Breakeven time measures the time to recover the investment in developing a new product from profits generated from the sale of the new product. This is represented graphically below.
This is an effective metric because it combines a number of factors:
- Initial Development Investment (non-recurring development cost) – as the amount of the investment is reduced through integrated product development practices, the breakeven time is reduced.
- Development Schedule (time-to-market) – as the development schedule or cycle time is reduced through integrated product development practices, the breakeven time is reduced.
- Product Capability/Satisfaction/Quality – as the capability of the product or its degree of satisfying customer needs increases, it will generate a higher sales volume, reducing the time to breakeven.
- Product Manufacturability/Design to Cost – As the manufacturabibility and affordability of a product increases, there will be a higher profit margin, reducing time to breakeven
Breakeven time requires a project costing system to accumulate the development costs including labor and a product revenue and cost accounting system to accumulate profits by product.
A more in-depth treatment of this metric is contained in an article: “The Return Map: Tracking Product Teams”, Charles House and Raymond Price, Harvard Business Review, January-February, 1991.