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Managing Risk in Video Game Development
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Managing Risk in Video Game Development

May 3, 2013 Page 6 of 9

3. Estimate Costs

Now we will estimate our project's costs.

Using the previously calculated values for the number of new users per month (75,000) and the retention rate assumption (60 percent), we calculate that 45,000 users are converted from new to active users each month.

Assume that our marketing department estimates user acquisition costs (UAC) of 60 cents per user. Using these, we can then determine our acquisition costs over the expected lifetime of the project.

We'll also estimate our development costs, using our best salary estimates broken down by discipline, combined with the expected work-months for each discipline to give us total salaries paid.  We'll then combine this with estimates of operational overhead and additional market research costs to estimate total product development costs.

Finally, we add these total operating costs to our total user acquisition costs to determine total project costs.

4. Develop a reverse income statement

Now that we know our required profits and operating margin hurdles and the estimates for our actual costs and revenues, we can compare them directly.

The reverse income statement acts as an essential "sanity check" in planning. The "cost cushion / deficit" and "profit cushion / deficit" entries in the table below directly compare our DDP estimates to our initial hurdles.  If either of these is zero, it means there's a serious problem and we should either attempt to adjust our plan to fix the problem or abandon the project entirely.

Plugging in the previously calculated numbers, we get the following:

As you can see from the table above, our total costs of $2.46 million are well within our allowable costs. However, our expected profits of$1.329 million are just barely above our minimum profit hurdle of \$1.3 million.  This indicates that the project in its current state is only marginally acceptable, and we should see if there's any way to adjust the plan to improve our profit cushion.  We will also need to be cautious moving forward to ensure that the project's outlook remains above our profitability hurdle as we learn more and narrow our assumptions.

In this case, we've satisfied both hurdles, so we can move on to the next step.

Page 6 of 9

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