Management

Your company is considering the development of a new product, delivered as software as a service (SaaS) which tracks employee’s time working. The engineering team estimates that it will cost $1 million to develop. The marketing team plans to charge $3 per month for each subscriber to the service and expect that server costs will run about $0.5 per month for each subscriber, which is the primary running cost. Additionally, the number of subscribers to the service is predicted as: 2000 in the first month, growing by 1000 per month for the first three years.
What are the fixed costs in this project?
Unit variable cost?
Unit margin?
Given these numbers, how long will it take for the project to break even?
If the numbers in the last question hold over the first three years, what will be the total ROI after the first three years?
More realistically, there may be uncertainty on the cost to develop the product and the number of subscribers. Now assume the engineers report a range of $0.7-1.3 million to develop the product. Additionally, assume the monthly growth in number of subscribers could be anywhere from 200 to 2000 (though we are fairly certain there will be 2000 subscribers in the first month). Given these ranges, perform a sensitivity analysis on the ROI estimate after three years. Because you have two variables you are uncertain about, you should perform the calculation all combinations of the low-medium-high values for each variable. Report your ROI estimates in a 3×3 matrix like this:
Based on the ROI values in this matrix, which variable would you like to have improved clarity on: the development costs or the demand projections? Why?

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