Building business cases as input to product planning and investment decisions are part of what most product managers do. Monetary values are easy to grasp and simple to compare. But business cases are only numbers. And just like statistics they can be altered to show whatever you want them to show.
Taking the time to work through business case assumptions and calculations has tremendous value if done right. And done right means done with focus on thinking, researching and analyzing. Not with focus on adjusting it until it “looks good”.
In this post I’ll cover some dos and don’ts based on my own experience.
Dos and Don’ts #1 – Do your homework
With the big value in the prep work first out on the do-list is “do your homework”. Spend time researching the market to understand how your product fit the customer needs and problems. Break the market down into segments and identify which to target. Research your competitors, identify your unique selling points and build a crisp value proposition. Work on your pricing strategies and compare with pricing from direct and indirect competitors. Understand your customers second best alternative to understand the real value of your solution. Figure out how to take the product to market, what sales and marketing channels to use, and what activities will be required to take the product successfully to market. With that work done you have credible assumptions, estimates and data needed to build a trustworthy and useful business case.
Dos and Don’ts #2 – Do a sensitivity analysis
Another thing on the do-list is a sensitivity analysis. This helps you understand what input parameters and assumptions have the greatest impact on your result. Play around with your numbers to identify what parameters have big impact and what parameters have small impact. This will help you focus your research efforts, but it will also help your investors and decision makers to understand how sensitive your case is to incorrect assumptions.
Dos and Don’ts #3 – Do NOT give a false sense of accuracy
Do NOT give a false sense of accuracy through mathematical precision. What I mean by that is make sure to round your output numbers. As an example think of a very basic case where you know the exact market size, say 2 300 items a day. You also believe you can beat a competitor that has a market share of 20%. You also plan on charging the same price they do, at $9.50 a piece.
Just because you know this, it doesn’t make sense to output a yearly revenue of $1 993 812.50 in your business case (25% market share, 365 days a year). Doing so will give a false sense of accuracy. Remember that your market share was just an estimate based on knowledge about competition and your solution uniqueness. Instead round that number up to $2M USD and you get the correct sense of accuracy. That also gives you room for a 25% increase or decrease in revenue. This means that your business case output would be valid also with a 20% market share, or 30%. At this point there is no way to know what it’s going to be, and therefore your investors need to be able to make the decision without that knowledge.
Dos and Don’ts #4 – Don NOT take financial terminology too seriously
Also don’t take financial terminology and methods too seriously. If someone tells you to go figure out the WACC for your market segment take it as a warning sign. The net present value is a good and straight forward output parameter, but make your life easy and just summarize profit from each year and forget about discount rates. And yes NPV was invented for a reason. But as input to product planning the business case should help you understand the magnitude of the opportunity. It should not be a 100% financially accurate statement. My experience is that your assumptions are going to be way too uncertain for the discount rate to make any difference. Keep it simple and focus on what matters, the research.
Dos and Don’ts #5 – Don NOT mix input, calculations and output
A bit of practical spreadsheet advice. Don’t mix input, calculations and output. Build a well structured spreadsheet with separate tabs and sections for input, calculations and outputs. If you want a one-tab overview, create a dashboard tab that ties the other tabs together. But don’t fall into the trap of mixing everything in one and the same place.
Why is that? Readability and maintainability. For others to understand, and for you to maintain the business case simplicity is key. Clearly mark cells that are adjustable input parameters. Only make one calculation per row. Provide clear instructions and comments. You, or possibly someone else, will thank your self later.
Should you follow up?
Should you be following up your business case once the product is launched? And if so, how and what should you measure? Measurability and ROI are hot topics, but how do you avoid becoming a product company where MBAs and controllers are the only ones in charge? And trust me, that’s something you want to avoid if you have any future ambition to innovate.
First of all remember that for measurements to make sense, the output of the measurement must lead to useful result. Either to an actionable insight, or to experience that will help you in the future. Preferably both.
So if you decide to do regular follow-ups it must be in order to take action if you get indications that you’re headed in the wrong direction. If you simply perform quarterly measurements and adjust input to compensate you haven’t achieved much. The question is therefore, what will you do if you realize you are not getting the volumes you expected? Or that the market price was lower than you thought? Or that the product need more functionality and R&D investments?
If that insight help steer the organization and other budget decisions, then measuring makes sense. It helps organizations, teams and people work together. If your volumes are not there, perhaps you need additional marketing or sales efforts. If pricing wasn’t right, perhaps you need to add more value, or find new market segments, or sub-segments where price levels are higher. New geographical focus areas?
Should you REALLY follow up?
My experience is that building a business case for an investment decision is one thing. It’s a tool to force a reality check of your assumptions. But to use it to steer an organization, which is what you need if following-up is to become useful, is a whole new game.
My recommendation is to at take one step at a time. Is your company mature in how you use business cases for investment decisions? Feel free to go ahead and implement reoccurring follow-ups and use the business case as an organizational steering tool. If you haven’t yet mastered the business case as an investment decision tool, I say stay away from the gran plans of regular follow-ups.
Working with business cases takes time, a lot of it. Figure out in steps if the value is worth the effort for you and your company.
If you only want one takeaway from this article, let it be this: the value of the business case lies in the work that goes into making well grounded assumptions. Not the numbers themselves.
If you want a few more, here’s the longer list
+ Do your homework – think, research and analyze your market and situation.
+ Do a sensitivity analysis to identify assumptions with great impact – then focus your research.
– Don’t give a false sense of accuracy – round your output numbers
– Don’t take financial terminology too seriously – ignore WACC and discount rates.
– Don’t mix input, calculations and output – keep your spreadsheet easy to read and maintain
– Don’t be overambitious – master the business case as an investment tool before you follow-up
Keep it simple!Building a business case as input to product planning? Check out 5 Dos and Don'ts! Click To Tweet