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How to set product budgets, forecast and create scenarios

by Leica Ison

As markets evolve in these testing times, product executives can play a major role in business success by leading the review of product revenue and costs forecasts, set the 2021 budgets and generate a range of scenarios to regain traction in 2021. 

Here are some tips agile product owners and managers can use to play a major role in your organisations success and set multi-year budgets and forecast product revenue and margin in today's business landscape.

Product management is the one function in your business where you can see and understand the drivers of the Profit & Loss (P&L) and Balance Sheet. Product managers set product strategy to turn a commercial opportunity into a business outcome.  Product managers can provide good quality and timely information to Boards on product health and future outlook. 

The product success manager is an emerging role in agile teams that brings together new product development and product management streams.  It has a huge impact on delivering a leaner product portfolio, product profitability and therefore business cash-flow.  The product success manager improves the gap between agile new product development and product management teams we are are now all working remotely:

  1. Defines new products to be built,
  2. Manages the development of an minimum viable product and
  3. Leads across the business the ongoing improvement of profitable growth after launch. 
  4. Actively triage a portfolio to recommend when to exit sun-setting products.

The product success manager is a wealth of knowledge in any business, they understand the companies' products, marketplace, customers, and the importance of agility and governance processes.  An effective product success manager can bring these together and craft good product strategy and execute a product plan to deliver value.  To do this they consistently complete product deep-dive assessments to get a pulse on the health of your product so you can deliver commercial value and see emerging risks.  I'm a big fan of completing consistent 90-day deep dive product assessments as they help you course-correct quickly.  As product portfolios get more complex and market changes product managers need a new way to set budgets and monitor financial and non-financial product areas effectively.  The nature of product management - where a product manager has to set multi-year business case, budgets and forecasts means you need to be able to foresee and predict the future outcomes.

When I look at product financials, I take the time to understand all the underlying drivers of product health which will dig you out of hot water when asked a left-field question on your product financial performance.  Just tracking an agile backlog and product roadmaps is not enough for profitable product growth.  If revenue or product margin is down or on a declining trend it's time to re-shape your product strategy and start deep dive reviews of your health to set 90 day improvement plans.

 

So here are my tips on how to know your numbers with confidence.

These 8 pragmatic tips are areas or techniques for a product success manager to do each week, month, and in more detail, every quarter:

1. Monthly, quarterly and annual budget

Start with basics.  Set your budget for the year.  If someone else has set your budget make sure you know the amount and the price, volume and unit cost assumptions. As you start the year, take time each month to compare your actual performance to the budget.  It helps to know the monthly performance, the quarter and full year numbers.

As you move into the year, you should also be re-forecasting each month.  Re-forecasting can be controversial, but my tip is if you start to go off track early in the year it’s better to re-forecast then sit flat footed on a budget that has a growing negative variance that you will never catch-up.

2. Revenue and product margin

Monitoring and reviewing monthly, quarterly and annual performance of product revenue and margin are very useful metrics to understand what has happened and how you are tracking with your budget and product growth strategy.

For revenue you need to understand who is buying your product — what customer segments and profile  and your share of wallet. Map the size of your market, market trends and your addressable market.  At this point I find a quick SWOT is useful.  I always have a customer persona for each market segment that buys the product and therefore generates your revenue. A revenue persona across each segment will help you target and tailor your product value proposition and product features to that specific segment.  For my detailed guide on all the definitions associated with product revenue, margin and forecasting see over 22 pages of terms you need to know, 14 factors to assess in your revenue forecasts, and 12 factors to assess in your product costs - How to use the best forecasting technique in the next 90 days

3. Prior-year product performance

Know your actual performance for the prior year and compare with the current period. You should know the prior-year month, quarter and annual revenue and margin numbers.  The reason to look at this is it helps you see trends, understand seasonal trends and if your year on year growth rate is achievable.

4. Product growth rate and scenarios

Know if your growth rate from the prior year is the same, better or lower than your budget for the current year.  Watch out for significant steps in growth in month-on-month revenue.  It’s rare that you get significant jumps in month-to-month performance. By comparing each period you can also work out any seasonal changes e.g. slow down of sales in the holiday period for consumer products or an increase in sales at the end of a financial year for business products. 

When setting your budget - set three scenarios when your assumptions are uncertain.  Most product teams set a baseline forecast and optimistic and leave out a pessimistic scenario.  Most product professionals are optimistic by nature or they wouldn't be in a role as complex and fast paced as product management.  I recommend that you complete a pessimistic scenario as its useful for your risk management.  It helps you see emerging risks and set triggers for when you are 'digging a hole'. 

5. Market growth & competitors

Know how fast the market is growing or declining and which competitor is getting the best revenue results and why. You can get caught out claiming a good product revenue performance compared to your budget if your growth rate is lower than the market average or your competitors.

6. Price & volume variance

If your revenue performance is less than budget or your latest forecast, try to work out the reason for the variance.  My tip here is to do a price or volume variance analysis quickly. What this highlights is that revenue may be down because sales discounts (price variance) or you have just sold less than anticipated (volume).  Your product strategy to address each of price or volume variance will be very different product decisions and actions.

7. Cost areas & budget

Product expenses should be carefully reviewed.  Know the critical chunks of cost for your product and breakdown and label these costs items as fixed or variable costs.  It’s important to know the essential areas of cost even if just your estimates.  Product margin performance is an important metric for product managers.

Often its hard to get a true picture of product margin. If you can’t get the essential cost areas from your reporting system at least do back-of-envelope assumptions. This list will help clarify your key cost drivers.  For detailed guide on the definitions of product margin contribution and variable costs and what is cost of goods sold see our detailed guide. How to use the best forecasting technique to triage your product portfolios

Knowing your product numbers is all about assumptions & drivers — what are the underlying driver categories of your revenue, value, customer experience & innovation areas.
A great product success manager can tell a clear story around product financials by going straight to the assumptions and underlying drivers. The numbers are just that a number.

I have laid out a step by step guide to understanding these drivers in our Skyjed health-check product management software.  It helps you do a deep dive review of your product in hours not weeks.  If you understand these drivers across revenue, margin, customer experience and innovation — about 40 driver areas for your product you will be one of those product managers who “really know their numbers”, track emerging risks & recommend when to course-correct.

8. Mitigation plan — your next 90-day plan

My one final tip is to make sure you are prepared to outline what you are doing to mitigate any variance in your product numbers and your course-correction plan for the next 90 days.

I have launched many new products in my career, but the most significant commercial successes are from doing deep dive product assessments every 90 days and working with a my virtual team across sales, marketing and operations .  In these times collaborating with your virtual team and bringing together agile product development and management is critical. 

Over my career I have completed more than 10,000 product budgets, forecasts and reviews.  The challenge is that these forward-looking reviews and pulse checks are complex and time consuming to prepare and require a product manager to predict the future.   So we have created Skyjed as simple to use commercial software tool to complete an AI driven product health-check that is based on predictive modelling.  Its simple to use. you can get started in minutes and govern your product with a forward looking plan.

The main benefit is that you can adapt to a changing market through rapid product health-checks with 90 days actions - reviewed weekly with real-time insights.  This means you make faster and better forward looking decisions with the contribution from your virtual team.

Have you tried Skyjed? We have a 90-day trial available here - our recommended amount of time to complete a deep dive product assessment and use our unique Ai-driven health-check score to make forward looking product decisions.

If you are new to product management or looking to refresh your expert skills, you can also join my on-demand free Webinar where I deep dive into how agile product teams can use predictive modelling to set multi-year product forecasts and some tips for prioritizing opportunities and risk using Ai based product health-checks.  Join anytime here Predictive modelling for agile product teams.

Watch our Skyjed intro videos:

 

Topics:Product PeopleProduct Management GovernanceProduct Growth Strategy