Understanding Your Product Development’s Return on Investment

Understanding Your Product Development’s Return on Investment

Product development can be a lucrative investment. However, just because it can be rewarding doesn’t mean it’s not risky. Your return can depend on lots of factors that are beyond your control.

To get a better picture of product development, let’s look at the theory behind why inventions can be lucrative for your chequing account. Then, we’ll look at why governments and the private sector enjoy huge returns by funding inventions.

Last but not least, we’ll look at some examples of truly excellent returns enjoyed by entrepreneurs and inventors.

How to evaluate (and predict) your returns

You can evaluate whether your product development will offer good returns for your investment. It’s all about estimating four important numbers to get a picture of how many years it will take for your profits to cover the project cost.

  1. Your average sell price – you can look at competitor prices;
  2. Your desired margin and your expected cost – if you don’t think you can build your product for less than a sale price that will cover your margins, then your product probably won’t be a great investment;
  3. Total cost of the project – including prototypes, marketing, etc; and,
  4. Sales forecast – look at how many products competitors sell or predict your market size to get a good figure.

With those four predictions, you can estimate your projected profits and analyse your expected returns over the coming years. If your four calculations are accurate then your profits (and thus the time it will take to pay back your investments) can be reliable.

It’s important to understand that the payback of your product development will vary from year to year. In the first years, your total development cost skews your payback and so your return may be negative while you work to cover your costs. Afterwards, as sales grow and the project is fully paid for, you can realize great returns.

What did we learn from a lesson in theory?

  • You have to make good predictions based on thorough research;
  • Your product sales may need to last several years before you can pay back your project costs;
  • If your sales continue well after your project costs are paid for and your margins are met, then congratulations – your product has potential to be financially rewarding.

The public enjoys high returns from government investment

Governments invest in innovation all the time. They do it through funding programs often without any expectation of direct returns for their investments. They do it because they know their investments offer returns for the public to enjoy, like building an innovative workforce and advancing medical and commercial technology.

One good example is the National Science Foundation in the United States, founded in 1950 and still operational today. At its inception, it received millions of dollars in federal funding but that has grown to billions of dollars every year.

The project aims to promote the progress of science, innovation and prosperity. It certainly got that, and more, when a few students started Google with the help of its program funding.

Google is now worth hundreds of billions of dollars and employs tens of thousands of employees around the world. It’s estimated that Google’s value alone would cover the cost of funding for the National Science Foundation going back to its inception.

On top of that, the program has funded advancements in many other major industries, meaning the true return on those publically invested dollars is untold.

Private sector returns on product development investment

In the private sector, the true value of returns on investment is also difficult to find out. There are a few reasons:

  • Licensing agreements between development companies and inventors are often kept confidential; and,
  • Inventors who develop their own products go on to launch privately owned companies. Without being publicly traded, it’s difficult to figure out revenues and the full breakdown of their returns versus their investments.

Still, some examples do exist. Let’s look at some lucrative product ideas that had incredible returns for their investments.

1. Someone “owns” the smiley face

You’ve probably seen the classic yellow-and-black smiley face symbol, but do you know who created it? The story goes that an American graphic designer named Harvey Ball sold the original design to an insurance company in 1963 to use on logos and company branding. His original design netted him just $45 at the time. Unfortunately for him, he never trademarked his product.

The image became popular and was later patented in different countries. The smiley face is now a lucrative license – bringing in around $265 million per year for the merchandising company SmileyWorld Ltd. which now owns the rights to the logo in many countries.

This is a cautionary tale for anyone who has a great intellectual property – always protect your rights with patents or trademarks!

2. Venture capitalists invest in products all the time

We can look at the success of private venture capitalists for clues about the financial returns of inventions. Their large portfolios of investments and patents can be tricky (and expensive) to manage. Nevertheless, venture capital firms bank on the lucrative upside of their product development investments.

They know that some inventions will bust, others will be successful and a tiny fraction will be blockbusters. If a single patent in a venture capital portfolio, which often features thousands of patents, is really successful, it could generate billions of dollars in revenues for the investment firm. This kind of return is worth many more times the entire portfolio itself.

Figures suggest that venture capital firms earn up to 700 percent returns on their investments. Of course, the downside is that they’re known to earn negative rates and lose lots of money if products fail. On average, a 25 percent return is expected and most firms expect to at least double their money every two or three years.

Those kinds of explosive returns can only come from taking on risky product developments.

3. The average person can be an inventor

What about for the average inventor? If you’re like most, you don’t own a venture capital firm, nor are you backed by one. That doesn’t mean you can’t realize excellent returns in how you pitch, market and develop your products.

Your return on investments don’t just have to come from sales – your idea can achieve incredible returns even at the investment stage. Just look at Alex Commons, founder of Bulat Kitchen. His company makes premium kitchen knives that you can buy for affordable prices.

During development, Bulat Kitchen kept costs low and used a rapid prototyping technique. They connected with people who had 3D printers to make new iterations of their prototypes. They cost as low as $30 USD.

Eventually, the company launched a Kickstarter campaign and raised over $700,000 USD to further develop their product. From an investment perspective, the company did an amazing job at maximizing the returns from their prototypes to get the financial backing to further develop their dream.

The business is now fully launched and monetized as a private entity. Want to know Alex’s number one tip for inventors and entrepreneurs? Perseverance.

For more about product development and how to get the most out of your investments, check out the Innovolog blog.

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