Navigating The Financials of Your Product
Navigating The Financials of Your Product
Form your own opinion of the financial health of your product
Your customers say your product is priced too high and your finance leader says your product isn't priced high enough. Who is right? It doesn't matter who is right. What matters is your opinion!
Product pricing feedback is one aspect of your product's financial status. However, there is more to evaluating financial status beyond pricing. To reach an informed opinion on your product pricing and financial status, here are the steps to take:
Learn the basic ingredients product financials
Collaborate with your financial team
Compare your financials to similar products
Let's dig into forming your own opinion of your product's financials.
The Basic Ingredients of Financial Performance
When thinking about product financials, the product team often turns to pricing. Pricing defined:
Fixing the value that you will receive in exchange for your product and service.
Pricing is just a number. How your product team gets to that number is complex and has many considerations.
There is more to financial performance than high or low prices.
Some of the key ingredients of financial performance are:
Units of measure: What is the customer paying for each unit of sale
Cost of each unit: How much it costs your organization to deliver that unit to the customer
Revenue: The amount of money brought in by operations over a set amount of time
Profit: The revenue minus the cost
Margin: The ratio of profit to revenue
The following worksheets show how a product manager on an example SaaS product can evaluate their essential financial ingredients. In this example, each user of the SaaS product has a monthly fixed price with fixed costs. New users come and go each month which drives the monthly revenue.
The example SaaS product has a fixed price and costs while the number of users varies each month. The monthly revenue varies due to the number of users. The cost per user is fixed and the margin is fixed. The product revenue and margin each month are below.
How do you account for your engineering and support teams in the product's margin? The salaries and benefits of your product team come into play in the product's margin calculations. In this example case, both teams are growing monthly. Here are the combined costs and revenue.
After adding in the engineering and support costs, what is the margin of the product? This is shown below with the monthly margin graphed on the right and the monthly revenue graphed on the left.
With the variable costs of the engineering and support teams plus the product costs, the margin varies from month to month as the users grow and shrink. In this case, the margin goes from 15% to 45% over the year with the total margin for the year at 40%
Now that you have the basic product financial model, is this good or bad? It depends.
How Finance Looks at Your Product
Your corporate finance team watches many factors on the financial health of your product.