How to Most Accurately Estimate Digital Product Development Costs

Successful companies not only launch excellent products to the market but also maintain a strong financial standing. Accurate estimation of product development costs is crucial to achieving this goal, as it plays an integral role in both digital product development and the overall success of a prosperous business.

With a clear understanding of the costs, businesses can make a more informed decision about which projects are worth pursuing and which ones are not. It helps save time and resources by avoiding costly mistakes, such as under budgeting, overspending, or misallocating resources.

However, product development cost estimation is rarely straightforward. You must factor in each aspect of the project, determine the optimal method for estimating costs, and create a reasonable margin to cover the unexpected. Estimating product development costs also allows you to plan how to control costs throughout development.

By utilizing the following information and strategies, you can attain more precise estimations of costs, ultimately resulting in more profitable margins.

What outside criteria should you consider before doing a cost estimation?

Before investing resources and time into estimating the costs of a project, you need to determine whether the project is viable by evaluating the following.

Market demand 

Market research is essential before deciding to proceed with any design planning aspect. You need to confirm the product addresses pain points in the market and customers are willing to pay enough for the solution to make it a profitable project for your company. 

Competition 

Investigate whether any other products similar to yours exist or are in development. Then, assess how your product stacks up to your competition, including your sales and marketing tactics, and how you’ll differentiate your offering.

Technological feasibility 

Innovative product ideas can generate interest among your clients and investors but may need to be more practical to bring to market. You must envision a workable production process to deliver your desired features and functions.

Availability of resources 

Before giving a project the green light, you must confirm that you have skilled software engineers on board. In addition, you need to ensure your team has the infrastructure and other IT resources necessary to support the product development process. 

Project timeline 

Suppose you are constructing something new, like an intricate AI tool, or revamping an existing product, such as a marketing tool. In that case, providing accurate estimates is often challenging if creating the former, which has never been built before.

How to accurately estimate product development costs 

When you have determined a project is feasible from a market, technology, and timeline perspective, it’s time to decide whether you can bring it in at the right cost.

Developers use various software development cost estimation techniques, from algorithmic, non-algorithmic, and learning-oriented methods. However, one of the most effective strategies is starting with a high-fidelity prototype that allows customers and the software company’s internal and development teams to align on product requirements, features, and performance. 

A prototype offers a tangible representation of an idea the team can experience and interact with instead of an abstract concept residing solely in each person's mind. A shared prototype fosters alignment as everyone can see the same tangible object.

To illustrate this point, think about building a house. The homeowners expect to see plans and offer input, but a blueprint isn’t enough for most people to visualize the final construction. 

Providing a 3D rendering of the home is much more beneficial, so homeowners can experience living spaces and what walking from room to room is like. At this stage, it’s simpler (and much less expensive) to make changes to deliver exactly what the customer wants.

A high-fidelity prototype offers customers a similar experience, offering an authentic look and feel of the software and interacting with its features and functions. The prototype will allow you to align with your customers’ expectations and use its data to more accurately produce cost estimates.

The prototype will also help you define costs in specific areas and the overall project. Additionally, remember you can always define a “good,” “better,” and “best” version. Make strategic decisions in these areas to develop a product that meets customer specifications, timeline, and budget.

Design cost

Adopting an iterative approach is recommended, building the product in phases instead of doing everything in one go. This enables you to make changes along the way if necessary. 

Ideas evolve, and requirements change once you begin building, so it is better to construct the product in pieces, giving room for adjustments, rather than completing the whole product only to realize later you need to scrap half of it.

Prototype cost

During the prototype stage, it’s essential not to compromise on quality. Investing in reliable prototype tools and services is crucial for gaining stakeholder alignment and accurately gauging the work and resources needed to attain the final product's desired capabilities and quality. Building an effective prototype may initially require a substantial investment, but it can ultimately pay for itself in terms of cost and time savings, as well as higher levels of customer satisfaction.

Production and product development cost

Utilizing your prototype as a foundation devises a production plan outlining the software testing and development resources required for timely product delivery. Precise costing estimates for production and product development keep your project on track and enable prompt corrective action as necessary.

Distribution cost

Factor into your cost estimates of delivering your new product, whether directly to a customer for on-premises deployment, software as a service (SaaS), progressive web app (PWA), or another option. Your choice will impact costs.

4 Challenges of Cost Estimation

When people ask how much something will cost, it’s like asking how long a piece of string is. It can be infinitely long, which is hard to estimate.Issues inevitably arise during development that make the process much more complex, which is one of the reasons prototyping is vital to accurate estimates.

With that, here are some challenges you might run into.

1. Big contributors to cost 

It’s vital to stay alert to these issues that may significantly deviate from your price/cost estimate:

  • API integrations never go as smoothly as anticipated. Development teams often uncover issues that add time and costs to a project. However, it’s always best to test early and often to understand what’s wrong.
  • The more roles, e.g., admin, manager, and various types of users, the more complex the app. Roles must be clearly outlined and defined before you give an estimate.
  • Support for multiple mediums will also increase costs. For example, applications that must operate seamlessly on mobile and desktop are more costly to develop. 
  • When developing a web or mobile application, utilize "core building blocks" that can be assembled in different ways to create a multitude of pages and experiences. Reusing these core building blocks instead of designing individual pieces from scratch saves both time and money.

2. Consider Unexpected Costs

Professionals skilled at product development cost estimation always leave room for the unexpected. However, careful planning can help you stay within budget, even when unanticipated events occur. When you develop a project in iterations, you can see a functional product at various stages, allowing you to monitor progress within the budget and make necessary adjustments.

3. Challenging technology landscape 

Development teams planning to disrupt their markets know they’re setting off onto an uncharted path. However, developers may not consider all that can go wrong. 

Assumptions are just assumptions. You can avoid unexpected costs and delays by monitoring progress and testing early and often.

4. Difficulty in defining requirements 

Misalignment between the customer and the software companies’ teams is another common reason production costs exceed estimates. It’s extremely risky to start a project when you only have a request like “an interactive dashboard that shows the data that users need” instead of input on detailed design.

If the customer hasn’t defined what they want the app to do specifically or hasn’t clearly communicated expectations with the development team, that will show when building the product. Remember, there is nothing slower than going fast in the wrong direction.

If you don’t have an effective process for aligning with your customers, find a partner to help you develop clarity around the vision for the product and enhance user experiences.  They’ll usually do this by creating a prototype and mapping user stories, which combine to form an epic. 

For instance, an epic would be the user registration and log-in process, while a user story under that epic would specify the action of a user being able to log into the platform. After that, they can estimate how long that’ll take to develop. 

How to lower your costs with the right digital product development partner 

Working with a digital product development partner can reveal methods to lower costs in ways you may not have thought about. For example, using a front-end framework such as Tailwind and prototype directly in the browser is beneficial rather than creating wireframes and designing everything from scratch. 

This approach can save time and streamline the development process, as you’re essentially skipping multiple steps. You also won’t run into as many quality assurance issues as you won’t have to convert design comps into code. 

To map out your product development, it's important to think of it in terms of a crawl, walk, run, and fly process. This means breaking down the development process into phases, starting with basic features before gradually adding more advanced ones to ensure a successful launch.

Your partner can also help you identify critical paths and build them first, so you can move the project forward and validate that it does what the customer wants. Then, you can address edge cases and “nice-to-haves” later if budget and time allow. 

And if they give you a quote that seems too good to be true, it probably is.

How to conquer cost estimation for digital product development

To determine costs, you can break down tasks into user stories and then group them into epics, assigning hour estimates to each. This approach allows for detailed cost mapping and better project planning. 

Creating accurate cost estimations allows you to profitably complete digital product development projects and think through ways to cut costs while still delivering an exceptional product. Furthermore, aligning with customer expectations, anticipating issues that can increase costs, and building within budget for contingencies rests on the quality of your prototype.

Evaluate how using a high-fidelity prototype can help improve the accuracy of cost estimations for digital product development and, ultimately, the profitability of your business.

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