Kevin Brennan

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.

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.

4 best practices for Product Manager job interviews

The most important parts of a manager’s role are recruiting, developing, and retaining high-performance product team members. Like all specialized roles, successfully hiring Product Managers requires that the recruitment and interview process be optimized for the unique aspects of the role. Here are some key best practices for interviewing Product Managers.

1. Have the interview be a simulation of the actual role

The best measure of a candidate is to evaluate the person operating as close as possible to the actual role. Hiring the candidate as a contractor for a period to work in the role would be an ideal way to assess fit. However, that’s often impractical for both the candidate and the hiring manager. Focus the interview on the key responsibilities of the specific product role and how the candidate fits these criteria. This can be accomplished in a variety of ways:

  • Presentation – Given the importance of communication and influence in most product roles, have the candidate create and present on a topic related to the role. Have the full interview panel attend the presentation and allow time for the panel to ask questions. This is a great way to start the overall interview.
  • Homework – Get the candidate to do an assignment based on a project they will encounter in the role. For example, get the candidate to do a market and competitive analysis for a specific product and to recommend features for the next version.
  • Case study – Leverage a case study that outlines an actual situation the candidate is likely to encounter in the role as part of the evaluation.
  • Behavioral questions – Use behavioral questions to see how the candidate would respond to common product management situations. Behavioral questions examine specific situations the candidate has experienced where they had to use certain skills. For example, “Describe a time where you had to drop a potential new feature from a product project,” or “Tell me about a time where you had to interact with a difficult client.”

2. As the hiring manager, take an active role in organizing the interview

It’s critical that the hiring manager takes an active role in working with the hiring panel in preparation for the interview. It’s not enough to gain commitment from the four to five members of the hiring panel and hope that they will know what to do. Meet with the interviewers before the interview to make sure the role and the ideal candidate criteria are clear and understood. Assign specific areas for each interviewer to evaluate that are critical to the role (see the list below). These assignments will help ensure that all important areas are evaluated and that there is no significant overlap across interviews. Discuss how each area will be evaluated and how notes from the interviews are to be captured and distributed. Common areas to evaluate for product roles include:

  • Teamwork
  • Influence and leadership
  • Strategic thinking
  • Decision-making
  • Problem-solving
  • Analytical skills
  • Communication skills, both verbal and written
  • Product design
  • Market knowledge
  • Technical knowledge
  • Company fit and team fit

3. Build the interview panel with roles the Product Manager will work with daily

Have the people the Product Manager will interact with most participate in the interview panel. If that’s not possible, at the very least, ask representatives from each functional group to participate in the interview. Common groups a Product Manager interacts with may include Engineering, Design, Program or Project Management, Sales, Marketing, Finance, and Legal. 

4. Conduct the interview in person

It’s common to do an initial screening of potential candidates on the telephone or on a video call. However, given that product management roles have a high degree of interpersonal interaction, it is best to conduct the subsequent interview in person where possible.

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