Kevin Brennan

Picking winning new product ideas is really difficult if not impossible. Research abounds on the high failure rate of new products and business ventures. By some estimates, less than 15% of new consumer packaged goods make a profit, less than 3% of patents ever generate revenue for the inventor, and over 70% of US startups stall at some point in the VC process and fail to exit or raise follow-on funding.

Most innovations fail, not from a deficit of technology or failure in product development, but from a lack of paying customers. That sounds obvious but when you think about it, most times a new business venture fails it’s because there wasn’t enough customers willing to pay, or the company didn’t know where or how to find paying customers. In comparison, developing, testing, marketing, and selling a product is much more deterministic and well understood.

The success rate for established companies developing new products that are evolutions of existing successful products is higher since the company knows lots about who the customer is, their needs, and how to find them. However, when developing new products or businesses that are not related to the existing business, established companies run the risk of short-circuiting validating the opportunity in the market and instead, moving ahead with the thing the organization is most primed to do: execute.

Lean Innovation emerged as a response to the above challenge. It focuses first on testing the appetite for a new product concept with customers and validating the new business model before significant resources are dedicated to the expensive tasks of fully developing, launching, selling, and marketing the product.

Lean uses the scientific method of experimentation to validate the hypotheses that the product’s business model is built upon by conducting hundreds of in-market experiments with customers, users, buyers, partners, and other ecosystem players to arrive at an evidence-based perspective on the attractiveness of the proposed new product. It does this with speed and urgency, thereby reducing risk and minimizing cost and time.

The Business Model Canvas (BMC) is a tool used in Lean Innovation where each of the key components of the business model are identified and represented graphically on a single diagram. At the heart of the business model is the Value Proposition for the product (the key product features and benefits and how they solve customer problems) and the Customer Segments (who the product creates value for).

“Product-market fit” is attained when a value proposition for the product has been determined that enough customers are willing to pay for. Reaching product-market fit is an iterative process. More often than not, the original product definition will not be what the market is looking for, and it takes a number of iterations before converging on the right product definition. Once product-market fit is attained, the other aspects of the business model are likewise tested, refined or outright changed until the overall business model is determined to be viable. However, product-market fit is the foundation upon which the whole enterprise rests.

When you’re working on new product ideas, take the time to properly validate the value proposition in the market and gain product-market fit. You’ll significantly increase the chances of success and avoid costly and time-consuming new product development in the wrong direction.

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

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.

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.

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.