Year 33% – Operating Margins 2% – Revenue Penalty for Being Late 3 Month Launch Delay
Example – 6 Month Delay
51.7% Decrease in Profit! $2.48M Lost
18 Months – Target Launch Date 3 Months – Ramp to Capture Max Revenue 24 Months – Revenue Life Cycle $10M – Max Revenue Per Year $2M – Development Costs Per Year 33% – Operating Margins 2% – Revenue Penalty for Being Late 6 Month Launch Delay
Put Your Numbers In, Create a Slide Like This
https://www.initialstate.com/LateCalc
Show the true cost of a layoff Justify a new hire Calculate the cost of a schedule slip Is that new feature worth a delay?