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January 25, 2022
June 11, 2020

Guide to Business Development: The Real Costs and Benefits

What is the real cost and risk of business development? What is the cost and risk of NOT having business development? Or better still if business development is not agile enough?

The highest risk is investing in a software development project that will not turn into a marketable (successful) product. By the time you experience the actual market reaction and receive feedback, it is either too late or your options to adjust and pivoting options are often already limited. This situation is typically tough to assess and you shouldn’t blame yourself if you don’t know where to start at all. We have created this guide to help you!

What is the cost of starting software development without business development?

Validation or development first? Such a complicated question. Common sense suggests that if you develop a good product, it will sell itself, customers will line up to buy it. Another belief is that you cannot validate without a product. In most cases, both beliefs are outdated and definitely misleading to this day.

At the outset, the cost of the product the team is developing needs to be estimated. This will be insightful in calculating the cost of no business development, or business development activities such as validation and customer insights which you would have gathered later.

When calculating cost you usually think of the cost already incurred. However, the following formula shows you the link between software development and sunken costs.

Total Cost = Cost of software development to date + cost of the revenue derived from the team - the cost of the code that can be reused after initial insight collection.

Based on experience, most CEOs do not calculate with the opportunity cost, the money the dev team could make if they weren’t coding something. However, that’s vital in a market where demand for human resources is still high. Let’s compare the most common calculation and the one including that opportunity cost.

Assuming your team is 5 developers strong, costing you an average 5k/month. If they have to develop your solution in 9 months it sums up to a  “total” cost of 9x5x5=225k. It’s already painful to pen down this kind of calculation, but believe me, there are worse situations.

Is the true number, including the opportunity cost, possibly bigger?

Let's add to the equation above a case where your developers could make on average 8k/month revenues for your company. 

9x5x5+ 9x5x8= 585k

Surely that's quite a sum but all hope is not lost. You can diminish the cost of the software development, after all having collected the insights you most likely will not have to start from scratch anyway, particularly when it comes to technical difficulties related to the stack and some specialties of the business field. Let’s say 30% of the work spent can be repurposed. (That’s pretty optimistic. Most of the time the team starts from scratch again.)

9x5x5+9x5x8- 0.3x9x5x5=427.5 k, which is still almost double the original estimate.

The real cost, or risk, is almost twice the cost compared to the original thought process.

Common ways of mitigating the financial risk.

It’s safe to say that if you are the CEO of a software company, early phase business development is still not a top priority, and that’s understandable. Typically, what you want to do first is to solicit external funding, probably experts like angel investors and people who have connections and would know the business domain. Also, there are Venture Capitalists or even R&D funding, which can be most likely accessed through the European Union or local funds. Again, you can hire sales personnel based on commission-only deals (one of the common errors you can read about in detail here).

Maybe you are creating a spin-off company and you want to motivate your developers by getting work done with reduced salary (or working on the project in their free time).In this spin-off you simply hire cheaper developers, so you can keep your most profitable people on paid projects. (“Team B”, read more on it here).

All of these are great ways to burn even more money! Still not solving the problem: what do customers want, and are we really developing that solution?

After cycling several times through the above options, some CEOs decide to invest in business development. Basically, you are going to build your own business development team. Start with hiring (read our functions list here), and probably hire one senior person only. The complications arise because you will normally have very high expectations, but unfortunately, business development requires a broad skill set. Tasks ranging from senior members that solve strategic problems all the way down to operation like a compilation of data done by juniors. You either don’t get all the skills necessary, or you pay someone senior salary for doing a junior’s job.

We have found that basically every organization and every CEO goes through this cycle. It’s just how we all mature and ease into business development and the importance of true, early phase insights in product development. There is no reason to feel ashamed or embarrassed.

However, we are here to show you the way it can work.

Agile Business Development: affordable, scalable, and mitigating risk to a much higher degree. 

What is Agile Business Development and what are its key returns?

The goal of agile business development is to cut costs and corners where possible. We do this by providing early insights, and quick sprints to provide you with options to figure out dead-ends or red flags in the shortest possible time.

Some examples: in a two-week sprint you can see if your message works or not. In a two-week sprint, you could set up a landing page of a (yet) non-existing product to gather feedback. Or you could create a webinar to attract visitors. All of these are small experiments that, when placed in the right order and the right time can reduce the risk immensely.

In agile, we involve decision-makers in the process as early as commencement. First-time clients usually get us involved in consulting when the existing product is not performing as expected. Long term clients ask for our help to validate the ideas right out of the gate before any development work starts.

Agile business development will help you cut costs in the following ways.

1. Customer involvement at the start.

Customers here refer to the decision-makers and the users. Either you have an understanding of the users, or just seen something missing (my pain is equal to everybody’s pain), we often underplay the value of customer feedback in the development process. You might have one reference client, but clearly, not all companies work the same way. It’s easy to talk to users, hard to talk to decision-makers, and much harder to get them involved. The prize is, if you can achieve it, market success.

2. Foreseeing dead-ends.

With the focus on decision making (e.g. the buying process), you can face the stone-cold truth right at the beginning of the product development process. No one will pay for that. If they will, only at a given price point. Such dead ends usually come 18-36 months after development starts. That means several 100k burnt into developing a solution no one wants.

3. Feature creep.

When business development starts before the software development, feature creep is less likely to rear its ugly head. However, based on interviews and insights from decision-makers and users, If you find yourself in the middle of a meeting asking, which features we need to sell more, you would have hard data to back up your decisions.

4. Change in culture and mindset.

Getting developers to meet and talk to clients is probably the most crucial and challenging of all tasks. If we can pull it off, it results in an entire team that is changing the way they think about the product. It’s not about the technical challenges only, but respecting what the insight team can bring to the table, the skills and effort the sales team puts into the game. It’s a huge accomplishment in company culture towards a more (financially) sustainable product development direction.

Is it worth it? You decide. In our consulting model, for the price of a senior developer, you get a team full of experts, delivering end-to-end go-to-market services. If we go back to the development team example, you can start your project either without developers, or with just a small team (2 persons) to figure out the problem, and the target market.

Our suggestion is to replace at least one member of your team with a professional, agile business development team, and your chance of success will be higher, and your financial risk way, way lessened.

If you are interested in putting us to the test, schedule a call: