Excursion 50

Cost analysis is like the weather

Treat cost analysis like the weather.

One of the challenges that new entrepreneurs face is estimating unknown quantities. How many customers are there? How much will it cost to build a mobile app? How much will we spend on marketing and promotions during the launch? Sometimes my students and my entrepreneurial mentees refuse to address these because they realize that they cannot obtain an exact answer that is guaranteed to be right.

This is, of course, terribly misguided. It is the equivalent of refusing to put on clothes before going outside because you do not know the precise expected high temperature for the day. We dress for the approximate weather. If the temperature is below 0C, we wear a jacket and gloves. It does not matter whether the temperature will be -3C or -7C.

Entrepreneurs need to accept that early stage venturing is quite like preparing for the weather. The predictions are rarely perfect, but a good guess is usually quite good enough. Market size, promotion budgets, launch costs and the myriad other calculations do not need (and are hardly likely) to be perfect. They just need to be reasonable and well-thought out. Ultimately, there is no significant difference between spending £10,000 or £11,000 on promotions in the first year. It probably will not make or break the venture.

On the other hand, there is a significant difference between spending £10,000 and £100,000 or even £500,000 building a mobile app. Get the order of magnitude right, come up with an estimate, and move on. The time wasted in trying to get an exact number is time you should be spending on getting that product in front of customers!