Cost Breakdown – Technology Development vs. Marketing
I recently received a question regarding the breakdown of start-up costs, specifically technology development versus marketing. This obviously varies business to business, but the topic is interesting nonetheless.
I am pretty young so I feel foolish talking about the way it was, but from what I understand the most significant cost that a technology start-up faced as recently as five years ago was the development of a proof-of-concept application. However, thanks to the “flat world” we live in today, the proliferation of open source development tools, and the commoditization of hardware, creating software or web-based applications is cheap.
At the same time, the cost of marketing has not dropped. I might go so far as to say it has increased. There are so many more messages being transmitted to the average consumer, that to get the same effectiveness as $1,000 delivered 5 years ago, one would have spend significantly more. Google has added accountability to the industry, but it hasn’t made it cheaper.
And just to clarify, because I know some of you will ask, the internet does lubricate the wheels of viral marketing, but please read my thoughts on the subject to understand why I don’t think this lowers the marketing cost for most businesses.
So the cost of development has gone down and the cost of marketing has gone up. Why is this important? Because it means that the larger expenses no longer come at the beginning of the start-up cycle but towards the later part. This means that entrepreneurs don’t have to take money up-front and can wait to have a fully working service before launching. It means entrepreneurs can build value for less and keep more equity. It also means that more and more seed stage funds will emerge providing smaller sums of money than they used to. All of this is happening not because starting a business is cheaper, but because the cycle of costs has changed.
Entry filed under: Start-up.