So you’ve done your market research, interviewed customers, and prototyped your designs. Your go-to-market strategy is in place. Engineering is ready to start development. Amongst all the excitement, coordination, and chaos, have you asked yourself the BIGGEST question?
“How much does my feature cost?”
In this article, we’ll borrow some lessons from Harvard Business School to estimate the cost of developing, selling, and supporting features built by product teams.
Why is cost so important?
When we talk about “cost,” we’re really talking about two different components:
- Development cost: The total amount of time and dollars used to build, sell, and support a feature.
- Opportunity cost: The cost of forgoing your next best opportunity.
The first one is the common understanding of cost, while the second is a bit less intuitive. We’ll go into more detail on each below. But both are extremely important to the profitability of your business. In high-growth software companies, the reality is that product managers often feel removed from profitability concerns. With the hundreds of tasks the average software PM has to deal with during a typical workday, profitability is not exactly top-of-mind. The pressure to grow, to retain, etc. is more pressing.
Once the company goes public, that’s a different story. However, we can’t just put our hands up and say “profitability will come, and we’ll worry about it later.” We need to be proactive and work on our costing strategy now.
To begin, let’s address how we can calculate a potential feature’s development cost. Of course, we can approach this in several different ways, but we’re going to take a page from HBS’s book and use a method known as TDABC.
Time-driven activity-based costing
Dr. Robert S. Kaplan is a professor at Harvard Business School and the pioneer of time-driven activity-based costing (also known as TDABC). This accounting method allows you to estimate future costs using historical baselines of both time and dollars spent on an activity. TDABC is widely used in the realm of manufacturing and is making its way into professional service industries such as healthcare and law.
Let’s look at a simplified example of TDABC in manufacturing. Imagine we’re operating a widget factory where there are three primary human inputs in the manufacturing process: engineering, quality assurance, and shipment. The first step of TDABC is to establish baseline time and costs. Upon further investigation, you determine that the average time and cost to produce a widget of “medium” complexity is:
|Quality Assurance||1.5 hours||$40/HR||$60|
Thus, you approximate that any future widgets of medium complexity will cost you $320. Formulaically, the average cost of producing a medium complexity widget is:
Total Cost = (Eng. Wages*Engineering Time) + (QA Wages*QA Time) + (Shipment Wages*Shipment Time)
LGTM: The development cost of taking your product (or feature) to market
Taking a product or feature to market is a team effort. As product managers, it is tempting to say that something is “done” once the code is written and deployed. In reality, that’s just the beginning. At a product-led company, every team member is a part of “the product.” This ranges from technical support and professional services all the way to marketing and sales.
As product managers, the first key takeaway from TDABC is establishing baselines. Look through past product/feature launches, successful or not, and estimate the amount of time it took to go to market. Examples of product launch attributes worth examination include:
- The average time engineering time it takes to complete stories/epics based on T-Shirt sizes or story points.
- The total number of meeting hours required to coordinate product launches with any given group within your organization and who is involved
- Total amount of time dedicated to training and creating training content
The end result of your baselining activity should be estimated costs for taking small, medium, and large features to market. At Pendo, we’ve even made our own cost calculator to make this process easier and more scalable. If your team plans to embrace the concepts of TDABC and LGTM, you may want to do the same.
Opportunity cost: The implicit cost of your decisions
Product management is the art of saying “no.” But what’s the price tag? Unfortunately, short of having a crystal ball that tells the future, no professor or business school has a good answer for this (yet). However, you should always go into building a feature with your eyes wide open. What are you giving up in order to pursue your roadmap? TDABC can be a valuable input into your trade-off analysis by comparing costs to potential revenue opportunities and approximating a return on investment.
Of course, this article isn’t a comprehensive guide to cost calculation. Ramping up, ramping down, context switching, etc. all have their own effects on product development. However, this can be a good starting point for product teams looking to be proactive when it comes to determining the costs of the features they’re building and putting into market.