Startup product development and day rates

When thinking about building a startup and a product development team, the day rate questions comes up a lot.

“Is £X per day too much?”

“Where can I get a cheaper day rate?”

Reasonable questions, but you need to consider the full equation when asking them.

The cost of your product comes from

1. Building the right thing

2. The time it takes to build, and

3. The daily cost of whoever you employ to build it (if this is you, this should also be considered as an opportunity cost, rather than a direct cash cost).

You could call the equation

P x T x C

Talking about day rates is only one part of the equation, what you need to assess as well is whether the structure you’re putting in place will accomplish part 1 (P), and how long the people building it will take (T).

Are you ensuring you’re building the right product?

If you build the wrong thing, you’ll need to spend time and money course correcting (sadly something I have much experience of). The wrong thing could be anything from a poor product spec — It doesn’t meet market needs, to bad user interface — it’s hard to use, to bad technical implementation — it’s buggy as hell.

Is it being built as effectively and efficiently as possible?

Then you need to consider the time it will take the team you have (in house or outsourced) to build it. The time in absolute terms affects the cost, but there’s also elapsed time which is your time to market. Depending on how much you can do in parallel and what size of team you have access to, the same amount of absolute time could take varying amounts of elapsed time. Startup founders are usually in a rush, and elapsed time matters, but not always as much as we think it does.

Are you paying a fair rate that delivers value?

Now it’s reasonable to ask the question:

“How much is my daily cost and is it reasonable?”

I think that this question is less about how low you can go, and more about whether the rate is fair for the value given. If you find the right person or team that helps ensure you’re delivering the right product (P) and does so in an effective manner, minimising the time it takes (T), then it’s fair if they’re paid well.

If you work on getting P right, and minimising T, then the fact that you pay someone a higher C would still equate to a lower overall cost, then getting P wrong, or building something inefficiently.

Most of this is determined by the mix of people and the quality of people you have in your team. To build a good digital product you need, at least, a product manager, a designer, an engineer and someone to quality assure the product. I’ve found people rarely talk about QA, but they’re invaluable. Adding a proper QA team to our business was transformational. (This is just about building the product, obviously many more skills are required within the business: sales, ops, financing, etc).

In startup teams founders will commonly wear multiple hats, but very few can be a good product manager, designer, engineer and QA, never mind the commercial or operational side.

I met someone once who had a great product idea, it definitely met a need within financial reporting. We discussed my team building it for him, but as a startup founder he balked at our day rates. He decided to go with an offshore team whose rate was very low. The problem was, the time they took to build it was ridiculous. I have no idea how they claimed it took the time it took, but they did. £30,000 in, which was an amount that should easily have provided his MVP, he still had no product and he ran out of money. The low day rate he secured was meaningless.

P was good, but he decided to minimise his C, and as a result T broke the bank.