How to Allocate Costs Related to Bringing a Product to Market
A great opportunity for a company to grow revenue is the launching of a new product. A perfect product launch strategy includes product design, development, manufacturing and post-sale service and support. Allocating adequate funds to each step of the product's launch is critical. If each step is not funded, the entire launch could be jeopardized.
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Instructions
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Work backward with market research and projections. One of the most important aspects of a product launch is market research. Market research should be conducted for the product, specifically within the target market. The data gained here should give you an idea of how much the end user will pay for your product, how many and how often they will purchase and where they would buy your product. The data gained from this research can help you build realistic market projections. Once you have a built a realistic market projection for the year, you should a have good idea of revenue to be generated by the product. This is a great starting point from which to begin allocating funds.
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Protect your ideas. If your idea contains intellectual property then it is of utmost importance, allocate some funds to protect that idea. Without a patent or copyright in place, it would be easy for an competitor to launch a similar product and take away market share. Without any sort of legal protection, winning an infringement claim against a competitor would be difficult. Keep in mind that spending the money now to patent the idea can potentially save thousands of dollars in legal fees later.
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Allocate some funds for production. Your market research should tell you roughly how many of your products you will need to cover your first year of sales. It is important not to overproduce the product, otherwise you may be left with a large amount of a product that you can't sell. A good rule of thumb is to produce a quantity equal to the amount of sales you expect in the first quarter of the product's release. This gives you time to increase production if sales take off. In addition, if sales don't go as planned, you aren't stuck with excess inventory.
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Market your product. Without a targeted marketing plan, your product's chance for success is greatly diminished. Funds must be allocated for the design, development and implementation of the marketing plan. These costs should include, among other things, web design, an Internet advertising strategy, a social media strategy, a print media advertising strategy and any television advertising costs. Data gained from your market research should help you target those areas that will most effectively use your advertising dollars.
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Determine sales commissions. A sometimes overlooked cost to the successful launch of a product is the sales commission percentage. Setting a sales commission can be tricky. The amount has to be enough to compel the sales staff to sell the product. On the other hand, it must be low enough that is does not negatively affect the profit margin. The sales commission should be one of the last allocations made. This is because there are fixed costs, such as production and supply costs and advertising, that must be determined before a commission structure should be put in place. Once you have determined the the total cost of manufacturing and marketing the product, along with its retail and wholesale pricing, you can now determine your rough profit margin. One common mistake that businesses make is to base sales commissions on total sales. Commissions should be based on a percentage of each product's profit margin. A good rule of thumb is to offer a commission between 20 percent and 30 percent of the product's profit margin.
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Tips & Warnings
Be flexible. Rarely do things go as expected during a product launch. You may need to reallocate funds from successful parts of the launch to help those areas of the launch that aren't going as well.
