How to Budget for a New Product or Service

Building a budget for a new product or service can be a daunting task. Whether developing a new service for a landscaping business or creating a new piece of software for the iPhone, the steps to success are the same. Follow the six P's of new product planning and budgeting to increase profitable product introductions.

1. Project the demand: Is their a market for the product? What are the characteristics of the market as far as number of customers, competitors, average selling price, volumes, market barriers, and so on?
2. Provide the specification: When asking the company engineers or developers to provide a good estimate on what it will cost in time and money to develop a product, give them a detailed specification for what features the product requires to meet customer needs. If you do not give a relatively complete specification, the accuracy of rules 3 through 6 will suffer. Generating a good product specification is the most important step to accurate budgeting for new products and services.
3. Plan the development: Based on the specification from rule 2, the development team will provide estimates on how long and how much money it will take to develop the product. Get separate estimates on each major feature of the specification so feature decisions can be made as quickly as possible while minimizing the number of cycles through the budgeting process.
4. Produce the product: Work with the production and development team to determine a cost estimate for producing the product. Look at the sales margin (based on average sales price and the production cost) to see whether it meets the company’s gross margin requirements.
5. Promote the product: What kind of sales collateral needs to be produced? What sales channel is needed to sell the product? How much is the chosen sales channel going to cost?
6. Provide the product: What does it take to provide the developed product to the customer in terms of costs and time? In the case of a service, the bulk of the cost is in providing the service. In the case of a physical product, the costs may include shipping, installation, maintenance, and warranty service costs.

Each of these rules needs to be budgeted in terms of time and dollars. Unfortunately, it is difficult to accurately estimate costs for rules 3 through 6 without doing a thorough job on rules 1 and 2. The more complex the product or service, the more difficult the budgeting process. Because of this, managers often go through the entire rule list two or more times to tighten up the estimates and span times. For example, if a product specified in rule 2 is deemed too expensive by either the developers (No. 3) or the production people (No. 4), the product will need to be bounced back up to rule 1 or 2 for modification. These repeat planning cycles cost time and money.

John C. Shovic is a partner in Coeur d'Alene, Idaho–based MiloCreek Consulting.