KPIs and Analytics
8 minute read

How to Effectively Quantify Product Value – A Guide for Product Managers

Laurie turns ideas into results. She creates multi-million-dollar businesses in secure network and cloud service delivery.

Amazing Products Can Be Defined by Differentiable Value

Many product managers will struggle to identify what makes an amazing product or service. Successful product managers, on the other hand, will invest the time to define and create differentiable value by innovating to solve unmet needs, improve processes, automate, introduce innovative valuable tools, attract a new audience, or predict the future.

In some cases, while the technology is truly unique, the company has just not figured out who wants it or why it’s important to them. Identifying and communicating a value proposition can be hard. Sometimes, stepping back to consider the bigger picture can drive different decisions.

Typical Decision Pressures for Product Managers

It’s not unusual for a product manager to get caught up in the day-to-day feature or functional discussions of managing daily standups or sprint meetings. This routine demands that they make micro decisions about the direction of the product, which can sometimes miss the opportunity for creating something truly amazing.

Many product managers will define value differentiation in terms of using the latest technology trends or breakthroughs such as machine learning, artificial intelligence, blockchain, or other new technology frameworks. Instead, differentiation should describe unique applications of any technology that can empower benefits for the customer.

Juggling Technology Decisions

Product managers today are living through this with the technology buzz around machine learning, artificial intelligence, blockchain, cryptocurrencies, quantum computing, identity and privacy, augmented reality, virtual reality, and autonomous everything.

On the positive side, there is clearly a lot of available venture funding for innovation that leverages some of these technology trends. This may be one of the key executive drivers for considering leveraging new platforms. Additionally, product managers will find that some customers want to be able to promote their culture of adopting the newest technology to show how progressive they are.

Evaluate innovation benefits over risks and costs of innovation

But there’s a delicate balance for product managers when dealing with bleeding edge technologies. Product managers that charge down the path of incorporating new technology frameworks or trends may struggle with being able to describe the true return on the technology investment.

And it’s important to remember, dramatic innovation does not come free. Engineering teams will find it hard to find the right skills in new technologies as they are rare and expensive, and easily lured away. Often, the time and cost of introducing new methods and tools can result in pricing pressures that will cause the business model to fail.

Product managers may want to consider that “differentiable” does not necessarily have to mean that the newest frameworks are being used, but that the solution offers a unique approach to achieve amazing results.

Quantifying Benefits Can Be Difficult

Professional product managers will need to consider the key challenges of defining and explaining value. Defining the strongest value demands a deep exploration into the impact of the solution. Value can be described in many ways and may be considered in terms of innovation, automation, cost reduction, speed, competitive positioning to gain more customers, or keep them longer.

In these situations, having a solution with financial models that support a detailed drill-down will have a significant impact on the buying decisions.

Calculate Value

There are dozens of methods of quantifying value. Here are some examples:

Category Description Calculation Critical Business Impact Examples
Productivity Improvements Automating manual tasks, reduction of redundant work; eliminating potential manual errors; process automation Calculate loaded labor rate against hours saved. Calculate "goodwill" value of accuracy in customer relationships (use customer lifetime value, reduction in cancellations). Cost savings; risk reduction; revenue protection
Business Intelligence Speed and quality of decision making, leveraging data and analytics to understand processes more effectively Calculate “before and after” scenarios—costs and revenues—showing the differences Competitive positioning, inventory management, customer adoption rates
Predictive Intelligence Drives investment decisions based on history and analytics to predict future behaviors Calculate “before and after” scenarios—costs and revenues—showing the differences Invest more effectively, reduce unused inventory, supply chain management, competitive positioning
Speed of Growth Describes, in volume, the velocity of the solution. Aside from revenues, in an online world, it might be viewers, minutes, clicks, or click-throughs that drive value. Calculate "before and after" scenarios that relate to the specific customer business Track and identify benefit against core KPIs of the customer

Predictive Analytics ROI Example

Let’s take an example of a machine learning-based predictive analytics service that could help communications service providers to improve the quality of service to their customers.

The Problem

Problems for this service provider are calculated in time and value. The major key performance indicators are based on the following:

  • A communications service provider support desk takes 600 help-desk calls a week from customers with an average duration of 20 minutes.
  • A team of eight resources handles the calls (calculated at 25 hours/week on customer calls).
  • 80% of the calls are complaints that their wifi is not working properly.
  • 60% of the calls generate a truck roll—a field service agent scheduling and driving to the home to fix the problem.
  • Their resulting churn rate (customers that leave because of service complaints) is 15%.
  • Their customer lifetime value is $6,000 over an average of seven years.

The Solution

There are four major areas that can be attributed to poor quality of service:

  • The WAN – The network from the home (endpoint) to the core or destination
  • The LAN – The network in the home
  • The gateway – The device connecting the devices in the home
  • The devices – Phones, computers, sensors, IoT, etc.

The solution might include a predictive network analytics solution to monitor all of the communications interfaces. It would detect anomalies, identify high and low usage, validate security, and manage the communications channels on which the traffic was traveling. It would identify and reset failing devices that are abusing bandwidth. It would automatically adjust available bandwidth or provide notification of an action that should be taken (e.g., shut off a misbehaving device) so that the customer does not have to get frustrated.

ROI analysis: Call center operation gets a boost with predictive analytics.

It could provide advance notice to the service provider’s marketing team that a client might become a good candidate for an upsell of more bandwidth opportunity if their usage is consistently going up (e.g., with gaming, streaming video). Further, from a customer satisfaction perspective, it demonstrates a valuable self-healing service, solving problems before a call is placed.

The Benefits

Call Avoidance – Fewer help-desk calls for connectivity-related issues

Truck Roll Avoidance – Fewer truck rolls required

Upsell Revenues – Identification of opportunities to optimize available bandwidth revenues

Customer Goodwill – Less churn, happier customers

Calculations – CURRENT

Cost Metric Calculation Annualized
Call Center Resources (avg. 200 hrs/week; avg. 25 hrs/pp) Loaded labor costs ($100,000 * 8) = $800,000 $800,000
Truck Rolls (40/week/pp) 600 * 60% = 360 rolls / 40 rolls/pp/week = 9 Loaded labor costs ($120,000 * 9) = $1.08 million # Trucks in Service ($40,000 * 10) = $400,000 $1.48 million
Upsell Revenues N/A $0
Customer Goodwill (15%) Churn rate * # of customers * CLV: (15% * (600 * 52) * 6,000/7) = $4 million $4 million
"Current" Costs $6.28 million

Calculations – AFTER

Cost Metric Calculation Annualized
Call Center Resources (reduce wifi calls by 75%) 600 * 80% = 480 (wifi calls) 480 * 25% = 120 calls left (remaining calls/week) Loaded labor costs ($100,000 * 2) = $200,000 $200,000
Truck Rolls (40/pp/week) 120 * 60% = 72 rolls / 40 rolls/pp/week = 2 Loaded labor costs ($120,000 * 2) = $240,000 # Trucks in Service ($40,000 * 3) = $120,000 $360,000
Upsell Revenues (25% of wifi calls); +25% revenues 480 * 25% = 120 customers Upsell / week (6,000/7 years) * 25% = $268/year * (120 * 52) = $1.263 million -$1.263 million
Customer Goodwill (15%) Churn rate * # of customers * CLV: (15% * (120 * 52) * 6,000/7) = $803,000 $803,000
Potential "New Model" Costs (Reduced costs, new upsell revenues) $100,000
Net Bottom-line Savings Annual Savings $6.18 million

Some models might go further, forecasting at the impact over time. The “current” model might show an overall customer base that never grows year over year because of churn and poor brand recognition. The “after” model would show the growth in customer retention, tied with positive churn (more customers) because of the excellent reputation they gain.

Turn Differentiable Value into Deals

The quantification of value using ROI models should be used with customers to help make a purchasing decision. The financial impact should also be used to drive a faster decision and shorten the sales cycle. For example, if the ROI models show that a customer can save $6 million a year by implementing a solution, they need to, therefore, recognize that each month of delay is effectively costing them $500,000.

Strong ROIs Can Drive Aggressive Pricing

With established ROIs for customers, product managers can be aggressive with pricing looking for a 6, 12, or 18-month breakeven for a customer, depending on the customer and the market. Working with this value-based pricing approach, less than 6 months of payback would suggest that the product manager may be leaving money on the table.

Return on investment models support pricing and profitability models.

Product managers should test assumptions with existing and potential customers, channel, and partners. Then, most importantly, they should run the numbers over the short, mid, and long term, exploring whether the business makes sense for the company.

Quantifying Value Can Make or Break a Company

Every product manager wants to innovate and create amazing solutions. With the current technological explosion of innovative and powerful frameworks, product managers have a fantastic opportunity to break new ground. However, the realities of running a successful business depends on the bottom-line financials. Major investment decisions can drive a need for board-level strategic discussions or additional funding.

An understanding of the impact on the business is critical. Finding skilled resources to complete the project in a timely fashion can sometimes be difficult. Customer research is imperative when determining differentiable value to validate if the anticipated benefit can be substantiated and sustained over time. Some product decisions may drive complete staffing, branding, and image overhauls. With the consideration of the cost of change and skilled talent, product managers need to consider the impact of the development costs and risks in delivering the solution.

But it’s truly only a numbers problem. Quantifying differentiable value requires a deep understanding of the ultimate benefit for a customer. Those ROIs can drive pricing, which in turn can drive the addressable market, revenues, and margin projections. It is a good time for a product manager to re-evaluate their key performance indicators (KPIs) on which the business will be measured.

Product managers should balance technology and feature decisions against the ROI models for the customer, as well as the revenue models for the company. A realistic understanding of the additional costs and risks of new technology can be balanced against the revenues. When the numbers make sense, product managers should enthusiastically embrace the opportunity to make major changes that can drive success.

Understanding the basics

How do product managers define differentiable value?

Differentiable value defines a unique solution to recognized challenges for a customer. It may be the value of innovating to solve unmet needs, improve processes, automate, introduce innovative valuable tools, attract a new audience, or predict the future.

What is the process for quantifying product value?

Product value should be calculated in the eyes of the customer. Determine the before and after financials to explore the potential benefit.

How does defining value fit into a product strategy?

Product managers will be asking for the funding required to create their product. The profit and loss statements for any product must take into account the potential revenues. These are driven by customers purchasing the product, which can be driven by the value it provides to them.

How can product managers confirm the value proposition for their product?

When researching their product design product managers should explore benefits together with their customers. What is the time saved? What are the resources saved? With a deep understanding of the impact, value can be determined and an ROI framework established.

How can ROI modeling shorten the sales cycle?

Strong sales leaders will paint the benefit to the customer in terms of savings, time, or convenience. All of this can be translated into dollars. So if the savings are estimated at $6 million a year, each month of delay would cost them $500,000.