In a previous post, I presented a method that product managers can use to integrate the stakeholders’ inputs into their business case, rapidly assess their impact on specific goals and, as a result, increase everyone’s confidence in the quality of the decision regarding the business case.

In the same post I then made the claim that this method, called a Monte-Carlo analysis, could be implemented in just one uninterrupted day by anyone with a minimum of spreadsheet skills.

This post walks you through the process via a step-by-step approach to help you build a bullet-proof business case in less than a day.

For the sake of the discussion, we will reuse the same example as in my previous post, and build an analysis to observe how Stakeholder’s input regarding price, quantities and fixed costs figures can impact the financial goal of a $1M NPV.

I must first disclose that I am not an Excel expert and I fully expect that someone reading this will suggest a faster and easier way to do this. This is an outcome that I am prepared for. Also, I have deconstructed the steps as much as possible so if you eyeball this post in horror, please do not get overwhelmed by the number of graphs and formulas. I am just trying to make it easy for you.

At any rate, you can access the actual spreadsheet here on the condition that you do not hold me responsible for any issues in your business case! Hang on to your boots; this is worth your time.

There are three steps I use to obtain the results presented in my previous post:

1. Integration of stakeholder’s input to the spreadsheet
2. Setup of the Monte-Carlo analysis
3. Plotting of the results

Let’s look at each step individually:

Step 1: Integration of stakeholder’s input to the spreadsheet (estimate – 3 hours)

Step 1 is the most complex step and where we will devote most of our attention. Let’s look at the figure below:

The first worksheet is composed of 4 sections. The first section is the original business case which will be used to provide the baseline for the Monte-Carlo analysis.

The second section, named “input from stakeholders” captures in spreadsheet format the input obtained during the feedback phase, as described in the previous post. For example, your CTO estimated that there is a 50% chance that the fixed cost may vary uniformly +/- 40%. This is captured on line 23. It is important to spell each input separately for two important reasons: first this will facilitate the work when running a sensitivity analysis, second, if one of your stakeholders wants to refine their figures (for example the CEO now thinks that the chances of a competitor entering the market is 40% instead of 30%), you can just input the new numbers in a flash and see the impact right away.

The third section consists of 3 random numbers generated for each of the 3 figures that will change during the Monte-Carlo analysis: fixed costs, quantity and price. Since it is assumed that changes in price, quantities and fixed cost are uncorrelated, we need these 3 random numbers. Please note if at some point you feel there is a correlation, you can always model it, but we will stick to the initial assumptions for this discussion. These random numbers are generated using the RAND () Excel function.

The fourth section “New Business Case Integrating Input from Stakeholders” is where the meat of the analysis is. It has the exact same format of the original business case, but several lines show different numbers than the original business case. For example, look at the fixed cost line (line 6 on the original business case and line 33 on the new business case), quantities (lines 4 and 31 respectively), as well as the average price per item (lines 13 and 40).  As a result of these calculations, a new NPV is calculated in cell C46.

A close look at the price per item indicates that it is $10 on year 2 (cell D13), but it is now $8 in the new business case (cell D40). Why? Because the corresponding random number in C26 (0.205647 which is 20.5647%) is below the 30% specified in cell C22. As a result, the 20% reduction is applied for Y2 and all subsequent years.

Look at the figure below to see how it is done in the spreadsheet. Please note that I left column A empty, so the first column you see on the left is B.

We can incorporate stakeholder input into the average price / item through use of a logic function. The probability of a competitor entering the same market is stated as 30% (cell C22 above). The formula in cell D40 tests the probability factor for competition generated in cell C26. If the value of C26 is greater than the threshold (cell C22) then we keep the price of the original business case. If not, then the price is reduced to the amount specified in cell E22 (20% in this example).

Let’s look at how the quantities are calculated now in the figure below:

To address variability into the sales quantity forecast we will incorporate stakeholder input through use of a linear equation. In cell C31 above, that part of the formula in parentheses calculates a factor that enables a range from plus or minus the percentage entered in cell E24, in this example +/- 20%.

The factor in turn will be used to vary the projected sales quantities originally forecast in cells C4:G4. This example illustrates a straightforward linear distribution. Other means of distribution such as a bell curve can be incorporated into the business case through modification of the factor equation.

Finally for this section, let’s look at how we include the engineering costs issue:

Cell C33 is calculated in the same way as  as was the price. If the random value for fixed costs (cell B27)  is above a certain threshold (50%  in this example as delineated by cell B23), then the costs are the same as in the original business case. If not, then they are increased by 40% (cell E23).

Completion of this step provides for a single business case on the basis of the generated random numbers. This becomes the basis upon which a series of similar business cases are run to generate a distribution of results.

Step 2: Setup of the Monte-Carlo analysis (estimate – 30 minutes)

So now what we have is a baseline business case with the NPV changing each time new random numbers are generated. Since these numbers can be generated by just pressing a key on your keyboard, one could be tempted to do just that, then write down the NPV and repeat the process a couple thousand times…. Wait! There is a better way, which is what this step 2 is about. We are going to cut and paste the new business case 2048 times in the worksheet. This will allow us to access the result of 2048 Monte-Carlo runs from one worksheet so we can plot the results.

Why 2048? I recommend 2048 runs as it will provide for consistent results of about +/- 3% – results that are practical for a business case. The variation can be further reduced with additional runs. Since there is a limit on the number of lines per worksheet, you can use several worksheets if you want to increase the number of runs.

You may argue that this cut-and-paste operation is as much of a hassle than the previous method, but my response is that you can cut one instance of the business case and paste it. That gives you 2 instances (or runs). You can copy these 2 runs and paste them to obtain 4, then cut and paste the 4 runs to obtain 16, and so on… I did just that until I got 2048 runs of the business case as seen below (2 runs out of 2048):

You can see that since each random number is different, then the NPV results are different. See lines 68 and 90. The whole process of cut and paste should not take more than 20 minutes.

Step 3: Plotting of the results (estimate – 2 hours)

So now you have 2048 NPV values calculated across a spreadsheet. You cannot really understand what this all means until you plot the result as I did in my previous post. The first order of business is to bucket the results so they can be analyzed.  By bucketing, I mean counting the number of NPV values within specific bounds. For example, I want to know, out of the 2048 runs, how many NPV values fall between $100k and $200k. I do this in several sub-steps:

a)      Copy columns A, B and C of the worksheet developed in steps 1 and 2 above in a second worksheet named “bucketing”.

b)      Clean-up the “bucketing” worksheet by filtering for only NPV values. You do this with a simple IF/Then statement:

c)      Filter column A so that only the appropriate NPV information appears:

d)      Bucket the NPV values. I do this hard way by setting up a logic formula for each of the columns in which I am interested. This is done through nested “IF” statements which generates a count of the number of NPV values that fall within the specified range.

If a cell gets a “1” it means that the NPV falls into the bucket in that column. For example cell G107 displays a 1 because the NPV in line 107 is $308,622 and column G represents values from $300k to $400k. There’s got to be a better way with Pivot Tables, so if someone knows how to do this more elegantly please let me know.

Now we are done with the exhausting part! All we have to do is create a new worksheet called “plotting” and plot the results of the consolidated data below. Add all the 1s you got for each bucket and divide that number by 2048, to get the appropriate percentage.

You can use the table above to plot the data in any way you want. I opted for a Pareto-type, 2 Y-axis graph for the initial post. Click here if you want to know how to create a Pareto chart.

That’s it! Now you are done as far as the details of the workbook implementation is concerned. You can now focus your attention on interpreting the results. That’s the most important part. There is a chance that you will not like the answer that the Monte-Carlo analysis gives you. This is normal, because the human mind is usually optimistic and there is always a need to inject a dose of reality in business cases. Here are the scenarios likely to occur:

• Your business case is “all over the place”. If half or more of the runs are within 50% of your financial goals, then anything could happen to your business case.  We will deal with this potential outcome in a future post.
• Most of the runs are way below projected goals. You obviously have an overly optimistic business case and must readjust your expectations.
• You see a bipolar situation, where 30% or the runs are well below your goals and 30% well above. You seem to have a business case that may depend on one or two extraneous events, such as a responsive/unresponsive market or competitor entrance/absence. Do not try to place your business case in the middle because obviously this “average” situation will not happen. Instead make two separate business cases for comparison and lay out the respective business assumptions to your management.

The next post in this series will discuss how to use the workbook developed above for a sensitivity analysis.

[Since I posted this, a few people suggested that I mention the existence of "cheap" packages which can do all of this above and more. This is definitely an option to consider]

So the business case for your new product is completed and you are ready to present it to your execs. As suggested in a previous post, you have consulted with the key decision-makers prior to the presentation and of course they disagree with your numbers and/or your assumptions. Your ability to drive everyone to a consensus will be critical to making your business case presentation meeting a success. But how will you make this happen when no one can agree on the key variables and assumptions?

When uncertainty is involved, as is always the case, the Monte-Carlo analysis can be used to better understand your chances of success or failure.

Armed with the results of an objective analysis, you can then go back to your execs and show the impact of their input. If there is little or no impact, you are in good shape. If there is significant impact at least you are no longer clueless about the key variables and are better equipped to address them.

The beauty of the Monte-Carlo Analysis is that all the known uncertainties you are aware of can be taken into account together to give you a full picture of your risk.

Implementing a Monte-Carlo analysis may sound complicated at first. However given rudimentary spreadsheet knowledge and one uninterrupted day any product manager can pull it off. For this post I will review the usefulness of the Monte-Carlo analysis. Future posts will talk about how this gets done with a spreadsheet, as well as how to use Sensitivity analysis to help isolate your issues.

The principle of a Monte-Carlo analysis is quite simple – it is to incorporate projected levels of uncertainty into a probabilistic analysis. If one or more of your figures is uncertain, then you create a variable for the figure and assign a random value to it that simulates the anticipated variation. For example, if fixed cost is projected to be $10 with a variance of +/- 10%, the random value will make the cost vary from $9 to $11. This is repeated for all known variables within the business case. You then run the numbers each time to see how it affects your objectives, such as NPV, cash flow or rate of return. The results of each run will return one out of an infinite possibility of outcomes. By repeating this exercise thousands of times, and this can be done in a spreadsheet in real-time, you can obtain a more realistic idea of your ability to meet your objectives.

Let’s use an example.  The figure below shows a summary table of your business case. Your objective is to reach a15% Net Present Value of $1M by the end of year 5. You get no revenue in year 1 as you are building the product and training the company during that time.

So far so good. However, after collaborative review, the following input was received from your key decision-makers:

1)      Your CEO thinks there is a 30% chance of a competitor entering your space in Y2 which, if this occurs, will force you to reduce your price by 20% starting Y2

2)      R&D is telling you that since this is a new product, your fixed cost figure really depends on the project going according to the conservative plan. Any unforecasted difficulty will impact the cost figure. Your CTO estimates that there is a 50% chance that the fixed cost may vary uniformly +/- 40%

3)      Your VP of sales’ quantity figures do not match what industry influencers think the market can bear. Your best estimate is that the quantities may vary uniformly +/-  20%

Now how do you account for the estimated variation in the business case? How will the combination of all these factors impact your NPV?

Let’s jump directly to the results of the Monte-Carlo analysis. Please note first that Monte-Carlo analysis requires multiple simulation runs involving lots of random numbers, so every simulation run provides similar yet different results.

After running 2048 simulations on my spreadsheet, the calculations return the following results:

The first thing to notice by looking at the Minimum NPV is that you could be losing money. A Monte-Carlo analysis was not required to tell you this. The theoretical worst case scenario could have been calculated by increasing costs to 40%, reducing prices and quantities by 20% respectively directly in the spreadsheet. The question truly is: what is the likely probability the worst case scenario will come to pass? A probability calculation provided by the Monte-Carlo analysis is required to provide this information.

The Maximum NPV shows that you can theoretically make more than the $1M NPV. The approach described above can be used to calculate the theoretical best case scenario – and the same applies with respect to probability of its occurrence.

The Mean NPV value is worrisome: on average, by running 2048 simulations, the average NPV was $667k. The probabilistic calculations provided by the Monte-Carlo analysis provide insight that your $1M NPV might be a bit idealistic. Again, what is the likelihood of that?

This brings us to the next graph. The grey bars show the % of occurrences that your NPV will be within a given $ bracket indicated in the X axis at the bottom of the graph. The blue line shows the cumulative distribution of % of occurrences.

The resulting Monte-Carlo analysis of the business case strongly suggests that more work is required to meet the stated objectives. In review of probability of outcome as depicted by the results of the analysis:

1)      You have a greater than 12% chance of realizing a negative NPV (extreme left bar). Your management must be prepared for this eventuality.

2)      You have an 80% chance of missing your $1M NPV objective, so you need to investigate further what needs to be done to bring back your chances within an acceptable range. We will see how this can be done in a future post using Sensitivity analysis.

3)      You have a 44% of chance that your realized NPV will fall between $500k and $1.1M. In other words, your business case is all over the place as reflected by a high degree of variance in the probabilistic analysis. Pretty much anything could happen to your new product in terms of profitability, and therefore your business case truly does not hold water.

This is bad news, but you have identified significant issues when no decision has been made and little money spent. It is better to know that you may crash before you board the plane!

Stay tuned to read about how we developed the results, and importantly, how primary issues can be identified through Sensitivity analysis. The resulting analysis will enable you to identify the problems that can be fixed.

Recently, I was lucky enough to have the opportunity to hear Jackie Huba, the author of “Citizen Marketers: When People are the Message”, speak about marketing in the Web 2.0 world.  She made many great points, but when she talked about a Participation Strategy, I really took notice.  Here are some of her ideas with some of my own thoughts about Product Management.

As you have undoubtedly heard, Web 2.0 is all about user generated content and its effect on people, products, institutions, etc.  In the old days, companies and mainstream media would push a message to consumers.  Now, B2B consumers can easily filter the messages they receive from the corporate world and they get a large portion of their purchasing information from other consumers via social media.  Companies and products can be eliminated from purchase decisions due to these customer conversations, so it is important that you have a plan to navigate these uncharted waters.

In order to respond to the changing ways in which product information is generated and communicated, you need to include a Participation Strategy as part of your product marketing plan. The purpose of this strategy is to answer one question in detail, “How do we intend to manage the participation of our customers in our product definition and execution?”  In order to define this strategy, you must first answer a few key questions about your customers:

• Who are the influencers/opinion makers/thought leaders in your field? Do they know about your products? If yes, what are their current opinions about your products?
• How does your community communicate currently?  Do they make use of Social Media (blogs, facebook, twitter, etc…) or do they gather and speak face-to-face.
• How technologically savvy are they?  My industry still makes heavy use of the fax machine, so I doubt that many of them are “tweeting” about our products.
• How involved are your customers within your product in general?  If you build a forum for them to discuss ideas, will they participate?

Once you’ve assessed your product’s community, you can craft your Participation strategy:

• Define your Role:  Are you going to monitor the conversation from the sidelines and make use of the information gained?  Are you going to participate – and to what level?  Who is going to manage that participation? In order to make this successful, you have to be sure to dedicate resources to this that have the business savvy to manage it properly. (If you try to control the participation too much, then you may be seen as meddling.)  Also, ensure that you have included the roles played by supporting teams – for example, you may need to your legal team to swiftly review company responses or comments.
• Document your Communication Vehicles:  Are you going to blog? Are you going to tweet out ideas and links to industry-relevant articles?  Are you going to react to questions or opinions in other blogs about your product? If you are going to use one of these communication vehicles, make sure that you have a publishing schedule and resources assigned to each medium and deliverable.  If you don’t, you will end up with large gaps in your content releases, unanswered user posts and generally poor communication which will cause you to quickly lose followers and relevancy.
• Specify your Objectives:  This is probably not going to produce a measurable ROI, yet it will add value because you will have much greater insight into your customers’ daily activities and a direct line of communication to them, but that is very difficult to measure.  Instead, try to think in terms of an ROO – Return On Objective – and define those objectives in terms that increase your customers participation, such as “Number of Customer Re-Tweets”, which would indicate that your customers like your tweets so much that they are sending them along to colleagues.
• Revisit, Revisit, Revisit:  As with any strategy, you need to regularly check on it to ensure that it is still relevant and effective.  I recommend that you schedule monthly reviews of your objectives and methods because this environment changes so rapidly.

Ms. Huba called Participation “The Fifth P”, which gives you an idea how seriously marketers are taking this concept.  If defined and implemented properly, your Participation Strategy will allow you to manage your communication with the customer, proactively handle adverse situations and gain the trust of the customer.

We are all familiar with Geoffrey Moore’s concept of “Crossing the Chasm,” which applies to new-to-the-world products entering an undefined market. However, little has been written or said about the internal chasm that a new product (along with the product manager) must often cross inside their own company to become successful in a B2B market.

Picture this: when you released your new product several months ago, the launch was flawless. Your positioning is crisp and your value proposition is well-articulated. The beta test / pilots are confirming that the product is solid and solves your customer’s business problem. The sales force is enabled and prospects are starting to trickle in.

But there is trouble in paradise, and it is coming from inside your organization…

First, some early prospects are asking for the features which you could not include in the first release due to a lack of time and resources.  These prospects decide to wait until the features they deem necessary are included in your product, leaving you without immediate closing opportunities. Yet, unfortunately, you no longer have the resources for a new release or agile iteration.

Second, the sales force is busy selling the legacy products they understand well and account managers are suspicious of the risks associated with your new product. Each is waiting for the other to sell it first so they can minimize the risk to their own accounts, so only a few brave souls are pitching your new product to your customers.

Third, many people in your organization, including your fellow product managers who were not too happy about your new product consuming precious R&D resources for months, are now anxious to focus attention on their own products and projects. The naysayers are getting in “I told you so” mode and your management is starting to wonder if your product is a loser.

Meanwhile, your competition is starting to get organized against your product and has now positioned their offering against your new product quite effectively.

You and your product are stuck in the internal chasm.

Don’t worry, it is normal. Remember, product management is not for the faint of heart.

There are several ways to handle this particular issue, ranging from the tactical to the strategic. Here are a number of  options which you may want to consider. Please note that each of these options is not incompatible with the others, –  they could all be implemented simultaneously:

1)       Change the incentives. Modify the sales force incentive plan to provide a SPIF (Sales Performance Incentive Fund), or even better a specific quota for new products. While this may not entice the majority of the sales force to abandon their “wait and see” attitude,  it may change the behavior of a few hungry account managers,

2)       The rolling thunder approach. Consider your launch as a work in progress and update your prospects, analysts and your internal constituents if and when you make progess in the marketplace.  Read more about this concept here.

3)       Opportunistic move. Capitalize on a lead customer who is interested in pursuing a sales cycle although the product is not complete in their view. The lead customer may be a large strategic customer for your company, or it may be an important new customer which your organization was not able to reach before in the past via its existing products. The key is to ride on your company’s obligation to please that lead customer to justify more investment for your product. Of course you want to make sure this investment results in features that can cover other customer needs. This is a long shot, and a lead-user may not be available. The lead user tactic can also backfire, as it is clearly dependent on maintaining the interest of one or several individuals working for your lead customer. Furthermore, many unfortunate events can occur when relying on a lead customer: they can find other ways to resolve their business problem, or champions may leave or be reassigned while they wait for your product to be ready. However, with perseverance, this option can bring you new, important customers that can be referenced both internally and externally, and, in time, get you out of the chasm.

4)       Organizational move. Convince your management that the current organizational structure does not optimize the chances of success for new products in general, not just yours. This is the most systematic approach and it may be the most important contribution you can ever make to your organization.  Point out that new products usually do not come out right the first time and they always need a few tweaks to be truly market ready. Analysts often joke that Microsoft products must wait for the 3.0 release before getting attention. Propose a dedicated structure for all new products that can ensure that your R&D firepower does not disappear overnight after your product is launched. You may consider having a dedicated sales force that works with or replaces the existing one for new products. The new structure will give your sales force the strong signal that your product is here to stay and that, should they bring a top prospect that is interested in your new product, their back is covered.

Granted, it is always better to have the sales incentives arranged prior to the launch, a strong lead-user program ready when your product is and an organization tailored to support new products before you submit your business case, but better late than never.

We spoke about Geoffrey Moore at the beginning of this post, and you may want to read his latest book which treats organizational issues for new products “Dealing with Darwin.” Distribute a few copies around to legitimize your call for reorganization.

Getting new products out to the point of revenue is really difficult. Many new products fail.

What do you need to make your new product successful enough to cross your internal chasm?

This is a continuation of a previous blog which deals with the details of successfully executing, presenting and gaining acceptance of a business case. In a future post we will deal with the content of that business case.

1. Think long and hard about the recommendations which you present to your management. During the presentation, go over the obvious ones (divest/stop investment) rapidly but ensure that everyone agrees. Also list options offered by the execs which you heard while building your business case. You can show your creativity by presenting options that meet your objectives but offer a lower cost to entry (partnership/ alternate sales channel).
2. Think about the organizational structure you will need to make the business case a reality. We will discuss this issue in more detail in a future blog. A business case may be a subtle way to plant a seed that the current organization will need to be revised to get the most out of the investment which you request. Is the company’s existing support/development/implementation organization able to handle your new product, or do you need a dedicated team? Will the sales force be empowered and willing to sell your new product or will changes be needed when the new product goes live? Think big. Don’t leave this out of the discussion.
3. Be as conservative with the timing and amount of projected revenues as you can. Sales cycles can be extended; the price originally set in the business case may have to be discounted. Recessions do occur. Your product may be delayed while the competition intensifies. You must be very careful about painting a credible revenue picture. A conservative view will definitely enhance the trust in your business case. Some present three cases – worst, best and most probable. If you present just one, everyone assumes that is your best case scenario.
4. The presentation meeting to the execs is critical. In an ideal case, all the decision-makers come to your presentation meeting, and are knowledgeable about your business case, your recommendations and agree with them. The function of the meeting is just here to seal the deal. Contrast this with a situation where one or two critical execs do not show up, and you have lost control of the meeting because 2 other execs disagree on an irrelevant point and precious time has been wasted. In order to run the meeting properly, you must first work the “back channels” and make your case individually whenever possible. Listen to each input and address it in the business case. Ask where they stand. At the very least you will be prepared for their objections prior to the meeting.
5. Demand alignment. Now that your business case is accepted, and a decision to invest has been made, you must ensure that the engineers will be available for coding, support employees will be available and trained, and service teams will be able to implement your product when it is ready. How does the investment make it to each individual department and get allocated to your product? You need to ensure that there is an alignment between all your teams, otherwise your business case, although accepted, will become a useless document because your initiative will keep being delayed or cut to make room for the crisis of the month. State this issue during the presentation meeting and later organize regular review meetings at the exec level to ensure that all the pieces are falling in place on schedule.
6. The truth shall set you free. There are times when the numbers do not add up and your product should be terminated. There are ventures that just won’t work because of the way they are set up. There are enhancements that will not provide a ROI commensurate with your company’s expectations. In these cases, think of your personal integrity, not your personal agenda. Telling your management that the partnership won’t work because the contract clauses are too limiting to do business is valuable information. You can be creative in proposing options to recover, but first state the facts as they are. Presenting a negative ROI business case and recommending that you should not move forward may be your best contribution to the company.

Keep in mind that there may be a time when the investors of your company request a copy of your business case and ask you what went wrong. At that moment, having a credible, truthful document will come in handy. It happened to me!

There is a time in the life of a product manager where a justification is needed to start a new product, prove its value or expand its capabilities. As a product manager, you are competing against other company resources and a business case is a great opportunity to demonstrate to the company your judgment and strategic mind, as well as your analytical and presentation skills.

Call it a business case or an MRD – every organization seems to be doing this differently. Some organizations require the use of a pre-formatted template that may or may not fit the need of your product, others need a 2-pager. In this 2-part post, we will be discussing 12 tips that will make your life easier and improve your chances of success, irrespective of the format required.

1. Budget at least 90 days for a medium to large business case. If someone asks you for a business case in less than 90 days, they are setting you up for failure. If you don’t have 90 days, reduce the scope of the business case to something that can be written in 90 days (or break it into multiple phases Your execs will remember the end result only, not the circumstances of the effort. Why 90 days? You will need to speak to many parts of your organization to determine potential revenues and costs and not everyone is readily available. It will take time to compile the information. Count at least 30 days for the review process: your management will request to review the document before it goes out, and when it is final, you should distribute it at least a week in advance of the presentation.
2. Organize your effort. What information do you need from others, who can provide it and in which timeframe? Who will review your drafts? Tell your reviewers when the first draft will be available and establish strict deadlines for the review process. Schedule appointments with whomever you need to speak with as soon as you can. Put together a mini-project plan that includes what you plan to accomplish and when. Add some slack and get support from your manager.
3. Make it short. In such an exercise, there is a temptation to be exhaustive and bring up as many details as possible in order to demonstrate your mastery of the situation. The truth is that no one reads long documents anymore. Keep it to 10 pages and include the 1-page executive summary. That’s what most people will read. You can always compile your backup information in support slides or in a separate document.
4. Include a “business risk” and a “business assumptions” sections. These are the most important parts of the business case: what are the market assumptions that you make? How will the competition react? What could go wrong? In these sections, you can truly demonstrate your strategic talent and clear understanding of the situation. Limit the number of risks and assumptions to 10-15 each and make sure the list is prioritized. Run that list to a few people you trust. These sections will increase the trust in your document as your audience will notice that you left no stones unturned.
5. Do not write your business case in isolation. Work with your fellow product managers. How does your new initiative relate to your company’s overall strategy? How can you leverage your fellow product managers’ effort and how will they be able to leverage yours? Were the last business cases presented successful? Why? What was the executive management feedback? How can you include that feedback in your effort?
6. Outsource the number-crunching to Finance. Or at least get their endorsement of your math. Even if you are a science major, if one person finds one single error in your spreadsheet, your entire business case has lost its credibility. Do not let that happen to you and work closely with finance to work out the costs, taxes, run rate and proper amortization techniques. That way you can be certain that your CFO will be behind you and no one will attack your numbers.

To be continued…

It’s usually true that most members of an organization appreciate how pricing has the potential to be used as a strategic tool. Unfortunately, it is also fairly universal that many are at a loss as how to best incorporate pricing into their new product development process for strategic advantage.

At many software companies new products begin with a general awareness of a market opportunity and as the idea grows in shape and potential, managers may assign a team to work together to design a product that they believe will sufficiently meet the needs of the customer.  Once the product is more-or-less market ready, management assesses the current and future costs associated with developing and supporting it. In an attempt to be fiscally responsible, the price is set high enough to ensure that the costs are covered and a profit is generated.

Can you see the flaws in this method?

First, you can’t calculate sales volume and hence, unit-cost, without first taking into account the price. I apologize in advance, but we’ll need to briefly dust off the downward sloping demand curve to illustrate this point.  The greater utility a consumer receives from a product, the greater the demand; conversely, as prices increase (utility falls) and demand decreases. Thus, setting the price impacts the units sold and therefore the unit cost. Simply put, managers cannot assume that they can adjust price without changing the unit cost, which leads to an exercise in circular logic!

Another problem with the cost-based approach is that the investments are made up-front without considering the value that the new product will provide to the customer. In other words, at launch-time, marketing is put to the test of convincing prospects that the new product creates enough value to justify the price needed to cover costs. In the case of products that have overspent on low-value features, this may prove to be challenging indeed.

Value-based pricing solves these problems, but as a product manager, you need to start early! Rather than leaving pricing until the end of the process, pricing strategy should be determined before development is ever started. In this way, you can ensure that a product can be sold profitably at a target price. Think about it this way, once you have identified a market opportunity; determine what potential customers will be willing to pay based on the value that your anticipated product will provide. Determining whether to invest in the product or not then becomes a function of product development’s ability to develop the product at a cost low enough to make the price profitable.

With a firm understanding of the value baked into the product creation process, value-based pricing also makes it a great deal easier for marketing to create sales tools that effectively communicate your product’s value to prospects. Likewise, the sales team will have less motivation to reward the strongest negotiators by giving into pricing discounts.

Sounds great, yes? Well sure, but how do you know how much your target customer is willing to pay? How do measure the value your new product will provide? These are great questions and luckily a concept called Economic Value to the Customer (EVC) is a big help… but that’s a topic for another post (see Unlock Your Product’s Value with Pricing).

There are many reasons that as a product manager you interact with the legal department:

• When introducing a new product or package, you need the customer facing contract to reflect and enforce your service level agreement, warranty, pricing and discount decisions
• When working with your business development group to negotiate a new technical or strategic partnership to complement your product, you need help from legal to formalize the terms of the relationship
• If your organization requires it, when all your collateral must be approved by your legal department
• When you want to protect your company’s Intellectual Property (more on this later…)

Most legal departments are pro-business and willing to go the extra mile to accommodate Sales, Marketing and Product Management. However Product Management and Legal can be at cross-purposes if you do not handle the situation properly.

The essential reason why a legal department may create difficulties at the worst possible moment (launch time) is that legal exists mainly to minimize the organization’s risk (although they like the word “mitigate” better). As you introduce new features, deploy new products, or want to expand your reach to new audiences, you are inherently creating potential risk. Making specific product claims, bringing an unknown party to the table, or targeting a new audience is enough to give corporate attorneys nightmares! The greater the perceived risk, the more time and energy must be spent – usually late in the launch cycle with the potential to erode your time-to-market advantage.

Hence the potential friction – or didn’t you want that launch bonus?

Maintaining a poor working relationship with your legal department could undermine your product initiatives in a number of different ways:

• Delay your product/partnership to explore legal ramifications: How is our Intellectual Property protected?
• Prevent you from creating impactful customer collateral by editing your material in a way that makes it removes its teeth: How can you back up your 20% ROI improvement claim when you have not implemented this product yet? Have you conducted a study to substantiate the claim?
• Prevent you from packaging your product the way you want to by disputing the language in customer facing contracts: We never had these clauses before. How can we enforce this packaging?

The points Legal brings up are usually valid and must be addressed.

How do you prevent a breakdown from happening? By being proactive!!

Here are 3 practical steps you can take early on in the process or at any time during your launch process to avoid the situation:

1. If you have put together a business case, in my book the most important section is the “business assumptions” section, where you lay out the conditions under which the business case is valid. Usually, there is also a section called “business risk” which lists all the bad things that could go wrong. No matter where you are in the launch process, you need to review those two sections periodically with Legal. If they don’t have time to listen to you, at least make sure they know you’ve made an effort to talk with them.
2. Each time you make a claim in a piece of collateral (productivity increased by 20%, ROI by 30%) make sure you have the proper supporting data to back it up. Those that are really on-the-ball might incorporate productivity and ROI studies into the beta test plan. However, if you’re in the unfortunate position of not having solid supporting evidence, (your claims are the result of a theoretical calculation), then you need to negotiate language with Legal that communicates the same intention but does not expose the company. The point here is not to have the argument when the collateral is under review, but to have the discussion with Legal leveling advance for each claim you want to make to justify the benefits of you product. Once an agreement is reached, you can get to your brochures, white papers or eBooks. It is far better to hit a wall early on than when the collateral is written, illustrated and laid-out.
3. If your pricing and packaging is different or appears exotic to the legal team–because you are targeting a new market, using a different channel or a new technology–you must be able to easily explain it to Legal, because if they don’t “get it”, chances are your sales force won’t either. Before you knock at their door, prepare in advance by asking yourself the following: Can you bill for it? Can you enforce the pricing with the customer? What are your proof points? Can you audit the customer to ensure they are paying the right amount? How does the competition package their offering?

Last of all, the legal department is a great resource whose input will make your product stronger. Just remember that they don’t like surprises. You need to be bold to survive, but you also need to ensure that the team that supports you is apprised of your thinking.