Money, it’s a gas: Schoolboy economics #1

Business is simple. You sell something, to someone, for more than it
cost you. This usually results in you making a profit.

Bad business is also simple. For example, you can sell things for less
than they cost you and/or you can sell things that do not do what you
promised the buyer. Both of these scenarios sound stupid but they
happen to occur more often than you think. The former happens when you
don’t fully understand the costs to your business of delivering the
product to the market and the second occurs when you don’t understand
the value of the offering or the offering itself, so you oversell it.
It could also be that what you’re offering is something the market is
not interested in paying for. All of these will mean that before long
you will be looking for something else to do.

Therefore, you have to make money from your game which roughly means
selling it, or some monetizable content through it, at a particular
price to a number of people for more than it costs you make it. The
likelihood of you successfully doing this depends on many things, not
least your game idea and ability to market it. How confident you are
that you can execute all these things correctly will also have a huge
bearing on whether someone will give you some money to help fund
development. Depending on the size of your project this could be
vital. For this project, one that’s small in scale, it’s likely that
person will be me until I have something that demonstrates the
viability of what I’m doing. My current philosophy is that you can not
do everything, as much as you want to, and therefore you will need
money to allow you to bring in expertise.

What figure that is will obviously depend on your project, for example
I know I could easily develop an iPhone game, it would be distributed
via the app store but there are key areas that are still missing, such
as art, music and marketing. Sure I could knock up some pixel art and
write some simple melodies but my cute game idea would be hobbled by
poor execution. If you then consider how much competition there is on
the app store my game would likely sink without trace, taking my small
investment with it. You could turn these limitations into virtues but
that in itself requires a lot of talent. I’m not that talented.
Therefore a smart route might be to find an existing publisher, start
a relationship with them early on to see if they’re interested in your
type of game and show them your game as soon as you’ve something working
(and fun!) to create some buzz.

Making your game is going to cost something. And not, Fame joke aside, just sweat. This cost will be the
sum of many things like your salaries, your office rent, your
equipment, your addiction to Jelly Belly, Lavazza, your utilities,
etc. Isolate your costs into a monthly outgoing figure before you
start, this will give you an idea of something that can be multiplied
out over time to give you a development cost. In startups we often
“hide” these costs as we’re in lofts, basements, sheds or anything
with enough power points for a small army. Don’t hide these costs, it
gives you a false picture of where you are. Learn your numbers; these
are your sanity checks. If you still want to tell people you’re making
your game out of sheer love, this is how much your love costs. Bottom
line: if you don’t know these numbers you wont know if you’re making
money and you probably want to.

In economics they have an idiom called Opportunity Cost, sounds like a
game show but it’s not. It’s what having A costs you in terms of you
not being able to afford B or C or D. To quote my wonderfully
eccentric economics tutor, Bernard, “The opportunity cost of having an
ice-cream is 2 bags of chips.” When you know what your game is costing
you, you can also work out what you’re giving up. It could be a 6
month project means you’re giving up 6 months salary which means it’s
costing you twice: the amount you need to fund it and the amount
you’ve forgone by not being available for work.

When you know your monthly costs, you now have a good unit of
investment into your project; there is also an emotional investment
but that’s for another entry. Each month this is how much you are
investing into your project. You can multiply this by the number of
months you think it will take (and then you can probably multiply that
by 2). By now you should be getting the sense that this could be
expensive and you might be questioning whether it’s worth it in the
first place, if you’ve been doing some simple sums in your head you’ve
probably hit around 5-10 grand. Great! That’s exactly what you should
be doing. Don’t forget to add on the money you would have earned if
you were doing a proper job =p

You can now split your personality to become a venture capitalist and
ask yourself some pretty tough questions like: How many units are you
expecting to sell? What will you price a unit at? How are you going to
distribute the product? How much will distribution cost you? How are
you going to let people know about your product? How much will that
cost? Oh, your putting it on Facebook, how are you getting money? Is
there someone who you can partner with to help with any of these
things? Can you buy the technology you need for less that it costs to
develop it? Have you done this before, do you know where the pitfalls
are? Even if you are able to do all of the work yourself, or convince
a few others to do the same with you it’s still expensive so you need
to make sure that you’re not doing this for less than nothing and
those sort of questions can help.

I’m only using my experience of working in startups over the past 15
years but running on enthusiasm and your own ability to develop a
product is usually not enough. It’s great fun but it’s probably a sure
fire way to burn yourself out and use up your savings. Irritatingly
there are, as ever with these scenarios, small exceptions to the rule
which become the poster children for the startup generation. You know
the sort, the guys (or gals) that built their tech in a garage, ate
nothing but sugar dust for 6 months and are now buying they’re second
Ferrari. Dig into any these stories and I bet that you will quickly
find that what was special about these guys was that they were able to
connect with someone who had the resources to realise their potential.
And they usually had a good sense that they had to. They still
needed a good idea and the passion to realise it but they were also
able to “sell” it to someone with money and that’s why you’ve read
about them.

You never read about the projects that ran out of gas.

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