Portfolio prioritization is a never-ending problem since it is complicated to optimize the portfolio’s value at a given level of resource consumption. To minimize the cost of a product discovery error, the ultimate objective is to get goods to market as quickly as possible.
To be more specific, it takes a Chief Product Officer 1.5 hours per day to obtain a birds-eye perspective of all products and features at the cost of about $30,000- $50,000 per year. Additionally, it causes a product team to slow down, costing a firm with 10,000 employees $4.3 million. As a result, the overall loss is between $4 and $7 million each year.
Additionally, most product prioritization techniques examine just market opportunities, customer behavior, and inputs rather than the specific business skills required to make this product successful. Just because one business has had success with a particular product does not imply that your business will achieve the same degree of success. It is for this reason that your product skills and resources are also essential.
The Use of NPV as a Foundation for Product Rankings
Companies that utilize Net Present Value (NPV) to prioritize their product portfolios account for 92 percent. In reality, it is one of the most accurate predictors of prospective value creation; yet, it does not represent how project managers perform their functions. What methods are used to corroborate the market estimation? So, what are the takeaways from the customer interview process? Were they appropriately completed? Were the prime ministers sufficiently insightful (or objective)? What criteria should be used to evaluate if technology is replaceable in the future? And there are many more.
Essentially, all of these problems are risks associated with the introduction of a new product. To summarize them, assign weights to each category, and subtract from the NPV as much as possible. The number received seems to be a legitimate Product Ranking since it considers the potential for wealth generation and the dangers associated with the product.
As a result, although the NPV from Product Rankings was not removed, the methodology was only based on this indication.
The following is the equation to be used in calculating Net Present Value:
Net Present Value= Year n Total Cash Flow(1 +Discount Rate)n
Where “n” is the year whose cash flow is being discounted.
Here are the categories of risks to be subtracted from the NPV. Please feel free to use this method inside your organization and share your findings with others.
Each kind of risk has a different weight, determined by the amount of “evidence” and arguments your Product Managers can provide and the depth of their completed work. You know all of these risks — the problem is to decide the weight that’s changing from industry to industry and relies on the product framework you employ.
The risk associated with novelty
A varying degree of novelty may be found in any product, ranging from a new product to minor modifications in the packaging or use of a previously existing product.
The most significant risk is presented by a new product that has no comparable effect on the market. If anything, it seems like such a plan should be constructed in the other direction. This is not the case for a variety of reasons, including:
- Considering that the product is unknown, it is impossible to predict how consumers would respond to it;
- It isn’t easy to earn money fast since it will take a long time to test everything;
- Bringing an original idea to reality requires a considerable commitment of time and money on the part of the entrepreneur, and success is not guaranteed;
- Because there are no competitors and standards, it is easy to make a significant number of errors at the beginning, such as sending an inappropriate message or packaging that is unattractive; and
- It will require a significant amount of money to promote and publicize the company, and the likelihood of making errors while designing advertising campaigns is considerable.
Risk linked to a mistake with a new product idea
At the outset of the execution of any product, a concept is created. For testing, teams first create a minimally viable version of the product (MVP) and then begin executing the project in full. There are numerous causes for making errors in the idea. They may be both internal and exterior. The second category is more difficult to forecast because it is difficult to predict changes in the demographic or socio-economic condition of the area.
Progress is advancing by leaps and bounds. New technology and answers to old consumer issues emerge frequently. Unfortunately, there is no assurance that immediately after the completion of expensive product development, a new result will not materialize, against the backdrop of which yours would look like an “unnecessary toy.”
Risk linked to competitors
Dozens of new businesses and hundreds of goods come on the market every day. There is no assurance that your business will win the competition. But losing it is very easy; one wrong choice is enough.
Competitors may “squeeze” you out of the market via dumping or massive advertising campaigns, for which there is no means to fight.
You should have a well-defined course of action, what to do if some “mastodon” arrives into your field with a new product.
Risk linked to shifting consumer preferences
Consumer tastes are evolving following global trends. What is deemed helpful now may not match the audience’s opinions tomorrow? Therefore, product managers constantly evaluate the product-market fit.
The shifting requirements are affected by various factors: new technology, crises, laws, etc. The product manager’s job is to identify all potential situations for changing conditions and create a strategy for re-orienting the company. Those who do not have time or cannot alter their development vector eventually become bankrupt and quit working.
Risks linked to cautious customers
Clients are highly cautious today. Not everyone is willing to throw up their money for a new product. There may not be enough beneficial features and advantages to persuade them to make a buy. Product managers continuously gather consumer input to learn what features and capabilities they want to see. This enables you to negate this danger.
These problems may occur on the path of any new or current enterprise. They need to look in the eyes, not turn away. Then it will be able to deal with the difficulties and push the company to a new level.
Product Rankings Algorithm
Thus, the following is the Product Rankings Algorithm:
1. First, you compute NPV for each product or feature
2. Then, for each kind of risk, you need to estimate KPIs and evidence/confirmation you’ll require from your PMs
3. Considering the weight of this risk aligned with your industry
4. Finally, list all the risks and subtract them from NPV