Prioritizing What Matters: A Data-Driven Approach to Product Management
As a product manager, you’re constantly faced with tough decisions about where to allocate resources and how to prioritize projects. When new ideas emerge, it can be tempting to stick with the original plan, but you might miss out on crucial opportunities. That’s where cost-benefit analysis comes in – a powerful tool to help you make informed, data-driven decisions.
What is Cost-Benefit Analysis?
Cost-benefit analysis is a widely used technique across industries to evaluate the viability of new projects. It involves calculating the costs of a project, including labor, materials, and services, and comparing them to the potential benefits, such as increased profit, new users, or improved key performance indicators. By subtracting the costs from the benefits, you can determine which projects will yield the most incremental value.
The Benefits of Cost-Benefit Analysis
Using cost-benefit analysis in product management offers several advantages:
- Data-driven decisions: Cost-benefit analysis helps you make informed decisions based on objective data, rather than emotional attachments or personal opinions.
- Debating assumptions, not opinions: By focusing on assumptions and data, you can have more productive debates about the potential impact of a project, rather than relying on gut feelings.
- Accounting for hidden costs: Cost-benefit analysis ensures that you consider all the costs involved in a project, including those that might be overlooked or underestimated.
Conducting a Cost-Benefit Analysis: A Step-by-Step Guide
Let’s walk through a simple example of how to conduct a cost-benefit analysis. Imagine you’re working on an e-commerce site, and your team is focused on improving the checkout process. Suddenly, your CEO approaches you with a new idea to partner with another company, which would require a significant integration effort.
Step 1: Calculate Costs
Estimate the engineering time required for each project, and assign a cost per day. For our example, let’s assume the checkout optimization project will take three weeks (15 days) of one engineer’s time, at a cost of $9,750. The partnership project will take 12 weeks of one engineer’s time, at a cost of $39,000. Add any additional costs, such as licensing fees or third-party software expenses.
Step 2: Calculate Benefits
Estimate the potential benefits of each project. For the checkout optimization project, let’s assume a 1% increase in conversion rate, resulting in $100,000 in incremental profit per year. For the partnership project, assume $1,500,000 in revenue, with a profit share of $150,000 in the first year, and an additional $50,000 in strategic marketing and awareness benefits.
Step 3: Compare Results
Now that you have both costs and benefits, compare the value of each project. Using our assumptions, the checkout project generates $90,250 in profit, while the partnership project yields $141,000 in profit.
Step 4: Scenario Planning
Consider different scenarios to understand how changes in assumptions affect the cost-benefit analysis. For example, if the checkout project can double its conversion lift to 2%, it would generate a higher net value than the partnership project.
Step 5: Make a Recommendation
Based on the results of the cost-benefit analysis, make a recommendation that takes into account the company’s strategy, goals, and constraints. Remember, the highest net value project may not always be the right choice.
By following these steps, you can make more informed, data-driven decisions about which projects to prioritize, and ensure that your team is focused on the initiatives that will drive the most value for your organization.