4 Strategies for Lowering Product Development Cost in a Startup

For a big company, lowering product development cost makes little sense. A big company has scale, and that means even small improvements in the product more than offset their cost.

However, for a startup, product development cost is paramount. Startups have only so much cash and no revenue. Worse, most startups do not raise anything close to big company budgets. Startups are often trying to develop disruptive products for a fraction of the cost big companies spend on more conventional products.

Further, a startup will likely have to develop many versions of the product and try many different methods to sell the product(s) before finding success. One of the fundamental assumptions of the lean startup movement is that the exact go-to-market strategy, marketing strategy, or sales strategy is not knowledgeable without first validating the market–that is, running experiments to determine if the product and strategies will generate profitable revenue. The adage, “No product survives first contact with customers,” is often used to describe the almost certainty that the product will fail the first time it is introduced.

Compared to big companies, startups have fewer resources and a more difficult development challenge. Startups must do a lot more with a lot less than big companies. Clearly, startups need to use a different product development strategy and process than larger companies.

Strategy #1: MVPs

A startup will develop many products before reaching cash flow positive, each one a result of learning from the introduction of the previous one. Trying to disrupt a market is not a linear process. Sure, the general idea may be correct, but details are important. Each contact with the market will yield new insights about what exactly the product needs to be and how it should be presented to the market.

Developing a “full” product, presenting it to the market, learning what needs to change, and then “re-developing” the product, is going to cost a great deal of money–much more money than any startup is likely to raise.

The key is to make each of these products as quickly and inexpensively as possible, and this is where the idea of an MVP (Minimally Viable Product) comes in. If we start with the assumption that a product we are developing is not going to be put into large scale manufacturing, and will only be used to test the market, then its development cost can be reduced. These test products are called MVPs.

Since we are only going to make a few MVPs, we do not need to worry about unit cost, tooling, fixturing, DFM (Design for Manufacturing), documentation, compliance, etc. Without these requirements, many low-cost options become available:

1. We can use subassemblies from other products we buy off the shelf.
2. We can use reference design.
3. We can use demo systems often sold by components manufacturers.
4. We can 3D print or machine the product instead of using injection molding.
5. We can use different materials that do not require tooling.

In addition, an MVP does not need to meet, or even contain, all of the requirements of the final product. A product consists of many different systems. In many disruptive products, some of these systems are not germane to the disruptive idea that needs to be validated in the market. Taken to an extreme, an MVP may not even be a physical product at all, just a rendering of a product that is shown to potential customers.

Strategy #2: Outsourcing

Product development is getting more and more complex. The days of a single “inventor” developing a product in his or her basement are largely over. Even the simplest of products needs a team—several people with different skills, talents, and experiences. However, people are very expensive. It also takes time—sometimes years—to hire them and get them to the point where they become a functional team.

A startup rarely knows the kinds of skills, talents, and experiences it will need in the future because they have yet to fully validate the idea, and it’s not always clear exactly what should be contained in the product. If your strategy is to hire your own team, then just as you get this team functional, the market validation will show the team has the wrong skill set needed to execute on this pivot. Meanwhile, a lot of money has been spent supporting the ongoing fixed cost of this team.

Fortunately, there is an industry built to serve this exact need: outsource product development. These companies already have functional teams, processes, and reference design. Paying by the hour avoids the issue of having the wrong skill set and the burden of fixed costs every month. In addition, many product development companies have numerous reference designs that may reduce development costs by starting the project half done (or more).

A word of caution is in order. Make certain you hire the right company. Many product development companies primarily focus on big companies. Although their client list will be very impressive, they will not know how to work with a startup; and worse, they will not know that they do not know how to work with a startup.

Make sure you hire a company that specializes in startups, or at least small companies. Their team and processes will be optimized around how startups work and most will have a number of reference designs they can use for your product.

Strategy #3: Strategic Sourcing

Products are made up of many different subsystems. Most revolutionary products are 90 percent something old and 10 percent something new. If you’re a startup, you do not necessarily have to design the 90 percent; you can strategically source it instead.

Some significant portion of your new product idea has, most likely, already been designed and is in low-cost manufacturing. These companies spent millions of dollars to get these subsystems into production, and they likely do not compete with you. Selling one of these subsystems wholesale to you is not going to take anything away from their current revenues, and therefore all margin they get drops straight to the bottom line. The potential savings can be tremendous to you, so this should be the first place to look for the 90 percent of the product that is something old.

Finding these strategic opportunities and negotiating a deal is not easy. You will need a team with the right talents, culture, and incentives in place. Design engineers are known for having NIH (Not Invented Here) syndrome. Design engineers want to design things, not find things. However, without the technical skills, anyone else will likely find the wrong thing.

Most researchers do not understand how to determine a particular product’s subsystems. Most negotiators tend to pride themselves on their ability to leave nothing on the table. All of these traits will make it difficult to accomplish the mission of finding strategic opportunities and negotiating a deal.

Good leadership is the key to making this happen. It is unlikely you will find a single person capable of performing this task. You need people who have three different talents: finding things, technical evaluation, and negotiation skills. Worse, the technical person will almost certainly be biased negatively toward anything that is found before it is even found. The person capable of finding things will need guidance from this technical person, and it’s no small task to buy wholesale from a technology company that is already “paranoid” about Intellectual Property (IP).

Ideally, the product development company you hire has this leadership and talent; however, that is not always the case. If you are in the position of putting this team together, here are some guidelines to follow:

1. Purposefully handpick the team. The technical person cannot also be the design engineer, for obvious reasons. The negotiator needs to be able to sell with a win-win philosophy, not a Machiavellian. The research person must have some technical skills.
2. Make sure the team fully understands the big picture. You want to paint a picture that the ONLY way to move forward is to succeed at finding these technologies because your startup will never raise the money necessary to develop these technologies yourselves. Purge the team of any person who cannot get on board with the mission.
3. Meet with the team weekly. Create a funnel and some Key Performance Indicators (KPIs) around the funnel. Give each person a KPI number they are responsible for. Have them focus on their numbers and get each team member to support and help each other.
4. Make decisions collaboratively while making it clear who has the role and responsibility to make each decision. One person will make the decision, but only after understanding the points of view of the other team members.

Conclusion: Product development is very different for a startup. Without an understanding of these differences, most teams will fail, or at the very least spend much more time and money than necessary. The key to reducing product development cost for a startup is a purposeful strategy that includes an understanding of these differences.