Estimating the Costs of Product Development Projects Based on External Data: The New Product Development Cost Benchmarking Method

Abstract

Activities for the development of new products are essential for most companies, and the investments for such activities can be substantial. Estimating the costs for new product development (NPD) projects is a challenging process as uncertainty is usually high and comparable data is scarce. While manifold work is available about general cost estimation methods, the estimation of NPD is still underrepresented in the literature. Except the few existing approaches, mostly build exclusively on internal data from within the company. In this article, we contribute to this gap by introducing an NPD cost benchmarking method. This approach faces the data availability problem by incorporating publicly available data of competitors into a regression model to estimate the average NPD costs of particular products. It is shown how specific adjustments to the data used for the model are necessary. The adjustments of input data account for macroeconomic circumstances and intercompany differences in accounting standards and development processes. Other adjustments (through a parametric model that builds on the regression results) account for company- and product-specific cost requirements. Using the method, relevant NPD cost estimations can be made for early-phase product management. The main output of this article is the introduction of the NPD cost benchmarking method as a novel solution to the challenging process of NPD cost management.