How To Estimate Business Startup Expenses for an Minimum Viable Product?

Starting a business can be an exciting but daunting experience. Estimating startup costs for a minimum viable product (MVP) can be especially challenging. 

So let’s start with the basics: What is MVP? 

Definition of MVP

A Minimum Viable Product (MVP) is a version of a product with enough features for startups to begin with and provide feedback for future product development. The term “minimum viable product” gained popularity in the book “The Lean Startup.” This book by Eric Ries emphasizes the importance of creating a product that is viable, meaning it is functional and valuable to customers while minimizing the investment of time and resources required to develop it.

The goal of an MVP is to quickly and efficiently test a product idea in the market with a smaller investment to see how customers respond to it. This can help entrepreneurs validate their assumptions and get feedback on how to improve the product before investing more time and money in it. The MVP can be a basic version of a product or service, with only the core features necessary to solve a specific problem or meet a need for early adopters.

Businesses may learn more about their target audience, what they value most, and what improvements they would want to see by establishing an Minimum Viable Product. The product and its features may then be improved using this input, increasing value and better meeting consumer demands. The MVP strategy lowers the risk of spending too much time and money on a product that might not succeed in the market while simultaneously enabling firms to be more nimble and responsive to client requests.

Read to know more about startup funding in the blog: Startup Funding Stages for Startup Companies

Startup Failure Statistics

• 9 out of 10 startups don’t succeed (source: Startup Genome).
• 7.5 out of 10 startups with venture-backup fail (source: Shikhar Ghosh).
• 2 out of 10 startups fail in the first year of operations (source: Bureau of Labor).
• Only 1% of startups become unicorn firms like Uber, Airbnb, Slack, Stripe, and Docker (source: CB Insights).
• The success percentage for first-time founders is 18% (source: Exploding Topics).

These statistics may be beneficial, but if you use them appropriately, they may also guide you toward the best course of action. The MVP strategy, as was previously discussed, is one such method. We’ve put up a tutorial on how to calculate beginning costs for a minimum viable product (MVP), covering ongoing expenses, one-time expenses, indirect expenses, direct expenses, taxes, expenses for the sales and marketing team, inventory expenses, and human resource expenses.

Types of Startup Expenses for an Minimum Viable Product

1. Expenses That Recur

You’ll have ongoing expenses that you’ll have to pay on a regular basis. Rent, utilities, and staff pay are a few of these costs. Take into account the following when estimating your ongoing expenses:

• Rent: Calculate the price of leasing an office or co-working space.
• Utilities: Determine the price of services like internet, water, and power.
• Salary estimates for employees: This should be based on market rates for the positions that they will be filling.

2. One-time Expenses

You will only pay one time for one-time expenditures. These costs cover things like purchasing equipment and legal fees. Consider the following when estimating your one-time costs:

• Calculate the price of any equipment you will need to buy for your MVP, such as computers or manufacturing supplies.
• Calculate the cost of engaging a lawyer to assist with things like business registration or document preparation.

3. Indirect Expenses

Indirect costs are those costs that are difficult to relate directly to a particular commodity or service. Items like marketing costs and administrative overhead are included in these costs. Consider these factors as you calculate your indirect costs:

• Determine the price of costs such as accounting, bookkeeping, and human resources.
• Your MVP’s marketing expenses, such as those related to website development and social media promotion, should be evaluated.

4. Direct Expenses

Costs directly related to producing your MVP are referred to as direct expenses. Labor and raw materials are included in these costs. Consider the following factors as you calculate your direct expenses:

• Make a labor cost calculation for creating your MVP. This might entail tasks like creating, designing, or programming.
• Determine the approximate cost of any supplies or raw materials needed to create your MVP.

5. Taxes 

It’s critical to consider your tax obligations before starting a business. These taxes include income tax, payroll taxes, and sales taxes, to name a few. When calculating your tax expenses, consider the following:

• Do a calculation of the sales tax you will be expected to pay to the state in which you operate your business.
• Estimate the taxes you’ll have to pay on your employees’ salaries.
• Tax on income determines the amount of income tax that will be due from any profits your business produces.

6. Inventory Expenses

If your MVP requires inventory, it’s important to estimate the cost of purchasing and storing that inventory. Here are the steps to calculate startup inventory cost:

• Determine the products you will sell: Identify the products you plan to sell and determine the quantity you need for your initial inventory purchase.
• Calculate the cost of goods sold (COGS) for each product: COGS is the direct cost of producing or purchasing the product. For example, if you plan to sell t-shirts, the COGS includes the cost of the blank shirt, printing, and any other materials used in the production process.
• Estimate the total cost of the initial inventory purchase: Multiply the quantity of each product by its COGS to determine the total cost of the initial inventory purchase. For example, if you plan to purchase 100 t-shirts with a COGS of $10 each, the total cost of the initial inventory purchase would be $1,000.
• Add additional inventory-related costs: Consider any additional costs associated with purchasing and storing the inventory, such as shipping, handling, and storage fees.
• Calculate the total startup inventory cost: Add up the costs from steps 3 and 4 to determine the total startup inventory cost.

7. Team Expenses for Sales and Marketing

Each company’s success depends on effective sales and marketing. Consider the following factors to determine your sales and marketing team’s costs:

• Sales team: Calculate the price of recruiting salespeople or contracting out sales activities.
• Marketing team: Calculate the price of recruiting marketing specialists or contracting out marketing work.

8. Expenses of Human Capital

The price of employing and keeping personnel is referred to as human capital expenses. Take into account the following when calculating your human capital costs:

• Calculate the expense of acquiring new staff, including the cost of publicizing job openings and holding interviews.
• Calculate the cost of keeping employees, including the cost of providing perks and training opportunities.

Conclusion 

Startup costs for an MVP must be calculated with great planning and attention to detail. You’ll be more prepared to release your MVP and expand your firm if you identify your MVP, ascertain your fixed and variable expenses, take into consideration marketing costs, and create a budget.

FAQs 

Do you know how much it takes to launch a minimum viable product?

The initial outlay required to launch a minimum viable product might range substantially from one sector to another and from one product to another. Nonetheless, it’s not uncommon to have to shell out cash for things like software creation, logo design, website maintenance, server fees, advertising, legal representation, and employee wages.

For my minimum viable product, how do I calculate the initial investment?

Creating an itemized budget of all the charges you’ll face while creating and releasing your minimum viable product is the greatest method to get a feel for your startup’s potential financial needs. You need to find out how much things cost in each of the following categories and then make a spreadsheet to keep track of your predicted and actual expenditures.

Where can I find ways to save money when launching my minimum viable product?

Using open-source software and tools, outsourcing development to a lower-cost provider, leveraging free marketing channels like social media, and negotiating reduced pricing with service providers are all great strategies to cut launch expenses for your MVP.

How can one ensure they don’t make these rookie mistakes when calculating their startup costs?

Underestimating the price of software development, failing to account for marketing and advertising charges, and overlooking legal fees and other administrative costs are all classic pitfalls when evaluating startup costs.

To what extent can I expect investors to contribute to my minimum viable product?

Bootstrapping, crowdsourcing, approaching venture capitalists or angel investors, and asking for loans or grants are all viable options for financing your MVP’s initial development and launch. It’s vital to do your homework before deciding on a fundraising strategy for your business, as each has its own set of pros and cons.