What a stupid question! Can there be an objective answer to it?
I was asking myself this question and I went into reflection and introspection modes and there came a few answers. Ofcourse, there can’t be a definite/ specific number that can magically be applied to all projects, but there could be methods to arrive at this number. I went on my quest to find out a framework that could help. Let’s explore that here…
Hari Nallan - March 2018
Before we begin, if you would want to read about fundamental concepts of MVP, you’d find them here.
I’ll not delve too much into the definition of MVP, however, I want to emphasise here that to me, this acronym stands for “Minimum Valuable Product”… I replaced Viable with Valuable for the right reasons. In that case, how do we evaluate value and arrive at a number? The answer is in the question itself… Value is what should determine your budget. My framework below is focused on the concept of Value.
If you are a start-up founder and you are familiar with raising money, I don’t have to tell you how to prepare a B-Plan. If you are not familiar with this, you will get plenty of content on the internet about how to prepare a B-Plan; or you might want to talk to somebody who can coach you on this. I’m going with the assumption at the moment that you have some sort of a B-Plan ready. Let’s start with that.
- What is the projected revenue of your product? This could be your actual full-feature product, not its MVP version. Let’s call this number ‘X’. But before we move further, let’s be aligned here that your revenue is a calculation of the product’s sellable price and you would determine that price based on how much the user would value it at. There are many startups and more so, recently who do not have revenues… you will calculate your projected revenue based on the same calculation: What is your user willing to pay for your product? You will multiply this figure with your assumption of volume (number of purchases) and you will arrive at that ‘X’.
- What is the projected time to realise that revenue (I’d want you to write the time in number of weeks)? Let’s call this number ‘Y’. You will calculate this projected time based on how long you think it will take your product to be accepted and paid for? It is neither easy to calculate this nor there is an off-the shelf formula to do it. You will have to go by certain benchmarks, your own understanding of business and competitive landscape, you may consult your friends, guide, coach or your consultant to arrive at this value.
- What is the projected time to create your MVP, in number of weeks? Let’s call this number ‘Z’. To arrive at this, you may want to speak to your developer/s. Ofcourse, you will also need to come up with your MVP strategy, as in what does your MVP look like, in its features, functionality, experience and value. You could go through this to get an understanding.
Coming to the big question, I suggest you spend atleast this much on your MVP: (X)*(Z/Y). That would be, X times Z divided by Y.
Let’s take an example here:
I want to develop a online news app that would feature its own ad platform and would further integrate standard ad resources. In addition to this, I want to be generating revenue through certain paid services which will be included in premium features. In this case, you will need to arrive at ‘X’ by adding ad revenues to premium subscriptions. Let’s for example assume that my ad revenues would be $100,000 and premium subscription would yield $20,000 in 216 weeks (18 months) timeline.
X= 120,000
Y= 216
Based on my MVP strategy, my developer gave me a timeline of 12 Weeks to realise it from day 0.
Z= 12
Based on the formula above, my MVP budget would be atleast $6,666.
Now, if you are wondering how this formula is justified, I have the following narrative for it:
- The time you spend on MVP is defined by your MVP strategy that is a part of your full-feature product proposition… and the amount you spend on MVP should equal to the time value of the full-feature product. Why it should atleast equal proportionate time value can be understood by the pyramid graphic here… and the time value is equated to revenue potential of the product at its full potential (break-even period).
- The budget above is an indication of all investments, including your people, marketing and product development costs. Again, I considered equated time value because of my belief that your MVP test should include all efforts, not just product development efforts.
- Finally, I would equate a product’s value to its revenue potential by a factor of 1. Yes, there are markets and conditions where it would go above or below this number, but the factor of 1 is a fair estimate I could arrive at, not counting in the value of the brand and its potential. If you are a product-brand, you may want to use your own factor and multiply ‘X’ by that number.
If you are a start-up founder or its shareholder, why not try this formula and tell me what it is telling you?
