Estimating the ROI of a new product feature
A simple method for predicting the business impact of a product or feature
Earlier this year Marty Cagan shared an article discussing the product manager’s responsibility for ensuring the value and viability of a product in an empowered product team.
For a product to be viable, our marketing organization must be able to effectively market it, sales must be able to effectively sell, finance needs to be able to effectively fund and monetize, and our offering needs to be legal and compliant with relevant regulations, as just some of the most common examples.
When assessing the viability of a product or feature one tool I’ve found helpful is to model out how this could impact the business. The goal of this exercise is to evaluate tradeoffs, opportunity costs, and how many resources we might allocate to the project. Of course, any model or projection is fraught with assumptions and downright BS.
These models and projections will vary greatly from product to product and business to business but this simple formula will help you think through product decisions and assist in pitching your idea to your leadership and stakeholders at the early stages.
The ROI calculation
(reach of users * new or incremental usage * value to the business) — development cost = expected ROI
Reach of users is an estimate of the number of users who will see, use, or be impacted by the feature.
New/incremental usage is an estimate of the change in behavior or primary action being driven as a result of the project.
Value to the business is the outcome you want to measure. This is often measured in averages or percentages and could be anything from LTV, conversion rate, renewal rate, etc.
It helps to create different outcome scenarios for the models. I like to use keep this simple with “bad, ok, good” versions of the model based on usage or margins to indicate a range of confidence.
ROI model in practice
Here’s a real-world example of how this calculation can be applied when evaluating a potential development project.
Let’s say you are the PM of an e-commerce site evaluating ideas to increase sales. One idea the team has is to use re-targeting emails to attempt to recapture sales from users who add an item to their cart but leave without completing the purchase.
Your data shows that on average 50,000 users per week add at least one item to their cart but never check out. The average value of those items in the cart is $10. Knowing this information we can create three different models based on projected conversion rates from the recapture emails. These models would look something like this:
Bad Conversion
(50,000 users * 0.5% conversion rate * $10 avg. per cart) = $2,500/week
Ok conversion
(50,000 users * 2% conversion rate * $10 avg. per cart) = $10,000/week
Good conversion
(50,000 users * 4% conversion rate * $10 avg. per cart) = $20,000/week
Don’t forget the hidden costs
Nothing comes free in software development. There’s a cost to develop the functionality and potentially an ongoing cost to support and sell it.
Using rough sizing estimates you can get a sense of how costly a product or feature might be to build. In the example above let’s say the team estimates that the work will take 2 weeks to complete. If our organization estimates that 2 weeks with a cross-functional development team costs roughly $25,000 then we can use that to factor in the expected ‘payback’ time for any feature or project.
Ongoing costs might include usage costs, like storage or shipping, as well as staffing costs to support the customers of the product. Trust me, you don’t want to be the PM who launches a new product that ends up overwhelming the customer support organization 🙃.
Thanks for reading!
Alex Pedicini
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PS - I’ve created a new resource for product folks. The Product Templates Library is a collection of ready-to-use resources sourced from companies and experts around the world. Everything from product 1-pagers, to strategy templates and roadmap artifacts that you can utilize in your work. Check it out below: