Graph image

How to fund digital products: Part 2 - Innovation budget planning

In this second instalment of our two-part series on funding digital products, we discuss how to make a compelling case for investment in a product that doesn't exist.

Josh Smith

16 September 2024

5 minute read


In part 1 of this series, we explored traditional budget planning methods for securing funding for digital products. However, these methods often fall short when dealing with entirely new product ideas or those lacking historical data. In part 2, we will delve into innovative budgeting techniques that can help you build a compelling business case even when faced with limited information. By embracing these strategies, you can increase your chances of securing the investment needed to bring your digital products to market.

Question 1. I have made a lot of assumptions. How can I validate them when bringing an entirely new idea to market?

Innovation accounting

When a product doesn't exist, there is no data to make standard measurements. As discussed in part 1, ordinarily you could form a hypothesis, and measure it (If X is true, then the outcome is Y). 

Innovation accounting, made popular by The Lean Startup, is a way of evaluating progress when all the metrics typically used in an established company (revenue, customers, ROI, market share) are effectively zero. Though this emerged from the startup world, it has since been adopted by corporates looking to measure their internal innovation efforts. 

In innovation accounting, we have to substitute ‘X’ for experimental data that we can get from small experiments on hypothetical features, and therefore forecast ‘Y’, based on this data that we can gain access to today! 

The two big buckets of assumptions to test for a given target market are value and growth. Just like A/B testing, this should be done one metric at a time to see which ones will work for you.

BO Box 4 - Value

Using smoke tests such as Dropbox's MVP demo video and Liquid Death’s marketing of a non-existent product to ‘headbangers who don’t want to get drunk’ are both good examples of value experiments.

BO Box 5 - Growth

Up Bank’s ‘Hook up a mate’ or Uber's refer and earn free rides are examples of successful referral growth strategies. Both are examples of strategies that can be tested with small audiences before rolling out the product.

Up Bank

Looking a little deeper at the Up Bank example, they had a rapid rise in the Australian market, capturing 400,000 customers in the first three years, with 58 percent year-on-year growth and over 90 percent being new-to-bank. 

Up Bank’s value mechanisms included convenience (the best banking app in Australia), immediacy (sign up online immediately) and status (it's a cool brand). 

As for growth, Up Bank has largely traded on its brand for viral growth with under 30s and its referral programs which brought about 60 percent of its customer acquisitions. 

So now you’ve seen how you can measure value and growth to prove your product is viable, let’s talk about how you can determine if your product will generate enough value to be worth launching. 

Question 2. Before I go ahead and build it, how can I know if this idea will be profitable once built?

CAC vs CLV

You’re not yet ready to look at the cost of delivery. Instead, you need to know whether the product itself has a chance of being successful. Customer Acquisition Cost (CAC) vs Customer Lifetime Value (CLV) is a model for forecasting just that. And it is especially useful if your new product idea or new product version is specifically aimed at reducing the cost of acquiring new customers. 

Customer Acquisition Cost (CAC) is how much it costs to get a target audience to find your product and onboard as a new user. This includes sales, marketing and advertising costs, and some secondary expenses such as the onboarding and administration.

Customer Lifetime Value (CLV) is an industry standard for measuring the value of a product to a business. In short, by engaging with your product over a given period of time, how much can be made from each active user. The important variables here are time and value (most likely direct revenue). However, there is a maintenance cost that also needs to be considered.

If your CLV is 2.5 to 3 times your CAC, then your product might just be a good bet - bdc.ca

Equation
Equation

So if you know you can make a profit from selling your product, then all that is left is figuring out how much you need to spend on your initial build that will also keep customers engaged for your required customer lifetime.

Question 3. I have a viable product and I’m confident it will be profitable, but what if I’m missing an opportunity to realise its immediate value?

Cost of delay

I know I have a product that people want and a strategy for growth. But how do I make sure I’m prioritising value in my MVP? The Cost of Delay asks the question, how much will I lose over 12 months by not having a given feature?

BO Box 6 - investment

For example: Not adding ‘X’ feature’ to the MVP build at an extra cost of $150k will mean missing out on an additional $1 per month (over 12 months) from 30,000 customers, or 350k in revenue and $200k in net profit.

With this answered you can create a business case for how much it's worth investing in building it now, rather than later. Put simply, if the build cost is lower than the gained value, then it should likely be a consideration for build. By bringing features forward, you are ultimately making the case for funding that much stronger.

Summary

This blog post is by no means a complete description of these tools, nor is it a full summary of everything available to you. Rather, we hope it inspires you to start your own investigations. We’ve included additional resources below to get you started and we would love for you to have a chat with us here at Luminary.

Looking to develop a digital product?

Talk to one of our digital product design experts about how to create a successful product.

Get in touch

Keep Reading

Want more? Here are some other blog posts you might be interested in.