Common mistakes when determining whether you will make money

Great Products ConsultingAnalyse (Validation), Product DevelopmentLeave a Comment

Common mistakes when determining whether you will make money

In my last article, I talked about how to figure out if you'll make money from your online platform or app. This article looks at some common mistakes that people make when they're assessing their idea.

Given that the simple equation for making money is that revenue (number of sales x price) is greater than your cost, then there are three main areas where people get it wrong:

  1. Overestimating demand
  2. Setting the wrong price
  3. Underestimating cost

Let's look at each of these in more detail.

1. Overestimating demand

When looking at your financials, it's easy to overestimate the number of people you think will buy your product. Even if you account for the time it takes to ramp up the number of users you'll get, if you start with the wrong number, you'll be behind from the beginning.

In product management, we’ve got a lifecycle diagram that illustrates sales over the life of a product. Guess what it looks like at the beginning...

That's right. At the beginning of most new products, sales are tiny compared to later on in their lives.

2. Setting the wrong price

Pricing is such a complex thing. There are many ways to charge people for your products and services. Pricing models vary to include options like monthly subscriptions, tiered pricing, or freemium - but what's the right one? And then there's the price itself. If the numbers are too low, you may not cover your costs. Too high and no one buys from you. That's the challenge of pricing.

When you're thinking about whether your platform or app will make money, you may pick a price that is too high or too low. Couple this with a demand estimate that is too high, and you won't be able to pay the bills!

3. Underestimating costs

This is a big one when it comes to platforms and apps. First, your development costs are probably going to be higher than you think. Second, you've probably underestimated the ongoing costs.

Unlike most physical goods, software platforms and apps have ongoing operating and running costs. You have to pay for hosting, someone to monitor your platform, fix problems, and if you've got a mobile app, you're going to be updating it every time there's a new Apple or Android operating system update. Then, there's the user expectation that you're constantly improving your platform and rolling out new features. All of this costs money - cash to be exact, as that's usually what your vendor prefers.

What can you do?

The main problem here is that forecasting and financial planning is not an exact science. If it were, everyone would be making money.

The challenge, then, is to reduce the risk of you being wrong. Along the lines of lean methodologies, you want to research and test all of your numbers. By testing the assumptions that you've made about your numbers, you can increase your chances of making money. It's a critical part of product development. Making a guess - even a fairly educated one is not enough.  Do yourself a favour - spend the time to figure it out.

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