There’s nothing new about the fact that product development projects often get delayed over time. It is often towards the end of a project that shortcomings are discovered – and surprises late in the project have a habit of becoming expensive. The development department has its budget, but what does it cost the company as a whole when a product arrives late on the market? Take a look at this problem, using your own figures as input data.
How did we work this out?
We have divided the costs into three sections:
Increased development costs
We have assumed that a qualified development engineer costs SEK 100 million a month including salary, equipment and other overheads. The above figure is quite simply SEK 100 million multiplied by the number of engineers and months of delay.
Lost sales owing to delayed sales start
“Time and tide wait for no man” – the same could be said about a product’s lifetime on the market. The later a product comes onto the market, the shorter its lifetime there.
The cost of lost sales is calculated as the number of months multiplied by the contribution margin (market price – production cost).
Loss of market shares
Everyone knows that a product that comes late to market loses market shares. The general calculation is that a product’s market share drops by 2%-6% for every month the company lags behind its competitors. The exact size of the difference depends on a variety of factors.
In the above calculation we have assumed a 2% loss of sales volumes for each month’s delay.
If you would like a more detailed calculation and want to read more about this subject, we recommend this blog. And if you would like a more advanced calculation then initialstate.com/latecalc is a good place to begin.