Kevin Brennan

Use personas to build empathy with your customer

When defining a new product, it’s easy to get lost in the details of functional (what the product will do) and non-functional (how the product works) requirements while abstracting away who you’re building the product for. To stay connected to the customer, create a persona that represents the customer and link the product requirements back to the persona.

A persona is a brief description (usually less than one page) of a fictitious person used to represent the target market segment, based on information and insight gathered from engaging actual target customers. A persona helps build empathy and makes the target customer less impersonal. Create personas for the end-user, the economic buyer, and other key people in the target market.

Common elements of a persona include:

  • Their name and a picture
  • Their role, such as “end-user;” for B2B products, define the job title for the target persona
  • Their profile:
    • Demographics: Age, gender, income, location, etc.
    • Psychographics: Personality, values, attitudes, interests, etc.
    • Behavioral attributes: Usage, brand loyalty, purchase occasion, etc.
  • Their goals, the top things the persona is trying to accomplish
  • Details of what is preventing the persona from achieving their goals with current solutions

An example persona for a frequent business traveler for an airline company looking to develop a fast-track check-in and security process might look something like this:

Bob is a business traveler based in San Francisco who travels to Asia frequently for work. Bob is 45 years old and a parent of two teenage kids. Bob works as a Business Unit Manager for a biotech company based in the Bay Area and earns greater than $300K per year. Outside of work, Bob serves on his children’s parent-teacher board and is a season pass holder to the San Francisco Giants. Bob travels alone on most trips but sometimes brings one of his kids with him. Bob values airmiles and will sometimes do a “mileage run” at the end of the year to ensure he meets the requirements for airline status.

Bob flies to Asia twice a month for work. Time is valuable to Bob, and he wants to minimize the time spent during the check-in, visa check, and security process at the airport. Bob would pay a premium to have a service expedite him through check-in and the security check process. Today, he typically spends 30 minutes going through airport security, although there have been times where it’s taken well over an hour, so Bob arrives at the airport at least three hours before his international flight.

When defining the product, and throughout product development, make the persona integral to product team discussions to ensure the effort is centered on the customer and their needs.

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

Assessing product profitability

Profitability is a measure of how a product or business generates profit or financial gain and involves an assessment of revenue and costs. This article outlines the steps to assessing product profitability using a Profit and Loss Statement.

A “Profit and Loss (P&L) Statement” or “Income Statement” shows the revenue and expenses for a product during a particular period. It’s common to create a P&L statement at the beginning of a project to estimate revenue and expenses and justify the investment decision, and the P&L is usually updated periodically during the product life cycle. The P&L statement is typically calculated for one or more years or quarters. At a high level, the P&L shows revenue, expenses, and profit. An example P&L statement is shown below for a three-year period.

Gross profit.

Product revenue is calculated by multiplying the units sold by the Average Selling Price (ASP). COGS, or Cost of Goods Sold, is similarly calculated by multiplying the units sold by the cost per unit. The first measure of product profitability is gross profit, or the profit left after COGS is subtracted from revenue. 

Net profit.

Operating expenses are the expenses not directly related to producing or manufacturing the product. These include Sales and Marketing, Research and Development, and General and Administrative. This leads to the second measure of profitability of the product, net profit, the income left after paying all costs associated with the product.

Profit margin.

Gross profit and net profit are sometimes expressed as a percentage of revenue as gross (profit) margin and net (profit) margin: 

Gross Margin = (Gross Profit / Revenue) x 100%

Net Margin = (Operating Income / Revenue) x 100%

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

Building a product forecast

Forecasting is the process of estimating future demand and revenue for a product. Forecasting is used to assist with investment decisions in new products, to drive manufacturing, to set budgets, as part of the strategic planning process, and to guide Sales and Marketing efforts. This article outlines how to build a forecast by taking both a top-down and bottom-up view of the market.

Estimate the total market size (TAM).

TAM, or Total Available Market, is an estimate of the size of the overall market for the product. Calculate TAM by multiplying the total number of units expected to sell in the market during the forecast period by an estimated average selling price (ASP) to arrive at a revenue estimate for the total market.

Segment and estimate the size of the target segment (SAM), if applicable.

If the product is not a mass market product and is instead focused on a subset of the overall market, segment the market and similarly estimate the size of the target market segment. This is the Serviceable Available Market (SAM). SAM and TAM are identical if the product is targeting the whole market.

Estimate the Share of Market (SOM).

Finally, estimate the part of the Serviceable Market the product will capture for the forecast period, the Share of Market (SOM). Usually, SOM is a fraction of SAM, which is, in turn, a fraction of TAM. The Total, Serviceable, and Share of Market can be represented in a few ways:

  • TAM, SAM, and SOM can be represented in absolute terms as units and revenue.
  • SAM is also often represented as a percentage of TAM.
  • SOM is often represented as both a percentage of TAM and as a percentage of SAM, depending on the context.

Compare the “top-down” forecast to a “bottom-up” forecast.

Some products lend themselves better to top-down forecasting, where you begin with an overall estimate for TAM and drill down to SOM. Other products, especially products with a highly concentrated customer base, can be more accurately forecasted by estimating the demand on a per-customer basis. It’s useful to create both a top-down and bottom-up perspective to cross-check the forecast for accuracy.

Create worst-case, expected, and best-case estimates.

Define the expected forecast and then calculate a best-case and worst-case forecast to show how the forecast could vary depending on a stated set of assumptions. This is useful to show that the forecast is just an estimate and that the actual results could vary, for better or worse. A common mistake is to focus on the potential upside, the best-case, while ignoring the downside potential of the forecast.

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

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.

Deciding to retire a product

Deciding to end-of-life (EOL) a product is an important yet often neglected decision for a Product Manager. Products often continue in the market long after they should have been retired and while most companies have formal new product processes for defining and launching new products, many do not have the same discipline when deciding to end-of-life products. This article identifies some key considerations that can help you make an end-of-life decision.

Consider the product and category life cycle.

Products and product categories in the decline phase of their life cycle are often candidates for end-of-life. Also, the decision to develop the next generation of a product should trigger end-of-life consideration for the old version of the product.

Monitor key financial metrics.

Actively monitor revenue, unit shipments, profitability, and market share in the absolute sense and compared to trends over time. When a product enters the maturity and decline phase of the life cycle, revenue growth slows and ultimately declines. Profitability can turn negative even during the maturity phase depending on market conditions. Once a product no longer makes economic sense, it should be actively reviewed for retirement.

Compare the product portfolio to the product strategy.

Compare the product or product portfolio to the company, business unit, and product line strategy. Does each product continue to make sense relative to the strategic goals of the business? Does the product continue to align with, and leverage, the core competencies and skills of the company? If not, then an end-of-life decision should be considered.

Monitor redundancy in the product portfolio.

Periodically, review the overall product portfolio and look for areas of overlap and redundancy. Are there too many products in the portfolio?

Conduct a competitive and market analysis.

When doing competitive and market analysis, consider how changes in customer preferences, competitive solutions, or technology advancements could make current products obsolete in the future and consider whether an end-of-life decision is reasonable. Often it takes years to fully retire a product and getting ahead of the process can save considerable resources.

Build an end-of-life decision process.

Finally, if your company or business unit does not have an end-of-life decision process, create one. Establish an agreed upon set of rules to guide the end-of-life process. Identify conditions that trigger an end-of-life decision. Establish an end-of-life committee of key stakeholders to assist in the decision-making process.

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