You can’t jump into the product development process unless you have a clear understanding of your anticipated return on investment, or ROI. ROI essentially illustrates the costs and benefits of a specific product, showing how much a company needs to put in to produce and develop a product and how much the sale of that product will bring in. A high, anticipated ROI can easily win over management and show the value of a new product. Here is what you need to know about calculating ROI.
Determine how much work is required to complete the product
This first step in any ROI calculation is determining how much work is required to complete the project. To do this, you will need to break production down into as many small tasks as possible. It can be helpful to use a mind map to visualize this breakdown.
Determine how much the work will cost
Once you have broken down the product production process into numerous small tasks, you will need to estimate how much each of these tasks will cost to complete. Be sure to take into consideration wages for all hires, contractors, and consultants, the cost of any necessary new equipment, and the cost of leases or rentals if you need to rent property or lease equipment.
Keep in mind that project managers will also recommend that you calculate opportunity cost at this juncture. Opportunity cost essentially describes the cost of picking a specific project over any other project. This isn’t really a true dollar amount, so not everyone calculates it in the same manner. However, it is incredibly useful when determining how to use your in-house resources appropriately, such as your employees’ labor and your company-owned equipment.
Calculate the returns
Here you will calculate your company’s change in revenue. In other words, how much this product will generate in additional revenue. Of course, you won’t have a perfect dollar amount available at this part, but that’s part of running a business — all entrepreneurs have to deal with imperfect data and ambiguity. But you should be able to come up with a reasonable estimate based on market data. Ideally, you will want to estimate the worst, average, and best case scenarios for sales.
Once you have the revenue the project will generate and the estimated cost of the project, you will need to subtract the costs from revenues to produce your ROI. Remember, the higher this number the better!
Pivot International is a product design, development, and manufacturing firm with extensive experience in the medtech industry. If you are interested in engineering a new product or updating an existing product, contact us at 1-877-206-5001 or request your free consultation today.