Play-by-Play: Fixed and Unknown Costs

June 1, 2010 by Craig

Unlike the variable costs, some costs are roughly constant regardless of how many customers you have. Paying for these costs is why it’s so important to have high margins and high customer volume; there’s a hurdle to overcome before the business is bottom-line profitable.

Legal

Legal costs aren’t much fun but they are necessary. I’m estimating roughly $1000 per year in basic legal costs. If I actually get sued then it’s another ball game entirely. The lesson here is “Don’t Get Sued.” Also, there’s roughly another $1000 in one-time legal fees during incorporation.

Insurance

Liability and business insurance are good safety nets to have; they will hedge against potentially catastrophic losses. I’m estimating $2000 per year based on some personal liability quotes I’ve received already.

Accounting

I do all my own accounting and taxes for my sole-proprietor consulting business, but corporate accounting makes me shudder. $1000 a year paid to a professional accountant is plenty, assuming that I have someone else do the actual bookkeeping. I’m fine with doing that myself for the short term.

Graphic & User Interface Design

I’m not the worst designer in the world, but I’m a long way from being great. Having a pleasing and usable interface is critical to any modern product. I’m going to budget $1000 for the initial design, with more as the business & feature set grows.

Not the Whole Story

There are other costs that I’m intentionally leaving out.

Cost to Acquire a Customer

This is a fancy way to say “advertising.” You have to get your product into the minds of your potential customers, and doing so will incur some cost. Word-of-mouth is by far the best and cheapest way to accomplish this, but it’s also the hardest — especially when you’re first starting out. Google AdWords is the easy route, but lately I’ve been hearing rumblings about how it’s not really all it’s cracked up to be. I’ve got some other ideas too; I’ll save those for another post.

The take away here is that it’s very hard for me to estimate what these costs will be in advance. Remember that the goal here is not just getting people to visit the site, but turning them into paying customers. Lots of companies have gone broke before figuring out how to do that effectively.

Support Costs

Customers need help — or eventually they won’t be your customers any more. The trouble is that it’s hard gauge how much money you’ll need to spend to keep your customers satisfied. It’s a combination of the number of customers you have, the fraction that experience trouble, and the time you need to spend to resolve the troubles. This is why user experience & interface design are so important; your application needs to be easy to use so that you’re not burning time, money, and support on frustrated users.

For the time being, I’m going to handle all support myself via email. Doing it myself isn’t very cost effective but it is low-risk in terms of cash. When the business gets big enough to warrant it I’ll look at hiring someone else to handle it; then I can concentrate on more value-adding activities.

Development

This is the big one. The tradeoff for the amazingly high profit margin on software is the amazingly high cost to create the product in the first place. I’ve already sunk “several thousands” of dollars into this project and it’s not even off the ground yet.

The trick here is that, as long as I’m the one who is doing the development, those costs are all phony. All I’m really spending is my time. I’m not emptying my wallet for someone else and I’m not paying taxes (yet) on the work I’m doing. My spent time isn’t valueless, but it’s a long ways off from risking my house and retirement as startup capital.

What Am I Missing?

These costs are just the ones off the top of my head. I’m deliberately not over-analyzing the business model because the unknown aspects are so big. However, if you’ve got a important point that I’ve missed, please feel free to share.


No Comments

No comments yet.

RSS feed for comments on this post.

Sorry, the comment form is closed at this time.