Kevin Brennan

Planning

Five key financial metrics for product management

As the “Business Owner” for the product, the Product Manager must be intimately familiar with common ways to analyze and measure the financial health of a product or business. This article introduces five of the foundational financial metrics used in product management.

1. Revenue (including unit volume and price).

Perhaps the most basic financial metric a Product Manager must be familiar with is the historical and anticipated revenue for the product. Calculate revenue by multiplying the unit volume by price. 

Revenue = Unit Volume x Price

For example, 10,000 units sold for $2.50 each generates $25,000 in revenue. 

With two of these data points (units, price, and revenue), the third can be calculated.

Price is often an average price across all units or the average selling price (ASP). Calculate the ASP by dividing total revenue by total units:

ASP = Total Revenue / Total Units

For example, if 1,000 units are sold for $2 per unit, generating $2,000 in revenue, and 500 units are sold for $3 per unit, generating $1,500 in revenue, the average selling price for the 1,500 units is $2,000 plus $1,500, or $3,500 total, divided by 1,500 units, or $2.33 per unit.

Unit volume is calculated by dividing total revenue by the average selling price:

Unit Volume = Total Revenue / ASP

For example, if total revenue for the time period is $10,000 and the average selling price is $2, unit volume is $10,000 divided by $2, or 5,000 units.

2. Growth rate.

The growth rate for various key financial metrics is often a key consideration in product management decisions and discussions. Growth rate can be calculated for any period, with yearly and quarterly growth rate being the most common. Quarterly growth is often measured sequentially (quarter to quarter) and year over year. The growth rate is expressed as a percentage and is calculated using this formula:

Growth Rate = [(This Period – Last Period) / Last Period] x 100%

For example, if revenue in year one was $1 million, and revenue in year two was $1.5 million, then the year-over-year growth rate is $1.5 million less $1 million, or $0.5 million divided by $1 million, or 50%.

3. Return on investment (RoI).

The return on investment is the gain or loss generated on an investment relative to the amount invested. RoI is usually expressed as a percentage and is used as a convenient way to measure the attractiveness of an investment or to compare investment options. RoI is calculated using this formula:

RoI = [(Gains – Investment Costs) / Investment Costs] x 100%

For example, if a company invested $10 million in a product that generated $50 million in revenue, the return on investment is $50 million less $10 million, or $40 million divided by $10 million, or 400%.

4. Breakeven.

Breakeven is the point at which costs and income are equal, and, therefore, the initial investment is covered. Breakeven is expressed in the number of units and calculated using this formula: 

Breakeven = (Fixed Costs) / (Selling Price – Variable Costs)

For example, if a product has fixed costs of $100,000, variable costs of $2, and a selling price of $4, breakeven occurs after 50,000 units.

5. Payback period.

The payback period is the length of time required to recover the cost of an investment and is calculated by dividing the initial cash outlay by the amount of net cash inflow generated by the product per time period. The payback period is usually expressed as the number of years or quarters. For example, if the initial investment in a new product was $1 million, and the product generates $200,000 quarterly, the payback period is $1 million divided by $200,000 or five quarters.

Read more about financial metrics and other key product management topics in my book, Mastering Product Management: A Step-By-Step Guide, available now in paperback and eBook.

Product portfolio management: Thriving in tough times (and good times)

With markets in turmoil and development budgets coming under increasing pressure, the need for prudent investment oversight at the product and portfolio level has never been more important. This article outlines a straightforward framework for evaluating where to slow down investment and where to speed it up to ensure continued long-term success.

Product portfolio management is the process of managing a collection of products. This could relate to all products at the company level, within a business unit, and even the different features of an individual product or service could be thought of as a “portfolio.” Portfolio management should be an ongoing activity where products and features that no longer make sense are retired and other investments are slowed down to allow increased investment in more promising areas. However, when market conditions deteriorate and investment budgets come under increasing pressure and scrutiny, the need for active management of the portfolio can become an existential necessity.

The 4 S’s of portfolio management: Stop, Slow, Start, Speed

Even in the best of times, there are finite resources to invest in new product development and maintenance. In essence, successful portfolio management is an optimization of contractionary and expansionary activity. Given a fixed amount of resources to invest (including money, time, and people), it’s a zero sum game between activities that must be stopped or slowed down to allow for other projects to start or speed up. The art of portfolio management is finding the right balance between these competing forces.

Managing a product portfolio

1. Determine the investment budget

Decide the total amount of resources to invest. This can include monetary and other resources such as employees with different types of skills, manufacturing capability, and channel capacity.

The overall budget for investment in existing and new products can shift based on the macroeconomy and what’s going on in the specific markets for the products. It could be the case that the investment budget needs to be reduced to manage costs during an economic downturn or perhaps there’s an opportunity to accelerate investment to take advantage of market conditions. Either way, having a definitive understanding of the available investment budget is necessary to balance the portfolio.

2. Quantify new investment areas

Measure the necessary investments in new areas. This is the “expansionary” perspective – the view of areas to increase investment in. What new projects need to be started and in which existing areas does the business need to accelerate investment? New products are the lifeblood of any business, and in tough times the business needs to ensure there is adequate investment in new areas to ensure the continued health of the business.

3. Make room for your new investment areas

Trade off new areas of investment with existing projects. With a fixed investment budget, you’ll need to reduce investment in existing projects (Slow) or stop projects altogether (Stop) in order to invest in new projects (Start) and increase investment in existing, promising areas (Speed).

The decision to slow or stop an active new product project is often among the most difficult for product leaders. Not only can it impact existing customer commitments, it’s hard to end a project you’re passionate about and invested in. Nonetheless, these tradeoffs are crucial to ensure the business remains strong.

Read more about product portfolio management and other key product management topics in my book, Mastering Product Management: A Step-By-Step Guide, available now in paperback and eBook.

Addressing competitor price reductions

Competitors can reduce their price for a variety of reasons, including reacting to the launch of your product, selling off inventory in the run-up to the release of a new product, or in a strategic shift to win more market share. Below are a couple of approaches to navigating competitor price reductions.

Percentage breakeven sales

A good first step when considering a competitive price reduction is to calculate the percentage breakeven sales change and make a judgment call on whether to change your price or not.

First, a definition. “Contribution Margin” is the incremental money generated for each product sold after deducting the variable portion of the product’s cost. For example, if the current price of your product is $50, and the variable cost is $40, then the contribution margin is $50 less $40, or $10. The percentage breakeven sales is calculated by dividing the potential price reduction by the product contribution margin. 

For example, if a competitor reduces their price by 5%, the percentage breakeven sales change for the same 5% reduction in your product is the price reduction (5% of $50 or $2.50) divided by the contribution margin ($10), or 25%. As a first-order analysis, if you believe that by not matching the competitor price, sales volume will be reduced by 25% or less, then it is better not to match the competitor price change since doing so would result in lower overall profit. 

On the other hand, if you believe sales will drop by more than 25%, then a price reduction should be considered. In deciding, you also need to consider whether the competitor price reduction was a one-time or temporary event. Perhaps the competitor is preparing for the launch of a new version of the product and is temporarily reducing the price to sell off their remaining inventory with the intention of reverting to the prior price for the next version when launched. If so, a price reduction on your part may be unwise and unnecessary. On the other hand, if you believe that a price reduction on your part may result in the competitor further reducing price, then you need to account for that when determining the appropriate course of action.

Cost of responding and competitor strength

Another approach is to estimate (1) the total cost of reacting to the competitive price reduction as well as (2) the strength of the competitor, and respond in one of four ways:

  1. Ignore – Ignoring the competitive move is prudent when the competitor is weak, and the cost of reacting outweighs the benefits. Matching the price reduction may also only precipitate a further, more painful reduction.
  2. Accommodate – When the competitor is strong and responding would be too costly, it is best to accommodate the competitive move and make the strategic changes necessary to address this new reality.
  3. Defend – When a response is cost-justified, and when dealing with a strong competitor, then the best strategy is to engage and defend your market position. The goal here is to convince the competitor to “play nice” and to signal that aggressive pricing is not in the competitor’s best interest. This may involve a temporary price reduction on your part with a subsequent price increase to signal your intent.
  4. Attack – Sometimes, a weak competitor misjudges their market strength and initiates a price reduction in the hope of gaining market share, only to be outdone by a strong response on your part.

Read more about pricing and other key product management topics in my book, Mastering Product Management: A Step-By-Step Guide, available now in paperback and eBook.

Five best practices for sharing product roadmaps

A product roadmap is a visual tool to summarize a product offering over time. A roadmap is most often used internally, for example, when working on project planning. However, there are times when a product roadmap needs to be reviewed with entities outside your company, for example, when pitching a future version of a product with a prospective customer. Be extra careful when reviewing what is primarily an internal tool with people outside your company. Here are five best practices for sharing product roadmaps externally.

  1. Remove all sensitive data such as features that are not being disclosed, project cost information, staff names, and competitor references.
  2. Include a prominent disclaimer to note that the roadmap is not a commitment and is subject to change. It is critical that external parties are aware that while the roadmap is an expression of intent, it is not a committed plan. Setting the right expectations is critical to avoiding disappointment if a plan changes in the future.
  3. Use project code names to obfuscate the product or brand name in case the roadmap ends up in the hands of competitors or others outside of the intended audience.
  4. Consider creating two versions: The version that is presented and a “leave behind” version that further removes sensitive data. Sometimes it’s acceptable to present certain information verbally but leave that undocumented.
  5. Use a secure .PDF or another non-changeable format. If sharing the roadmap under a non-disclosure agreement, note that and include the name of the external partner on the roadmap.

Read more about roadmaps and other key product management topics in my book, Mastering Product Management: A Step-By-Step Guide, available now in paperback and eBook.

Not all product features are created equal

Products and services are often made up of a collection of features and benefits that combine to deliver the full value of the offering. Some features are bare essentials and represent the “price of entry” for customer consideration. Other features make up the core of the product value proposition and are the focus for customers when deciding to buy. Understanding how a feature is perceived by customers is the key to successfully defining a new product or service and optimally managing scarce product team time and resources.

A tremendously useful paradigm for evaluating product features is the Kano Model. Features are categorized based on how satisfied the customer would be with a given feature (ranging from “frustrated” to “delighted”) based on the level of implementation of the feature (from “absent” to “fully implemented” ). The resulting five categories are:

  1. “Must-Have” features are expected by the customer. Although these features will not make a customer satisfied with the overall product, excluding them creates dissatisfaction. Continuing to invest in Must-Have features beyond the customer’s expected level of performance is pointless as it does not increase satisfaction.
  2. “Satisfiers” are features that provide a satisfaction level that increases linearly with the given level of functionality (for example, higher pages per minute throughput on a laser printer or more processor cores on a PC). These are typically the core features that the product competes on. Choose the right Satisfiers and the right level of implementation given how the product will compete in the market.
  3. “Delighters” are unexpected features that have a disproportionately high impact on customer satisfaction given the level of investment. Strive to have one to two Delighters in the product to create customer delight and positive differentiation.
  4. “Indifferent” features are ones that the customer doesn’t care about. Eliminate these since they have no impact on customer satisfaction.
  5. “Reverse” features are the opposite of Satisfiers in that the more that are added, the more dissatisfied the customer will be. It’s important to monitor new features to ensure they are not, in fact, Reverse features, and if they are, to remove them.

When considering a new product or service, gather feedback from target customers on potential new features and attributes. Start by eliminating any features that fall into the Indifferent or Reverse categories. Include Must-Have features but only develop them to the customer’s expected level of performance. Build the overall feature set primarily on Satisfiers, the key three to five features the product will compete on in the market. Finally, include one to two Delighters to create customer delight.

Recognize that value changes over time. What was a Satisfier in a prior version of a product may now be a Must-Have feature as customers’ expectations evolve. When planning a new version of an existing product, re-evaluate all features to see if their classification has changed.

Read more about feature prioritization and other key product management topics in my book, Mastering Product Management: A Step-By-Step Guide, available now in paperback and eBook.