Your Product Toolbelt | PaaP&L
Your Product Toolbelt is for the Founder, the Product Manager, the curious, and anyone who wants to contribute to the discussion.
How do you treat Product as a P&L (PaaP&L)?
Early in my career, I spent a lot of time learning SQL, HTML, and CSS for basic understanding. I then moved into learning to code, eventually finding some limited success with Ruby on Rails. As mentioned in the first post, most of us seem to take classes, read books, attend meetups, and network to gain new perspectives. Unfortunately, one thing we continue to miss out on is how to look at Product from a financial perspective.
That is a HUGE opportunity we are wasting!! It’s like watching every other episode of Game of Thrones and expecting to still understand the storyline. You’ll end up looking like Jon Snow…
The last tool is a magnifying glass. Use it wisely and you’ll see what you couldn’t before: where you are today, why you are where you are, and how you can leverage product releases to attain greater revenues and profit margins.
Step by Step
Step 1: Check the receipts
You should have a pricing model in place. If you don’t, hold that thought. If you do, great. Utilize whatever tool you have in place to track product pricing and customers contracts. You want the following information at a minimum: Account Name (client), Product Name (product), Client Segment (if you segment clients), List Price (standard product price), Actual Price (what the client is paying).
If you do not have a pricing model in place, the Actual Price will be informative. This is what your sales partners are currently converting at. You’ll need to analyze if that is appropriate or not based on win / loss data, conversion data, resources spent, and conversations with the team.
If you do have a pricing model in place, utilize the data to understand if your sales partners are discounting to close, are pricing up because they show clients additional value, etc. Just like your friend without a pricing model, you’ll need to analyze if that is appropriate or not based on win / loss data, conversion data, resources spent, and conversations with the team.
Step 2: Income is 👑
Convert your data into an Income Statement. Some key buckets to include in Revenue are Recurring, One Time, Net New Recurring, Net Partner (if applicable). For Operating Expenses, think about things like Staffing, Recurring, One Time, Net New Recurring. Admittedly, many items make up these larger categories! You will have to make many assumptions throughout this process. Keep track of each and the justification for them — I recommend a tab for each category for ease of use.
Take your categories and calculate operating income and profit margin (use formulas throughout so that changes to inputs easily recalculate outputs). Here is an example with the numbers obfuscated:
Step 3: What now?
If you track sales over time, you can use this data along with a layer from your current sales funnel to project into the future. Projections are a hypothesis. They, like the product roadmap, are never 100% accurate. Instead, projections help you to understand business decisions you can make:
- How are our margins impacted if we bring on more headcount?
- Does that ‘buy’ us more growth to increase revenue enough to be worthwhile?
- What happens if we increase our prices?
- What costs can most obviously be cut?
- Are our partner programs currently worth the effort to us financially? Do we get enough out of them because of the brand association?
The questions are limitless; the insight is powerful. Use your financials to give you a decision making advantage.
Step 4: Sugar on top
What do the decisions today mean in context? Simply put, use Net Present value (NPV) to understand what potential revenues in the future are worth today. You should never invest in something that has an NPV below $0. You should seriously question if investing in a product with NPV equal to $0 is worthwhile. You should talk about the NPV threshold for investment for your business. See the resources section for how to calculate this.
Toolbelt Takeaways
The finance department is your friend. If this is your first time constructing a P&L, lean on them and your manager for help. Check to make sure your numbers are consistent with finance. Start with a simple model and gain complexity over time. Simple construction is typically a good representation of what is occurring. Your financial statements should tell a story. Read into that story and help to write its narrative going forward. Use this as a part of how you converse with the leadership team and partner to make the best decisions for the business.
IF YOU LEARN NOTHING ELSE!!
- Finance is your partner. They want you to make the best decisions with the data at hand and will help you do it successfully.
- Use formulas to drive your spreadsheets, so changes to the inputs give you your outputs.
- Financials are a great indication of how your business is performing right now.
- Use that information to arm yourself with greater decision making power.
- What you spent already is a sunk cost.
- What you can spend going forward is your opportunity.
Where We’re At
Congratulations! You have the basic tools needed to become a successful product manager. Go out there and build something awesome!
Next up… well… let me know if there is a topic you want to hear more about!
Resources
- NPV: The Gold Standard of Financial Decision Making Tools by John Cousins
- Excuses for Ignoring Profitability Management from OpenView Partners
- Thoughts on pricing if you haven’t built out a model yet -> The Startup Playbook: Nailing Pricing Strategy by Rajat Bhargava
- Finance for Product Managers — calculating profit and loss for a simple online business by Stephen Cornelius
- And for some good, old-fashioned debate, check out The Myth of the Product Management P&L by John Mecke
- More tools here: 317 Free Resources for Product Management from fyi
For more reading, check out these previous posts:
- Your Product Toolbelt
- Your Product Toolbelt | The Problem Statement
- Your Product Toolbelt | Market Sizing
- Your Product Toolbelt | Competitive Analysis
- Your Product Toolbelt | North Star Metric
- Your Product Toolbelt | Discovery
- Your Product Toolbelt | Ideation
- Your Product Toolbelt | Validation
- Your Product Toolbelt | Delivery
- Your Product Toolbelt | Personas
- Your Product Toolbelt | User Stories
- Your Product Toolbelt | Roadmap Prioritization
- Your Product Toolbelt | Go to Market
