Thursday, October 09, 2014

The opportunity cost of delaying software releases

Let me paint a simple picture (but with lots of numbers).

Some software has been built.  It generates revenue (or reduces cost) associated with sales, but the effect is not immediate.  It could be the implementation of a process change that takes a little time to bed in, or the release of a new optional extra that not everyone will want immediately.

It is expected that when it is initially released there’ll be a small effect.  Over the next 6 months there will be an accelerating uptake until it reaches saturation point and levels off.

Nothing particularly unusual about that plan.  It probably describes a lot of small scale software projects.
Now let’s put some numbers against that.

At saturation point it’s expected to generate / save an amount equal to 2% of the total revenue of the business.  It might be an ambitious number, but it’s not unrealistic.

The business initially generates £250k a month, and experiences steady growth of around 10% a year.

What does the revenue generation of that software look like over the first 12 months?

It’s pretty easy to calculate, plugging in some percentages that reflect the uptake curve:

Period Original Business Revenue Software Revenue Generation Additional Revenue
1 £250,000.00 0.2% £500.00
2 £252,500.00 0.5% £1,262.50
3 £255,025.00 1.1% £2,805.28
4 £257,575.25 1.6% £4,121.20
5 £260,151.00 1.9% £4,942.87
6 £262,752.51 2.0% £5,255.05
7 £265,380.04 2.0% £5,307.60
8 £268,033.84 2.0% £5,360.68
9 £270,714.18 2.0% £5,414.28
10 £273,421.32 2.0% £5,468.43
11 £276,155.53 2.0% £5,523.11
12 £278,917.09 2.0% £5,578.34
Total: £51,539.34

Or, shown on a graph:

So, here’s a question:

What is the opportunity cost of delaying the release by 2 months?

The initial thought might be that the effect isn’t that significant, as the software doesn’t generate a huge amount of cash in the first couple of months.

Modelling it, we end up with this:

Period Original Business Revenue Software Revenue Generation Additional Revenue
1 £250,000.00 £-
2 £252,500.00 £-
3 £255,025.00 0.2% £510.05
4 £257,575.25 0.5% £1,287.88
5 £260,151.00 1.1% £2,861.66
6 £262,752.51 1.6% £4,204.04
7 £265,380.04 1.9% £5,042.22
8 £268,033.84 2.0% £5,360.68
9 £270,714.18 2.0% £5,414.28
10 £273,421.32 2.0% £5,468.43
11 £276,155.53 2.0% £5,523.11
12 £278,917.09 2.0% £5,578.34
Total: £41,250.69

Let’s show that on a comparative graph, showing monthly generated revenue:

Or, even more illustrative, the total generated revenue:

By releasing 2 months later, we do not lose the first 2 months revenue – we lose the revenue roughly equivalent to P5 and P6.


When we release in P3, we don’t immediately get the P3 revenue we would have got.  Instead we get something roughly equivalent to P1 (it’s slightly higher because the business generates a little more revenue overall in P3 than it did in P1).

This trend continues in P3 through to P8, where the late release finally reaches saturation point (2 periods later than the early release – of course).

Throughout the whole of P1 to P7 the late release has an opportunity cost associated.  That opportunity cost is never recovered later in the software’s lifespan as the revenue / cost we could have generated the effect from is gone.

If the business was not growing, this would amount to a total equal to the last 2 periods of the year.

In our specific example, the total cost of delaying the release for 2 months amounts to 20% of the original expected revenue generation for the software project in the first year.

And this opportunity cost is solely related to the way in which the revenue will be generated; the rate at which the uptake comes in over the first 6 months.

Or to put it another way – in this example, if you were to increase or decrease the revenue of the business or the percentage generation at which you reach saturation point the cost will always be 20%.

So, when you’re thinking of delaying the release of software it’s probably worth taking a look, modelling your expected uptake and revenue generation to calculate just how much that will cost you…

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