How to justify the cost of a product manager
April 25, 2019
April 25, 2019
For many product teams, the concept of product management is more an understood practice than a defined role. Typically, a product founder sets direction and the team around them follows the vision. As the product picks up in adoption, a founder can find themselves stretched thin dealing with wearing too many hats. In this world, a founder can be responsible for fundraising, managing leadership teams, finances, legal and other more hands on aspects from support, sales and development. In this case, the quality of the decision making starts to decrease simply because there is not enough time in a day for one person to play so many important roles in an organization.
When you take a step back and think about the touch points of most product-based businesses, they typically revolve around how well your product manager prioritizes features. Specifically:
- Conversions: Sales are driven based on the ease of on boarding of a new product. You can have a great product, but if no one knows how to use it or cannot figure out the setup process, it is useless. Your ability to properly master the on boarding flow is directly tied to your ability to drive revenue up.
- Churn: Users stop using a product for a number of reasons. Some of those reasons are out of the product’s control. Many of the reasons could have been prevented with changes to the product. To shrink your churn rate, you need someone really learning why users stopped using it and working to prioritize features that decrease churn.
- Monetization: Products make money by monetizing in a variety of ways. You can go ala carte. You can be component based. You can have subscriptions or one time fees. There are many ways you price and monetize your product all of which ties back to how well your product is setup to support your customers and what customer pricing makes sense for your market segment.
- Value Add. At the end of the day, does your product add value to your customers. Do you currently solve their pain points fully. Are you keeping up with competition? Are you keeping up with the industry? Have you expanded your offer to continue to solve their needs? This will ultimately define not only your growth but how long you can stay in growth mode.
With that being said, if you are a small product team that is now realizing you have someone on your team wearing the product manager hat and trying to decide if you can justify the added cost of a new product manager, go through this helpful exercise.
- Look at your revenue model for the next 24 months. Assume if you improved your on boarding experience and streamlined setup, you could increase your conversion rate. If you know you have a complex on boarding today, move the needle further. For example if you convert at 25%, assume you can get it to 28% and uptick that over your first 12 months.
- Look at your churn rates in the same revenue model assuming a 24 month window. Think about the areas people churn for and how much of the reason is product based. If you had someone committed to prioritizing features and solving deeper product issues that lead to churn, how much of an impact would you anticipate? Decrease your churn in the model based on what you think could happen over a 12 month period and then let it run out to a full 24 month window.
- Lastly, think about how many leads you do not get. How many people may find your product but decide not to use it because you currently are not solving their needs? Are there major areas of your product lacking or missing that causes you to not be a great fit for a larger market audience? If you had a product manager driving those changes, what could that increase your trial base into? In your model, over a 24 month period assume if you flushed out your product you could increase your trials and see what that looks like by growing at a higher rate over a 24 month period.
At this point you should be able to compare your model with out a product manager and your model with a product manager. My assumption if you did the steps and took an honest look at your levers on what moves your business you will see that your revenue has increased drastically over a 2 year period. The simple math on that is to look at budget that creates to make that a hire for a new product manager.
Your product manager is one of the few roles which pays for itself within a short period and then increases the overall value of the business from there. Like all investments, you need to spend upfront to make the higher and measure each month your metrics to see them increase and wash off the expense.