More often than not, it’s not a good idea to build software as your minimum viable product.
Building software is risky. It’s time-consuming. It’s expensive. Especially if you don’t know what you’re doing with software and don’t have investors backing you up. I know this because for the last fifteen years, I’ve been a software developer as well as an engineer, a team lead, a manager, a designer and the founder of a few software companies. In the last five of those fifteen years, I’ve also run a software development agency that helps startup founders build their products.
So although it might seem unusual to hear a developer advise against building software, hear me out on this one.
The math behind building software
Imagine you decide to build an initial version of your software product.
You begin by estimating what building the MVP will cost you. The estimate will vary depending on what you want to build and the development team you’ll be working with, but let’s just say you calculate a cost of $50k. If you want your product to be polished and fully automated, you might calculate a cost as high as $200k, maybe even higher than that.
A developer with a great track record who can work independently agrees to work with you. You decide you want to fit this into a $35k budget, so you strip down unnecessary features. And let’s say you’re bootstrapping — investing your own funds — so you plan to pay that developer $5k/month for the next 10 months. After that, you’ll invest all your time and money into the product launch.
By your calculations, you think you’ll break even in two years.
Here’s the problem. You haven’t accounted for changes to your best-laid plans. Because a project that was estimated to cost you $35K will often end up costing you more.
Say the project ends up costing you $50k. Assuming your launch costs you nothing, you’ll either need to have approximately $25k of revenue per year or at least 200 customers paying you $10 per month for a subscription to your software product.
But don’t forget about marketing costs. (It’s impossible to predict the cost per lead and conversion rate for your market and your product, so let’s use an estimation.) Say you pay $1 per lead and get a 10% signup conversion rate. Every customer who signs up will cost you $10. That means you’ll need $2k to get those 200 people to sign up.
There’s also the retention rate to keep in mind: the number of customers you’ll keep versus the number of customers who’ll cancel their accounts with you. (Yeah, not everyone who signs up will pay you forever.) According to Mixpanel , the average retention rate after eight weeks for most industries is under 20%, meaning that fewer than 20 users out of 100 will stay with you after two months. Let’s assume the best case scenario: a 20% retention rate. Multiply the $2k you need to get 200 customers by five. That becomes $10k.
But what if it costs you more than $1 to generate leads? What if your retention rate is lower than 20%? Your marketing costs may easily double or triple, increasing the amount of time before you break even. And, chances are, the numbers will double or triple — especially if you’re new to the market or new to marketing in general.
Additional, inevitable costs will arise. Software will require maintenance; you’ll have to keep paying your developer. Users will find bugs; you’ll have to make little changes to the product here and there. You may get early users; you’ll want to change and improve your product as soon as you do. Your competitors may launch a product; you’ll want to move more aggressively.
Note: These estimations are for a $50k product that was initially estimated to cost $35k. Your expenses will increase as your software product gets more complex.
The problem with focusing on product
I’m sorry if I’m scaring you with this example. I just want to illustrate a point.
Too often, founders spend all their time and money on product development, only to realize that they don’t have any money or energy left to devote to marketing. (In fact, I find that founders usually put marketing on the backburner because they think that marketing is, well, hard. Putting in the work to find customers often seems much more challenging than just paying developers to build your software.)
But you can’t just focus on product development. To get customers, you need to factor in time and costs for marketing. So, what’s the solution?
If your resources are limited, don’t build an MVP that’s a software product — build an informational product instead.
Let’s say you want to build an app to manage workflow on space stations around the universe. You could go all-in and build a software product as an MVP…or, you could offer something simple, like a cheat sheet or an e-book for officers who run space stations to help them optimize their workflows. This product, which is much simpler to build than software, will save you time and money. It’ll leave you with enough resources build out your marketing, test if there’s a demand for improving workflows and build an audience of people who are running space stations and are keen to improve them.
Of course, there’s effort involved in creating a helpful and valuable cheat sheet or e-book. But if you know your topic, you can do it well. And with just a little bit of marketing, you can build an audience and sell them this simple product. If there’s an issue with your market, you’ll notice — and you’ll have to choose another market if that happens. But at least you won’t have lost anything major because you’ll have made this choice at an early stage when there’s no software product to build and nothing to pivot from.
Will this approach work for everyone? Definitely not. Some founders are 100% sure about their ideas and will thus be confident in building a software product as an MVP. You might also decide to build software if you’re competing against another startup and simply can’t wait to build your product for another month or two. But if the software business is new to you and you know the cost of failure will be high, consider the informational MVP approach. If you encounter failure, you’ll lose very little — just the hours you spent creating the educational product and a few thousand dollars you spent on marketing. If that sounds like a lot, trust me — it’s nothing compared to how much you’d spend on building software.
Originally posted on Medium