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%.
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.