“Everything is important” – How many times have you heard this? Too many times is the right answer .

The problem with this statement is that mathematically speaking, if everything is on the same level of priority, then importance has no level of comparison, so we can also say that nothing is important and the statement will still be correct.

As a Product Manager or Product Owner, in order to deliver the desired product, ensure that the business goals are attained, and have stakeholder buy-in, you will need to prioritize by using some prioritization techniques.

To prioritize is more of an art than an exact science, and having some mental models on how to prioritize will help you both in stakeholder negotiation and management and keeping your development team focused.

In Agile software development, tackling the Budget/Scope/Time trifecta is more clear and easily followed by using Agile frameworks and implicitly implementing the principles and values mentioned in the Agile manifesto.

The delivery has implicitly defined quality, by using Acceptance Criteria and DoD ( Definition of Done ), is early reviewed and scrutinized and by early releasing.

So, usually the budget and time are maintained and we negotiate on scope, below I will show a graphic representing this

In the end, the product scope will be split in:

1. Initiatives/Themes
2. Features
3. Epics
4. User Stories

Sometimes the product may just be broken down into Epics or Features, and from these Epics or Features, we prioritize them using prioritization techniques into Releases ( see here and here for some examples where we’ve discussed release planning and roadmap planning ) and one of those Releases is an MVP ( Minimum Viable Product ) so that we can get rapid market feedback.

Epics are themselves broken down in User Stories that are User-centric requirements for the Development Team to pull into their Sprint Backlog according to their capacity and forecast. These are also prioritized using the prioritization techniques discussed below.

So to sum up, we’re going to have two categories of prioritization techniques:

1. Epics/Feature level prioritization techniques;
2. User Stories or PBIs prioritization techniques.

Please keep in mind that these might be used interchangeably at both levels (US or Feature), so there is no hard separation between one or another that should be applied.

The MoSCoW model technique

MoSCoW is an abbreviation that comes from ( Must Should Could and Won’t Do ) as can be viewed from above.

The distinction about where the categories come from is:

1. MUSTs – These are those requirements if they are not delivered, the product or project will not function accordingly or will not attain the value needed. They are those US/Epics/Features that if not delivered will not let you sleep at night. Ask yourself if these requirements are not met what happens? If the answer is: “impossible” or “cancel the project” then these are the MUSTs.
   Examples of MUSTs are:
   1. Legal, Compliance, Regulatory requirements;
   2. Major security issues;
   3. No functionality that makes the delivery viable on a specific date.
      
2. SHOULDs – Are the requirements that are important but not vital as the MUSTs. If they are left out the product can still function as it is, but if they are included they bring tremendous value.
   Examples of SHOULDs are:
   1. Non-functional improvements such as in performance or security;
   2. Major bugfixes or UI/UX improvements;
   3. New functionality that enhances the MUSTs and so on.
      
3. COULDs – This is where it gets tricky if there is no issue in distinguishing between the MUSTs and SHOULDs, the distinction between SHOULDs and COULDs is less obvious. There are some guidelines in better helping you decide between these two, but for now, let’s cover what COULDs are. COULDs are those requirements that you feel good about dropping if you are close to a deadline. These types of requirements bring minor improvements to the whole product.
   Examples of COULDs:
   1. Minor bug fixes;
   2. Minor UI/UX glitches;
   3. Enhanced functionality.
      
4. WON’Ts – These are fairly simple, if you follow the above these are usually the ones left at the end. These are the type of requirements that are not going to be delivered in the current time frame and do not impact the product’s success if left out.
   Examples of WON’Ts:
   1. AI integration;
   2. Interfacing with other products;
   3. Preference targetting.

Following a column approach where you drag the requirements into a MUST, SHOULD, COULD, Won’t have this time column, will help a lot in the initial stage:

You begin by first dragging requirements in the MUST, then follow with the SHOULD and COULDs and what is left out are going to be the WONTs.

If you correlate this technique with a Story Map described here and here you will have a very point-on prioritization to help you schedule your next releases.

The Kano model technique

The Kano model is a prioritization technique created by Dr. Noriaki Kano, focused on customers reaction towards the released features.

The two criteria in the Kano model are:

1. Impact on customer satisfaction;
2. Effort needed to implement these changes.

The features that focus on the customers desirability are broken down into:

1. Basic – Are those essential features that customers assume that are included in the product. For example, in a phone we should have contacts and a dialer for the most basic features;
2. Performance – Are the features the customers ask for as they are not always assumed to be included, going with our phone example, binding contacts to certain keypads or numbers on the dialer;
3. Excitement – Features that are not even on the customers mind but are excited to have them, e.g. with our phone, voice calling certain contacts, facial recognition and so on.

Here is how a Kano chart might look like:

As we can see from the chart above, over time Excitement/Delighter features become Performance, and Performance features become Basic as customers become more accustomed to these features and with competitive products.

The Hybrid model

Mixing MoSCoW and Kano we will get a more clearer view on how to prioritize our backlog:

MUSTs being the most important ones have been included and they represent the most basic of features, SHOULDs have been prioritized because they are easily implementable and bring a notch in performance, there are also some COULDs that will ensure a high degree of traction and maybe we will or will not do some WON’Ts.

If there is no time left, most surely we will abandon COULDs. WON’Ts are already scheduled for next release.

Feature prioritization

On a top level view, a more suitable approach for prioritizing Features is the Weighted Shortest Job First ( the WSJF prioritization model ). This model is a weighted model that uses a matrix with different weights to reach a top-down priority list.

It is mostly seen in SAFe but variations of this exist in various frameworks and methodologies under different names, using different criteria for columns to calculate priority. Marketing teams use it, sales teams use it, you can even find it in the finance department, but today we’re going to briefly walk through the simple WSJF prioritization technique.

The columns are filled one after another, so “Features” filled with features, then we jump to “User-business value”, we fill that one top-bottom for all features and so forward for all columns.

You always start by deciding on each column which feature has “1” and you go from there by comparison.

The CoD (the Cost of Delay) is the sum of the “User business value”, “Time criticality” and “RR|OE” (Risk reduction/Opportunity Enablement).

• User business value – The relative value towards the customer or business, this can be taken from the leading metrics per releases, based on previous releases and so forward, this will take a value by comparison between 1, 2, 3, 5, 8, 13, 20. That is why it is a relative value, because it is given based on metrics and agreement, what is important is to arrive at a relative value so you can make assumptions;
• Time criticality – How urgent it is, does one feature have a deadline then the rest? Is it important to release on a specific date because of market impact or competitors? Again, the higher the constraint, the higher the number;
• Risk reduction – Does this reduce a risk? Does it enable an opportunity? Be careful, sometimes an opportunity might also be a risk. Again, the greater the risk and opportunity, the greater the quotation.

Job Size – This can be the accumulated velocity points per release or an accumulated point system that also takes into consideration outsourcing and vendors and FTE’s and whatnot ( skillset, technologies and so forward ). Again this will not be expressed with something that you have on a storymap or release or product roadmap basis, but on a relative towards all the other features, again, expressed as a number between 1 and 20 ( just to keep consistency with the above ).

Now with all the details put in place, let’s run to an example using our MedicalApp:

You can find our medicalApp example, here and here. Based on the joint discussions with the stakeholders, we’ve reached the conclusion that the calendar brings the least value, is the least time critical and it doesn’t enable any opportunity so far. The job size was a relative estimate between 1 and 20 that we’ve assigned based on feature estimations, FTE’s and budget.

The final conclusion was that writing promotional content for our app came first, then the mobile application and lastly the calendar feature. (31/20 = 1.55 or 55, 21/13 = 1.61 or 61 and so forward)

Conclusion

We’ve learned that given the impact of what exactly to deliver and the multitude of ideas and requests, there is an absolute need to prioritize. We also found out several techniques one can employ to make sure we’re on target by prioritizing exactly what to include in each release.

There are also levels of prioritization, but again only your imagination keeps you in rigid borders, because the simple fact is that you can use any technique mentioned above at any level. You can use the WSJF model at story level if you want ( even thou it brings a lot of overhead, but hey…if you have time and are very uncertain, why not? ).

In the end, keep in mind that these prioritization techniques also serve well to negotiate with stakeholders, because rarely these prioritization techniques are done in private, usually and the recommended way of doing them, is with the most important stakeholders at the table.

Hope you’ve learned something new, be sure to check my next post on how to prioritize between innovation and technical debt.

Thank you!

Useful Links

• Weighted Shortest Job First
• The Professional Product Owner: Leveraging SCRUM as a competitive advantage
• The Product Manager’s Survival Guide

Empathy mapping is an ideation technique using empathy to generate a deeper understanding about the customers being targeted.

The Empathy Map game (ideation technique) was developed originally by Scott Matthews at XPLANE company as part of the human design toolkit called Gamestorming;

It can be used to help generate user personas, improve customer experience, used in combination with the Stakeholder Map to better understand the impact and influence of the stakeholders, to Culture Map an organization, and so forward…

When to use Empathy Mapping?

Why do most start-ups fail and why most new initiatives inside big companies carry so much risk?

It is because initially there is a mismatch in the problem/solution fit lifecycle stage of the product.

As we can see, the first rationale is finding a problem worth tackling, this is best done by using the Design Thinking approach.

Design Thinking developed somewhere in the 40’s and now it has become some sort of a buzzword, but the benefits are reaped by major companies and products around the world. What is important about the Design Thinking approach is that it has Empathy as the first step of the process.

Empathy is the beginning of the Design Thinking process and right here is where you will use the Empathy Mapping ideation technique/game.

Sounds great: when should I use it?

1. New Product: When you are in the Problem Space definition phase;
2. Existing Product: When branching out in new markets;
3. Customer Insight: When generating user personas or just wanting to familiarize the team with the customers.

Drawbacks

As Steve Blank’s CEO once told him:

“Motioning to our VP of Sales, he ordered: ‘Go with him and get him in front of customers, and both of you don’t come back until you can tell us something we don’t know.’”

Steve Blank – Customer Development Framework – https://steveblank.com/2009/10/08/get-out-of-my-building/

1. Emphatic design is qualitative in nature, without other qualitative gathering techniques, such as customer interviews, it might be hard to put yourself in the customer’s shoes or you might end up with generic personas;
2. It is not a rigorous scientific way of generating personas, you still need quantitative data from actual users to narrow down your guesses;
3. It is not a one-time process, meaning it should be applied and re-applied during the whole product lifecycle to get to know your customers as much as you can.

How to use Empathy Mapping?

Prerequisites

1. Prepare any personas / market segmentation / customer journey maps you already have available;
2. Have ready any qualitative studies you might have available, like customer interviews / user testing / surveys;
3. A physical or digital whiteboard with real-time collaboration, post-its and most importantly…
4. 3-10 people from multiple fields: developers, product people, marketing, designers, the more diverse, the better;
5. A facilitator

The process

1. The event is timeboxed to 20 minutes;
2. The facilitator will ask the group what is the GOAL of this exercise (points 1 and 2) for this empathy map;
   1. Who the person is;
   2. What is the challenge they are currently facing in reaching your goal;
3. The facilitator will ask the group to give this person a name;
4. The facilitator then will go clockwise through all quadrants, one by one.

The important thing to note here is that before the process starts, the group should leave behind any biases they might have regarding culture, societal, religion and anything of such sort, if they have any biases, they won’t be able to put themselves in the customer’s shoes and fully empathize with their pains.

The first thing that the facilitator will do, is first give an example of how to put yourself in the customer’s shoes and answer specific questions from the quadrant by choosing a hypothetical person and walking briefly through the quadrants.

Here is a brief explanation on how the quadrants should be thought of:

1. What do they SEE? – Imagine that the customer is not your user just yet. What does he/she watch, read, and is exposed to in your industry that could influence him/her? What does he/she see other people are doing? Take into consideration anything that might take his/her attention away from your product, e.g.: notifications, emails, promotional ads, etc. Consider what alternative products command her interest;
   
2. What do they DO and SAY? – What is his/her behavior? How does he/she act in private? What about in public? What is their attitude and what do we imagine them saying? What can we imagine their daily activities are? What behaviors have we already observed? What might they do differently than what they say?;
   
3. What do they HEAR? –  What does he/she hear from his/her work colleagues/friends/relatives that might have an influence over him/her? What about what bloggers are saying, social media influencers, and other notable persons they might follow? Focus on impactful information, think about reviews on a restaurant for example;
   
4. What are their PAINS? – What do they fear? What makes them anxious? What makes them think of multiple choices before committing to something? What might be some frustrations and challenges? What obstacles stand in their way?;
   
5. What are their GAINS? – What makes them excited? What are their dream goals? What do they hope to achieve? What are their aspirations?

Example: Insurance prospect

Here is an example Miro board I have put in place to briefly illustrate how these questions should be answered:

This Empathy Map canvas exercise gives us some valuable input we can use next for our Persona Generation.

Persona Generation

Using the outcome from the previous exercise, we can either enhance an existing Persona Canvas template or create a new one:

With this Persona now done, next time you create a User Story, for example, you can use “As Jane” and your team will better understand exactly what needs and wants they are addressing and how they can, by doing their work, can improve Jane’s life and also bring business value.

Conclusion

It is a challenge to get customer insights just from quantitative data such as customer segments and demographics. Doing empathy maps will enforce a Design Thinking mindset and will help with figuring out how to tackle a specific customer problem.

Not having found out the problems of your customers, you will probably diverge with solutions and might miss a market opportunity, empathy mapping helps keep your focus on the problems your main personas have.

Empathy mapping helps you to rapidly ideate and familiarize yourself together with your stakeholders and your customer base. It helps you build new user personas or enhance existing ones, so you can better address these or find out new problems to tackle.

Hope this exercise has proven useful, it can be applied both to internal and external customers. Be on the lookout for my future posts where I’m going to also discuss about using the Stakeholder Map in tandem with the Empathy Map so you can better address the internal customers as well.

Thank you!

Useful links

• Gamestorming
• A guide to stakeholder mapping by Miro
• Customer Development Framework by Steve Blank

Whenever you take a road trip, you make a plan to get there, you choose specific routes and certain stop points to provision yourself or simply to rest. A roadmap is not so different. It is a visual representation of the Product Strategy, without it, you might derail from your objectives.

The roadmap is dynamic, so a living artifact, it doesn’t set in stone deadlines and neither the features, it represents the current knowledge (what you know so far and what goal you want to reach) and is constantly updated by input from other stakeholders and the current market conditions.

Think of it as a football game, the product roadmap represents a football formation and as a football formation, it is constantly in flux according to what the other team is doing ( read here market ).

I’ve mentioned briefly the product management vacuum in my previous post regarding the difference between a product owner and a product manager, here.

For us to have a brief overview of the input for the product strategy, I’m going to share here again the image of the product management vacuum.

As we can see, the Product Vision which is the goal of a Product Roadmap, is dictated by the Corporate/Business Strategy.

Having the business strategy in mind we define a roadmap and with this roadmap we will be able to:

• Align stakeholders on the Product Vision;
• Define the strategy on how this Product Vision is met;
• Make it transparent to everyone how you’re going to achieve value.

Prerequisites to a roadmap

A roadmap requires is the visual representation of a strategic plan and every strategic plan has 4 important components:

• Where we currently are? (Context)
• Where do we want to get to? (Goal)
• How do we get there? (Implementation)
• How do we measure our progress? (Metrics)

The first point is in regards to our current context: what is our product, what is our current market value, who are our competitors, who are our customers, what have we achieved so far.

The goal is our product vision, what problem we’re trying to solve, for which customers, what differentiates us from our competitors, and which future market share do we want to achieve.

The implementation part is tied directly to our release plan (a type of roadmap, read below), this is more focused on the WHAT part, meaning the actual solution together with…

Metrics: if the product vision is a subset of the overall business strategy, then the metrics are based on the release expressed either as SMART or as OKRs.

So going further with our prerequisites we will need:

1. Context: here you can use a metric based on your product current lifecycle stage you’re in ( read more here ) or combined analysis of Porter’s five forces (read more about it here and here), a SWOT analysis ( detailed in an upcoming post ) or as we’ve done in our below example, a combination of multiple indicators. Usually, business and financial metrics are provided by the business/corporate strategy, the metrics for your customer value you can take them from previous releases and product increments;
2. Goal: This is where you want to get, the product vision for a given timeframe, usually expressed as a statement with a model below ( MedicalApp example from part 1 here ):

Our vision for our product for next year is to get more engagement from our patients’ customer segment and because of that, our goals concentrate on the attainment of original specialized content by providing customer education and more doctor-patient interaction. Based on our vision and goals, our overarching strategy is to achieve a uniquely differentiated market position.

This strategy will enable us to focus on segments, where we will attain a market share of 25%, a 38% improvement over where we were at the end of this year. Our product investments will focus on targeting mobile technology, which will enable the flexible and rapid development of new features that allow us to deliver a profoundly distinctive user experience.

Given our forecast of increased competition in this area, we will focus more on offering the same features our competition offer and at the same time distinguishing our self with new technologies.

By doing so, our customer value proposition will allow us to improve our pricing power over the competition, with a 30% premium increase over other available products. Furthermore, because we will more effectively differentiate our products from the competition, we can direct our promotional investments to educate our customers through our promotional content and advertising programs, as well as enhanced sales training. With all of these, we expect to increase revenue by 36% over the next three years, with a corresponding increase in profitability.

Product roadmapping: example of Product Vision for our MedicalApp

3. Implementation: Here we’re going to adopt a forward-looking mindset, by focusing on WHAT we can do to reach our Product Vision mentioned in Step 2. Here is the place to document our release schedule by using a Release Roadmap or a Now, Next, Later Roadmap (examples under each section);
4. In this step, we will focus on those metrics that are mentioned in Step 2, and on the goals needed to reach our Product Vision, we define the leading indicators for each of our releases, such as we’ve done in our Goal Oriented Roadmap

Going forward with our Product Vision from step 2, mapped for the upcoming 3 years, we map our assumptions and define this strategy the same as we’ve done for step 1 above, but this time forward-looking.

Think of these metrics as lagging metrics for which we will define leading metrics in our roadmap examples below.

Because this is high level, you will want to review this and track progress on a quarterly basis.

Best practices

In order to succeed with the roadmap, there are some common guidelines that should be followed:

• The roadmap should be somewhere visible for everyone;
• It should be reviewed frequently, at least once per iteration, and updated if necessary;
• It should not present fixed dates, instead, use timeframes and ranges.

The act of setting up a roadmap, is more important than the actual roadmap itself. The process will make priorities clear and align everyone on the same strategy.

Not having fixed dates but rather frames will let you keep your flexibility in reaching a market date. When to release is also part of the strategy, as we will discuss below.

A note about dates

During this post I will mention dates and releases. It is important to understand that these do not represent a guarantee, nonetheless dates are important for some of our stakeholders, such as:

• Service and Support;
• Sales;
• Marketing;
• Management Sponsor.

They will have certain activities, such as scheduling a marketing campaign, driving sales and scheduling communication, assuring budgets, and so on.

Sticking to a roadmap is ideal, but along the way, experience has shown that things happen, keeping an open mind and adjusting and making compromises in the time, budget, scope trifecta is advised to keep as close as possible towards our business strategy goals.

Types and formats of Roadmaps

Roadmaps come in all shapes and sizes, they can have different names and show different things, but in regards with content and strategy, they roughly fall into groupings such as:

If we’re talking about strategy:

• Short-term;
• Long-term.

If we’re talking about the level of content:

• High-level;
• Low-level

Story Map

As we’ve seen in my previous post, a Story Map is a prioritization tool that has two dimensions and is user-focused. Each theme and epic is focused under a specific persona and then we begin breaking down stories for those epics. The stories are prioritized top to bottom, with the first few of them going under the first release as an MVP while the rest in subsequent releases.

This can be called a long-term low-level view, because we can tell for several releases into the future, which User Stories ( not features or epics or themes ) go into which release, meaning a very detailed representation of what needs to be done.

The problem with this approach is the level of granularity, so having US in releases will not help you focus on customer value/business value. Why? Remember the strategy that we’ve enunciated above? Let’s take an example macro-metric Channel and Customer Usage Index. We’re planning on launching a mobile application and have 20% of our current users migrated towards our mobile app.

Can you pinpoint exactly which US accomplishes a part of that goal? Exactly! Being so broken down into development stories, it will be hard to translate the leading metrics from epics to each subsequent story.

Another caveat about this approach, is that it cannot be used on its own, it is missing the time dimension. You cannot roughly say when the releases will be: in this quarter or the next.

Let’s make a new StoryMap for MedicalApp according to our strategy and vision:

As you can see, we’ve prioritized mobile development and premium contents according to our vision, also added later on, integration with social media networks and opened ourselves to a monetization scheme based on a referral program so that we boost our customer base.

But at the same time, you can notice that there are no metrics attached to the releases.

Now let’s look at how a Release Roadmap looks like with the above example.

Release Roadmap

The Release Roadmap is a long-term low-level view of the releases, that satisfies the vision for the Product Roadmap, within a year.

Here we can also put metrics attached to releases and also include the time dimension. Given the above, this focuses on Step 3 from our strategic planning, meaning: Implementation, the what part.

As you can see from above the releases have been prioritized from the Story Map, by using:

1. The velocity of the teams involved;
2. Quoted US with US points per Release in the Story Map;
3. The number of Sprints needed to do a Release.

Here if you ask yourselves how the roadmap was done, specifically why “Release 1” was made for 6 sprints, it was taken as an example.
But, to go forward and add detail to this example we will use the story map with the total User Story Points per release:

The velocity for our team for the last 5 sprints was between 20-24, so for each release we will have:

1. 112 / 20 (min velocity) = 5.6 ( rounded to 6 );
2. 80 / 20 (min velocity) = 4.4 ( rounded to 4 );
3. 48 / 20 (min velocity) = 2.4 ( rounded to 2 ).

The Release Roadmap is usually done for 3 to 6 months ahead, going with 6 sprints for each platform with one team with 20 points velocity minimum, we think we can deliver the MVP for each platform in the first two quarters.

Also, notice there are no metrics attached to this Roadmap as well. This can be covered later on with another type of Roadmap
( The Goal-Oriented Roadmap ).

Keep in mind the releases put down on the release roadmap are not set in stone, what matters is the Product Vision. If it respects it, keep it, if not pivot.

Now, Next, Later Roadmap

The Now, Next, Later Roadmap is focused on features, so you can tell this is a more short-term low-level focused roadmap.

It doesn’t contain any dates and it doesn’t contain any other metrics. Here’s how a Now, Next, Later might look for our MedicalApp example:

Also as you can see, there is no indication on how much effort this takes to be done, just an overall view of what needs to be done in the upcoming timeframe.

Goal-Oriented Roadmap

The Goal-oriented Roadmap or how is commonly known as GO Roadmap focuses on high-level goals. It tracks metrics and follows goals to be reached that follow closely the Product Vision.

The GO Roadmap doesn’t track features (so is not focused on output) but rather how these features and releases focus on the Product Strategy. (Outcome focused). It might or might not have dates. This type of roadmap might be used in tandem with another roadmap to further add detail to what needs to be done in order to attain our goals.

Conclusion

Any product roadmap is actually a visual representation of the business strategy. It helps by guiding and aligning the stakeholders on what needs to be done to attain specific goals from the business strategy. No single roadmap gives you a full picture and it is important to understand that they should be reviewed frequently and adapted based on the progress towards specific business goals.

Keep in mind that specific business goals are more important than keeping to a roadmap, so if on any stage of any roadmap you notice a deviation from the plan put in place, you will need to take corrective actions and pivot.

In a world of complex problems and a rapid marketplace, a plan is there only to give you a baseline from where to pivot if needed.

Useful Links

• A simple top-down representation of how Business Strategy is tied with releases;
• An informative read from Roman Pichler on building roadmaps;
• Roman Pichler’s book, “Strategize“;
• Steven Haines book, The Product Manager’s Survival guide

Ever wondered how you will manage to forecast a release with a new feature? Do you only have a rough idea of what you need to deliver, but not exactly know where you should start? You were assigned a new team and don’t know the team’s velocity to help you plan?

No worries, here we’re going to cover the process to help you better with your release planning, from the initial problem hypothesis to the estimating and forecasting, covering 2 scenarios where the team is newly formed or when you’re planning a project that will start ahead into the future.

The process that follows is common for release planning a product in an Agile way:

• Having a rough idea of what to deliver, what value it brings, and for whom we deliver (covering the WHY part);
  • Defining the business need and what problem it tackles;
  • Understanding the personas targeted;
  • Defining the solution.
• Defining a story-map, an impact map, and deciding which testable hypothesis we want to test (covering the HOW part);
  • Create an impact map;
  • Creating a story map;
  • Defining the MVP;
  • Estimating and forecasting;
  • Roadmap planning. ( covered in part 2 )
• Delivering the MVP, gathering data, repeating, and improving the process ( covering the WHAT part ). ( will be covered in part 2 )

Defining the business need: covering the WHY part

In this step of the release planning, we will want to understand what is exactly the problem space or the business perimeter we’re trying to tackle. There might be different cases here involved:

• Did you found out about a new market opportunity or was it brought to your attention by other stakeholders?;
• Is it a new product or an existing product?.

But the common theme is that you will have a rough idea about why you’re doing this, the problem you’re trying to tackle and the customers targeted expressed as personas.

If you’ve followed a Design Thinking process, this roughly equates to the Empathize and Define stages, you can read a brief overview of the Design Thinking process here.

You can also start by creating a Lean Canvas as described in one of my posts here. What is important is to have the Problem, Customer segment clear, and a UVP ( what sets you apart ).

Notice that we haven’t focused on a solution so far. If it is a brand new product or a completely new problem you’re facing, then following the Design Thinking process here you will probably run a Design Sprint in the Ideate stage, to rapidly generate some ideas and user-tested facades. These will provide sufficient information for the next process and can jump straight into release planning.

If this is a familiar topic in your product domain, you might already know what to implement and the Personas to use.
I will also cover the Persona generation technique in a different post.

A template for this stage would be:

As a <USER persona> I want to use <solution> in order for me to <solve PROBLEM / end benefit >

The market in <industry> potential is <numbers>.
Currently we have: <number> contracts/market share/growth. ( this may be a bullet list, with different metrics )
By focusing on <USER persona> and solving <PROBLEM> we will expect to grow these by doing <specific actions> and getting <specific numbers>. ( again this may be a bullet list )

UVP: <What we’re selling> <for whom> <what’s in it for them>
E.g.: “Paperless insurances on the go. Log into your mobile device and use it anywhere. Cheap with no commitment.“

Having this in place you can now start with the next step into your release planning process.

Getting into specifics: the HOW part of the release planning

Impact mapping

If you noticed, we’ve started this phase with creating an Impact Map. Why is this useful? Because a good impact map will:

• Clear the business needs and goals for the teams;
• Align stakeholders;
• Find out something new or maybe something that was missed;
• Clear out metrics and what to track;
• Clear out personas;
• And most importantly, helps you by identifying common patterns ( for your epics/themes ) and deliverables for these patterns ( PBIs ).

I will cover impact mapping in a different post, because this is a whole topic on its own, for now I will cover the most important parts of the map:

• Goal: The goal is the business goal we’re trying to achieve. It is usually best that we keep the impact map focused on a singular specific goal that we’ve identified in the defining Business Need process;
• Actor: This is also the Persona. I have seen usage such as “Customers” or “IT Operations” and etc. But this should be customer-centric, by having the persona clearly and specifically defined. “Customers” or “IT Operations” clearly are too vague and do not bring any value. This is the same persona from the defining Business Need process;
• Impact: These are the activities the Actor needs to do in order to accomplish the Goal. It ties the Business Objective ( Goal ) with the Personas
  ( Actor ). These activities are reached by either using an Ideation process from Design Thinking or by brainstorming sessions with the team and stakeholders or by using similar functionalities that you’ve already developed ( existing experience, behavioral metrics from analytics,
  etc. );
• Deliverables: These are the actual requirements you will have to deliver in order to satisfy the Activities. In the end, these will be your PBIs
  ( Product Backlog Items ).

As you can see from the example above, we have been very specific about what our goal is ( increase by 20% conversion rate ) and who our users are ( doctors and patients, registered in our app, that use mobile devices ).

We can already start grouping the above activities into themes:

• Update availability and Book availability = Calendar epic;
• Post medical content = Blog epic;
• Pay for different services = Mobile Payment epic.

These epics can be also grouped by platform or any other functional domain, e.g. (iOS) Calendar, (Android) Blog, (ApplePAY) Mobile Payment, etc.

With the common themes in place, we’re ready to jump to our story map.

Story mapping

A story map is a two dimension representation of Personas, Themes, Activities and PBIs.

On one dimension ( X-horizontal axis) we will have Themes and User Activities grouped by Personas and on the other dimension ( Y-vertical
axis ) we will have the PBIs grouped by User Activities arranged top to bottom by priority ( top having the most priority and bottom the least priority ).

You can think of a story map as a more customer-centric backlog, focusing on the user experience and where each deliverable fit in the customer journey.

Going forward with our medical services app, here’s how a Story Map would look:

Defining the MVP

When doing the Story Map, always prioritize at least using a MoSCoW technique ( Must-Should-Could-Won’t do ), from top to bottom.
I prefer to use a hybrid model of MoSCoW and Kano models, I will write a later post to detail further the prioritization techniques.

The first release will be the MVP ( minimum viable product ).

We can see that the first release is the MVP, which will offer us feedback early on and it has the complete customer journey, BUT has some or no performance attributes and no exciters ( so only the MUSTs from the MoSCoW ).

As you can see, comparing an MVP with a car, an MVP is not only the wheels or only the driving wheel, it’s a complete usable car, but the most basic one.

That is why we’ve linked ourselves to an existing payment option in a web view, we will deliver as performance features ApplePay integration later on. If we didn’t have an already available payment option, then just prompting the users to wire transfer would have been enough.

Estimating and forecasting

Estimating and forecasting are a big part of your release planning process.
IMPORTANT NOTE: For all the below points, everything should be expressed as a range.

In release planning we have:

• The work to be done;
• A team that does the work;
• A budget for the two above;
• A timeline to deliver work.

Now there are also three dimensions that go into the release planning:

• Time;
• Scope;
• Budget.

Please remember, that one of the main decision criteria in choosing between an Agile approach and a Waterfall approach is knowledge of the requirements, in other words, the degree of uncertainty.

Agile frameworks are catered towards complex problems, meaning involving high risk and uncertainties.

Usually, there will be two aspects that will be uncertain at the beginning of the project, and those usually are Time and Scope.

Meaning we’re going to have to figure out how much we’re going to do and in our budget scope.

We have three ways to do this, and all of them involve using the team’s velocity ( meaning the pace of the team ):

1. Use historical values;
2. Run an iteration;
3. Make a forecast.

Run an iteration

Now, the first point is very relevant and for most of your career you will be going to use point 1, preferably you will be using point 2, with the least favorite being point 3.

Using historical values is pretty straightforward, gather the Velocity of the team for the past 10 (3 as a minimum) and do an average, so were going to focus on the other 2 points.

Probably you’ve recognized these from Mike Cohn’s “Agile Estimating and Planning” book ( if not, I urge you to read it ), so I’m going to speak from experience here: 1 iteration will not be enough, 3 will not be supported by the sponsors. So what can we do? Here’s how I’ve done it

1. Refine the subject before the project starts as much as you can;
2. Do magic estimations;
3. Involve stakeholders from business as much as you can, in each of your refinement sessions with the team.

So, before the project starts, if you do the above steps, the team will be aware of the subject and you, most importantly, will know exactly what will be the pain points. Trust me on this one, when the team quotes something above the 13 SP threshold, that will be a point you will need to gather more data on, break down into details and focus your refinement sessions on.

Ok, so let’s say you’ve refined the subject before the project starts and you’re wondering about magic estimations from above.

Magic estimations are all about speed and gathering feedback about what the potentially complex issues will be. I honestly prefer a hybrid model between Magic Estimations and Poker Planning.

Before the project starts, and after we have our kick-off, I present only the headlines of the stories, defined as specific and atomically as I can.

Where I cannot define the stories headlines as mentioned above, I ask for the team’s feedback and help, so that we might end up having more headlines than originally defined or less. After this quick collaboration exercise, I ask for the team to poker estimate each and every headline.

Having all these headlines defined and “magically estimated” top-of-the-head will give you something valuable: the potential blocking points.

Not having any values, how do you decide how many PBIs to select for the first iteration?
A nice technique is to assign 8 SP to each team member, if we have 5 team members, the possible velocity will be around 40. So you will select PBIs worth of maximum 40 SP. At the end of the Iteration, you will see exactly how much of those 40 have been actually done, it could be 30, it could be 20, but nonetheless, you will have a clearer view after this first iteration.

Now you’re ready to run your first iteration. During your first iteration, you’re going to continue refining and adding detail towards the rest of the MVP as part of your regular refinement process.

Having a 2-week sprint iteration into the project, meaning 1 month, usually isn’t such an over cost towards the whole project, but there will be cases when this will not be agreed upon or you’re planning way ahead in the future, so what shall we do next? Enter dreadful point 3 in your release planning process.

Make a forecast

1. Estimate the number of hours each team member will work on a project each day;
2. Find out total number of hours spent on the project during the iteration;
3. Split the PBIs into smaller tasks and estimate them in hours and choose the PBIs that fit into the number of hours in the iteration;
4. Use ranges.

Let’s go over each point individually:

1. Estimate the number of hours each team member will work on a project each day and total number spent on an iteration:
   First, you ask the team for known: trainings, holidays and anything that is not project related. Then, depending on the maturity of the team and your organization’s efficiency, you multiply the total hours spent by the team with a multiplier. The reason behind this is that usually, a team member does not work 100% on the project.
   
   So anywhere between 60-80%, meaning 0.6 or 0.8 will do. Let’s say you have a team of 5 developers that are full-time and you have a Sprint of two weeks, this roughly equates to 5*8 (full-time hours ) * (10 working days – Sprint ceremonies = 8 ) = 320 hours/Sprint.
   
   We’ve also mentioned the multiplier, so in our case, if the team is all on the same level of knowledge and involvement, we will multiply 320 * 0.8 = 256 hours. If the team is not on the same level of knowledge or has different project allocations, you will have to use a multiplier for each team member and then use the sum of all the hours resulted.
   
   Going forward with our crude example, have you noticed anything missing? Production incidents, if you have those, timebox 10% out of 256 hours/Sprint, that means you’re left with 254 hours for actual work. NOTE: this is an estimate, you will see more real values once you’re a few sprints into development.
   
2. Split PBIs into tasks and estimate each task with the team, in hours. NOTE: be careful at the team’s skillset. A tester might have to wait for development and a database engineer might not do actual development.
3. Pick as many PBIs that fit into the available 254 hours. If the sum of the chosen subset is 221 and another PBI would have increased the number beyond 254 hours, then stop, 221 is reasonable. Also, if the team feels they can commit on 221, then stop.
   
   In the end, you should have a list with PBIs estimated in Story Points and with sub-tasks in hours.
   
4. With the total number of Story Points, you multiply those by some multipliers (like 0.5 – 1.5) to give you a possible range. In our case, if we go with the 221 hours per Sprint, which after selection they total for about 30 SP, we will get 30*0.5 = 15 and 30*1.5 = 45, so a possible range of velocity sits in the range of 15-45 SP per Sprint.

With this in mind, in the end you will have a rough guideline of the Velocity. Take note that this will be gradually self-adjusted as you run iterations, so take them for what they are when starting planning, estimates.

Conclusion

Estimating and forecasting is just that, a forecast. In specialized literature, there is this concept of the Cone of Uncertainty, a concept borrowed from hurricane impact prediction. The closer you are towards delivery the higher the chance of a precise estimate, the further you are, the less precise the estimate is, and the more risk the project will have.

Using techniques such as impact mapping and story mapping will help you know how to choose an MVP and what value it brings to your users and business. Going forward from there, you’ve learned 3 scenarios you will face when making estimations and forecasting and we’ve focused on the ones where the team might be newly formed or the project is planned in the future.

Hope you’ve learned something new to help you in your release planning process and keep an eye out for my next part in release planning.

Useful Links

• Mike Cohn’s Agile Estimation and Planning
• Impact Mapping
• Product Plan on Story Mapping
• The Cone of Uncertainty
• Design Thinking in a nutshell

Being a Product Manager also means to have some sort of basic understanding​ of financial knowledge. What will follow is a quick short way anyone can do, without high-studies in Financial Analysis, to quickly gauge a company’s fitness in terms of economics.

It prepares you for the final level as a Product Manager

If you read the 5 levels of a Product Manager, here you will spot the Entrepreneur.

The Entrepreneur is the last level where the Product Manager has P&L (Profit & Loss) responsibility.

Understanding financials will distinguish you from the pack, keep your business strategy afloat and spot warning signs early both in your own company and in the industry you’re activating in.

It helps you position yourself in a competitive market

One of the roles of the Product Manager is to do market competitive analysis.

Studying competition goes into knowing your position in the market and I’ve covered economic moats and positioning in another post here. Apart from marketing and sales analysis, competitive analysis also benchmarks the companies studied by using financial data to compare and gather valuable information on how companies manage their resources.

How can you study your competition?

If we’re discussing public companies, apart from marketing and sales data, you have a wide array of financial documents that are publicly available that tell you exactly what the competition has done to use to position themselves in the market.

Using financial data with your competitive analysis you can tell where the competition stands in regards to:

• Liquidity;
• Financial leverage / Financial health;
• Efficiency;
• Profitability.

We’re going to cover next exactly what metrics to look out for in the competitors’ financial statements to give us a hint on where they focus their business strategy more. But first, a little accounting intro. For those of you already familiar with the 3 Financial Statements, please feel free to skip this section.

Accounting Intro: Financial Statements

There are 3 types of financial statements and each have their own role and tell a separate story.

The first rule to keep in mind is that they are all tied together. They are linked and support each other, so to have a complete hypothesis ( I will avoid the word story ) is to go through all of them.

The 3 financial statements we’re going to check are:

• Balance sheet aka statement of financial position;
• Income statement aka Profit and Loss statement;
• Statement of Cash Flows.

Without further ado I’m going to briefly cover what these statements show how they look like.

Please feel free to document yourself further into accounting if this subject has picked your interest. I have also linked to a few useful resources in the Useful Links section below.

The Balance sheet

Remember a time you went on a holiday and took a group picture?

Did you ever post that picture on a social network or kept on a cloud storage service?

If you did so, from time to time, the social network or the cloud service app will show you what you’ve been doing for the last 2-3-7 years ago, by highlighting the pictures.

The balance sheet is exactly that, the picture of a company at an exact time.

The balance sheet shows the resources owned by the company ( assets ), how much it owes ( liabilities ) and what is left to the stakeholders after all debt has been paid ( equity or capital ). Analysts use the balance sheet in their competitive analysis to check the firmness of the financial foundation.

The balance sheet is called like that because it is always in balance, meaning:

Assets = Liabilities + Equity OR Equity = Assets – Liabilities

Curious why?

Let’s say that you want to start your own business and need a loan to do just that. If you borrow 100k from the bank, you are going to have Cash 100k (asset) and you owe the bank 100k (liability) and has not generated any profit ( so 0 equity ).

Thus 100k (Assets:Cash) = 100k(Liabilities:Long Term Debt) + 0 (equity)

If you later add 10k out of your own personal money you will have.

Assets = 110k, Liabilities = 100k and Equity = 10k.

Assets and Liabilities are of two types: current and non-current.

Current means in case of assets = quickly converted into cash ( in the same reporting period ), non-current means that they can be converted into cash after the reporting period, so more of long-term usage.

In case of liabilities = current means to be paid in the same reporting period and non-current after the reporting period, so a long-term debt.

Usually the reporting period is 1 year.

Under Assets, Liabilities and Equity, you will find other entries that reflect where specifically the money went (or came from), such as Inventories or Equipment, but we’re just going to briefly touch upon these with examples.

Here is a typical format for a balance sheet:

The Income statement

The Income Statement also known as the Profit and Loss account.

Here you can find revenues and expenses that the company has amassed during a particular period.

If the balance sheet is a snapshot in time of what the company owns and owes, the Income Statement is the total of how much money the company is making or losing for that time period.

If the Analysts use the balance sheet to test the company’s financial foundation, they use the Income statement to actually test for performance by checking margins and such. This is not only used for competitive analysis.

In this section you will find the 3 major types of profits:

1. Gross profit;
2. Operating profit;
3. Net profit.

You will also encounter Revenue or Total Sales or just Sales, keep in mind that the wording might differ, but the overall format stays the same.

Also another interesting expression to keep in mind is that Net profit is often called “the bottom line” because usually you can find it at the bottom of the Income statement.

If you’ve ever encountered acronyms such as: EBT, EBIT, EBITA, EBITDA and NOPAT it’s from this statement that they’re calculated from.

Just as a short interlude, I’m going to briefly expand the acronyms above:

EBT = Earnings Before Taxes

EBIT = Earnings Before Interest and Taxes

EBITA = Earnings Before Interest, Taxes and Amortization

EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization

NOPAT = Net Operating Profit After Tax

You might think of advanced mathematics or how hard it all sounds, but don’t worry, I assure you it isn’t. With just addition and subtraction you can reach a lot of conclusions about where the money came from and where it went.

We will discuss some of these Financial Indicators below.

Here is how a typical Income Statement format looks like:

And here is an example of how an Income Statement looks like:

The Statement of Cash Flows

Imagine that you have your own business and you sell your services or products.

When the service or product is offered, you offer an invoice and based on that invoice you might not receive cash for the product or service immediately.

Now here’s the catch, the Income Statement records everything on an accrual basis, meaning when the transaction has occurred, in this case, the invoice was released, not necessarily when you received the money.

That means that you will see this transaction on the Income Statement as Revenue, but not actually have cash inside the company.

The statement of Cash Flows only considers cash in and cash out. It does not register transactions only what cash comes in and out of the company.

Given this, I would recommend always looking at the Cash Flow statement first.

The Cash Flow statement has three categories:

• Cash flows from Operating activities;
• Cash flows from Investing activities;
• Cash flows from Financing activities.

The cash flows from Operating activities include activities related to sales and day to day business such as: wages, operational overheads, cost of sales and so on.

The cash flows from Investing activities include activities related to investments in the companies assets that allow proper functioning of the business, such as investments in property, plant and equipment and so on.

The cash flows from Financing activities include activities related to purchases of common stock, issuance of common stock under employee plans and other, issuance of long-term debt, payment of long-term debt and so on.

Here’s how a common Cash Flow statement look like:

How the Three Financial Statements fit together

You can view here for a very nice video better explaining this:

Even though each financial statement offers different information and has a different usage, each of them has a link between each other.

1. The Balance Sheet (referred for brevity as B.S.) is connected with the Cash Flow (C.F.) statement:
   The Cash entry under Assets in the B.S. statement for two years is the same as the Net increase (decrease) in cash from C.F. statement;
2. The Balance Sheet is connected with the Income Statement (I.S.):
   The Retained Earnings from B.S. statement is tied with the Net Income from the I.S. statement;
3. The Cash Flow statement is connected with the Income Statement:
   The Net Income from I.S. is tied with the Net Income from the Operating cash flow category in the C.F. statement.

As you can see, there should not be any discrepancy between the 3 financial statements.

The images attached above are only for format purposes only, these differ between standards ( yes, there are accounting standards and are regulated by policy makers, two such standards are: US:GAAP and non-US: IFRS ).

Also these differ from industry to industry by specifics not by format. Again, this is a whole subject on it’s own and several books have been written to cover this, please document yourself responsibly.

Where to find the Financial Statements

I will not go into details but public companies show this information on their website ( as required by regulations ) under: Investors Relations or Investors.

As a general rule of thumb always use at least 5 years worth of data, 10 years is recommended.

We will talk about growth ratios and how to compare several ratios in the Key Financial Indicators section below.

Key Financial Indicators everyone should know

Liquidity ratios

Liquidity means how efficient is a company in turning it’s assets into cash to fund it’s regular day-to-day operations and most importantly to cover it’s short-term debt. Why is this important? Because usually lenders have a strong preference for cash when settling debt.

This has several implications such as:

• How efficient is a company at collecting it’s bills from customers;
• How good a company is in turning their inventory into cash;
• How much money does a company has on hand to pay for it’s day-to-day operations.

Cash Ratio

Cash Ratio = Cash & Cash Equivalents / Current Liabilities

E.g. if a company has: Cash = 50k, Marketable Securities = 100k and Short-term debt = 100k

Cash Ratio = 150/100 = 1.5, meaning the company can cover it’s debt 150% and still have some cash on hand to pay something else. This is a good case.

Usually a ratio of at least 0.75 is a good sign.

Current Ratio

Current Ratio = Current Assets / Current Liabilities

E.g. if a company has: Cash = 50k, Inventory = 25k, Account Receivable = 10k and Short-term debt = 40k

Current Ratio = 50 + 25 + 10 / 40 = 2.1, this is a very good ratio, generally speaking everything that is over 1.5 as a current ratio is a good sign.

Warning: Current Ratio takes into consideration inventories, but if it’s inventory turnover ratio is low (covered below), then most probably the inventory items will not be able to be sold at the value mentioned in the Balance Sheet ( imagine trying to sell old-furniture ).

Note: Account Receivable means money that you need to collect from the customers ( so it is owed to you ).

Quick Ratio

In order to be more conservative regarding inventories, another popular ratio is the Quick Ratio which doesn’t take into consideration inventories.

Quick Ratio = Current Assets – Inventories / Current Liabilities

E.g. if a company has: Cash = 50k, Inventory = 25k, Account Receivable = 10k and Short-term debt = 40k

Quick Ratio = (50+10) – 25 / 40 = 0.87, this means that without taking into consideration inventories, this company can cover it’s short-term debts in 87%. This is not so good, usually a Quick Ratio of 1 is considered a water-line, everything below means that for every 0.8$ of your current assets you have 1$ current liabilities.

Warning: Have you seen those Account Receivables for both Quick and Current ratios? Well, they look good on paper, but what happens if the customers don’t pay? Always corroborate the Account Receivables with a quick check on something called “allowance for doubtful accounts“.
This can be found just below the Account Receivables entry on the Balance Sheet and if not, in the Annual Report in the footnotes.

Operating Cash Flow Ratio

If the Current Ratio uses it’s Current Assets to cover it’s Current Liabilities, the Operating Cash Flow Ratio uses cash generated from it’s continuing operations to cover it’s Current Liabilities.

Operating Cash Flow Ratio = Operating Cash Flow / Current Liabilities

The Operating Cash Flow(OCF) Ratio is reported on the Cash Flow Statement either using the direct method ( each cash outflow and inflow is reported directly, see example in Cash Flow statement ) or by the indirect method ( it is derived from net income ).

The formula for OCF when in the indirect method is: OCF = Operating Income + Depreciation – Taxes + Change in Working Capital

As with other ratios above, anything above 1 is a good sign.

Financial leverage / financial health ratios

Once we’ve figured out how much a company has cash on hand for day to day operations and to cover it’s short-term debts, we can now focus on it’s overall debt. The problem with debt is that it is a fixed cost. When business is bad, the fixed costs of debt push earnings lower.

Debt To Equity

Debt to Equity analyses how much of a dollar from debt the company generates compared to equity.

Debt To Equity = Total Liabilities / Total Shareholders Equity

Just by glancing over our examples above for ACME company, and looking at the Balance Sheet we have:

Debt To Equity = (Current Liabilities 11.205 + Long-Term Liabilities 3.450 = 14.655) / 11.567 = 1.2

This means that ACME company has 1.2$ of debt for 1$ of equity. Anything below 1 is okay, everything above 2 is considered risky.

NOTE: Take into consideration industries such as banking which will always have a high D/E ratio.

Times Interest Earned or Interest Coverage Ratio

This Ratio is self-explanatory, it measures how well a company can cover it’s interests on it’s outstanding debt from it’s earnings. The higher the better.

Times Interest Earned = EBIT / Interest Expense

Where EBIT = Net Income + Interest + Taxes, if we look at our ACME company example from our Income Statement we have:

EBIT = Net Income 87.404 + Interest Expense 4.200 + Income Tax Expense 14.936 = 106.540

Times Interest Earned = 106.540 / 4.200 = 25. So ACME company can cover 25 times it’s interest which is a pretty safe margin.

Efficiency

Before diving into the bread and butter of a company’s profitability that has a major impact into your competitive analysis we will discuss about how efficiently a company can translate it’s assets into profits. These ratios will be used also in the Profitability ratios below.

Inventory Turnover

The frequency for how a company can out their inventory, especially a higher frequency will tend to outperform other companies that are inventory intensive. This is a critical measure in your competitive analysis, for example in the retail industry. The lower the frequency, the higher the holding costs will be.

Inventory Turnover = Sales / Inventory ( for a more concise number, calculate average inventory: Average Inventory = (Beginning Inventory + Ending Inventory) / 2 )

For example, if we use our ACME company, we have the Revenue: 180.000 and we can imagine they had Inventory worth of 25.000.

Inventory Turnover will be = 180.000 / 25.000 = 7.2. This means that ACME company has turned over it’s inventory 7.2 times in a year.

Asset Turnover

This ratio tells us how much of revenue is generated from each dollar of asset. The same principle applies for Inventory Turnover.

Asset Turnover = Sales / Assets ( for a more concise number, calculate average inventory: Average Assets = (Beginning Assets + Ending Assets) / 2 )

Looking at our ACME company, we will have: Revenue 180.000 / Total Assets 26.222 = 6.86, which means that for every dollar in assets, ACME generated 6.86$ in Sales. It seems ACME is very efficient at translating it’s assets into money.

Profitability ratios

This is the most crucial part of our competitive analysis process. How much money a company is generating relative to the money invested in the business. In your competitive analysis, you can just imply plug these ratios into a spreadsheet program (rows) and for columns you can enter the companies to get an overview of which company in a specific sector or industry is more performant in generating profits.

Net Profit Margin

Net Profit Margin is just that, what percentage of the total Sales is left over after everything is paid up.

Net Profit Margin = Net Income / Sales

For example ACME has: 87.404 / 180.000 = 0.48, this means that for every 1$ sale, after operational costs, taxes, interest and everything else they pay, they remain with 0.48$ in hand.

Operating Margin

Operating Margin tells you exactly how efficient the company is in generating profits from it’s core business.

Operating Margin = EBIT / Sales

ACME Company = 106.540 / 180.000 = 0.59, this means that the core business is responsible of generating 59% of the total revenue. Which is a good ratio, by reducing their Cost of Goods Sold ( Cost of doing business ) and by employing better management of their resources, they can increase this margin.

ROA

Whereas Asset Turnover ratio is how much of the total sales the assets represent, ROA measures how much of the net income comes from it’s assets. In your competitive analysis, if a company can post consistently above 6-7% for at least 5 years, it means it may have some competitive advantage over it’s peers.

ROA = Net Margin x Asset Turnover

Having calculated these before we will have: Net Margin 0.48 x Asset Turnover 6.86 = 3.29, meaning that for each dollar in assets, the company generates 3.29$ in net income.

This ratio for ACME is below benchmark, but in itself doesn’t really tells us if it is a clear indication of something wrong, be sure to check exactly what the industry standard is.

ROE (DuPont’s ROE)

Some companies are not sitting on a large stock of assets, so whenever you’re doing a competitive analysis, as part of the process we will need to see exactly what part of the margins is financed by debt, not assets. This is the indicator that helps us the most to see that.

In general look for above 10% over a 5 year minimum in general for non-financial firms and if you spot a company that in general posts above 15-20% ROE in general for a 5 year minimum, then it should be a very hot company in your competitive analysis heat map.

DuPont’s analysis breaks this ratio into financial activities, to see exactly which ones are contributing to this indicator.

We’ve covered Net Margin, Asset Turnover and now we’re going to explain Financial Leverage ( also called Equity Multiplier ):

Financial Leverage = Assets / Equity

Financial Leverage or Equity Multiplier ratio tells us how much of the company’s assets is financed by equity rather than debt. The higher the company’s assets is financed by debt, you guessed it, the higher the risk.

Going further with our ACME example, we will have: Assets 26.222 / Equity 11.567 = 2.2 . This ratio is an exception to the other multipliers, the lower it is, the better. Here we can see that roughly half of ACME assets are financed by Equity the rest is financed by debt. Be sure to check also the industry standard. For Verizon ( March 2016 ) 245billion Assets over 19billion Equity = 12.9, so … it could be worse.

So let’s calculate the ROE for our ACME company:

ROE = Net Margin X Asset Turnover X Financial Leverage = 0.48 x 6.86 x 2.2 = 7.2

So what can we tell from the ROE’s deconstruction:

1. The company doesn’t have a high Net Margin, but…;
2. The company does a great job at having it’s asset turnover, that means it’s doing a great job at extracting dollars from every asset it has;
3. It doesn’t rely heavily on debt for leverage, having more than half of it’s assets sponsored by the firms equity, so it means it can easily pay it’s debt from it’s ongoing operation AND because it’s high asset turnover.

But it also has a warning sign here, for you doing the competitive analysis, that this specific company, can take on more debt to boost it’s Net Margin by investing in it’s business to boost it’s Net Margins, so…it doesn’t fit the radar, but if it consistently closes to a ROE of say 10%, then for surely it should be on your radar.

Other ratios

Next you can make a very interesting competitive analysis by dividing Free Cash Flow by ROE to come to the conclusion of exactly how much REAL money ( not accrual ) a company has on hand by using leverage and asset turnover.

You can also use ROIC ( Return On Invested Capital ) or ROCE ( Return On Capital Employed ) to see exactly how much the return is on the capital that the shareholders put in. The world is yours. I will leave you to further delve into this subject and if the interest is high on this chapter, I may write a separate blog post on how these ratios are used.

An Example: Comparing apples with apples

For our competitive analysis, we’re going to use 3 companies from the same industry and sector, score them, trend them and reach a conclusion.

The chosen industry is: Retail, sector: Super Markets and Hyper Markets and top 3 companies:

1. Walmart ( https://stock.walmart.com/investors/financial-information/sec-filings/2021/default.aspx ) choose annual statements 10-k
2. Costco ( https://investor.costco.com/static-files/7ef7bed6-c48f-4687-9c82-eb104b4823a5 )
3. Target ( https://corporate.target.com/annual-reports/2020/download/pdf?parts=part6 )

Below you will find an example competitive analysis with trends and using a choice from the financial indicators above. All information gathered from their public websites, correlated with data from Yahoo Finance.

The first thing I urge you to look at is that the ROE is correlated with the Financial Leverage, the lower the financial leverage is, the lower the ROE.

Also ROE is correlated with Debt To Equity Ratio, as you can see, the higher the D/E ratio, the higher the ROE ratio is.

In order to prioritize these companies, you will have to assign some weights to particular indicators of interest, depending on your competitive analysis objective, for me given the retail sector, I would prioritize it like this:

1. Inventory Turnover
2. Financial Leverage
3. ROA

Why? Because all of them have a ROE over 15%, so I would not hold ROE as an eliminating factor, right off the bat, but we can see that in the case of Target, neither is the Net Profit Margin or the Asset Turnover high, but the Financial Leverage beats the other two companies. So Target relies heavily on Debt, which is correlated with the high Debt to Equity ratio.

So for me Target would be less of a concern, because if I were to activate in the retail field, Target would not be a major threat because the Time Interest Earned is also the lowest of the bunch, that means they are struggling to cover their interest and keep pace with the other two.

The next one would be Walmart, with Costco being the leader in terms of competition. Why? Because the Net Profit Margins are the same for Walmart and Costco, but Costco leads in Operating Margins, Asset Turnover and Inventory Turnover.

Also Costco does a very good job at covering it’s interest, being the leader in Time Interest Earned.

So the clear winners are:

1. Costco
2. Walmart
3. Target

Now this financial competitive analysis has to be correlated with other market studies, so that you know exactly what is the secret of Costco’s really nice Inventory Turnover and Asset Turnover.

Conclusion

To sum up, using data from the Financial Statements to supplement your competitive analysis, not only gives you leverage in terms of knowledge, but also:

• It is concise and readily available;
• It is reliable and audited;
• It is unbiased.

You’ve learned where to look and what financial indicators to keep your eyes on. It is important to also understand that there is no single financial indicator that provides you with a single source of truth, you have to couple some together, because businesses usually make compromises in terms of: profits, efficiency, liquidity and financial health.

When a business fails several dimensions at once, let’s say efficiency, liquidity and financial health, you can be sure that profits won’t be sustainable and a new empty space will be left in the market. Space that will be yours for the taken.

Keep in mind when using financial indicators in your competitive analysis always to:

1. Use data and trends for at least 5 years;
2. Compare companies from within the same industry and sector.

Hope I have been able to offer some valuable information and would really like to know what financial indicators you use in your competitive analysis.

Thank you and please feel free to check out the links below with books and resources I’ve read that helped me.

Useful Links

• Benjamin Graham’s – The Interpretation of Financial Statements: The Classic 1937 Edition
• Benjamin Graham’s – The Intelligent Investor
• Finance & Accounting for Nonfinancial Managers – Steven A. Finkler
• Analysis for Financial Management – Robert C. Higgins
• Five financial indicators to predict a competitor’s business susteinability

I think you got the idea how passionate some of us can be in optimizing our time to better do our work and save more for our leisure time

Jake Knapp is one of those productivity geeks. During his job at Google he experimented with several ways he could improve team processes.Having several results he found out that the best ideas and results came from work under specific time constraints. 

The looser the time constraint, the less efficient the process, tighter time constraints did not offer time to ideate.

Picking a time constraint, then adding all the stakeholders together for this whole amount of time was the start of the “Design Sprint”.

The last pieces of the puzzle were offered by other contributors that joined the effort:

• Braden Kowitz: story-centered design 
• John Zeratsky: focusing on the end-result/end-benefit
• Michael Margolis: having a tangible outcome at the end of the Sprint.

Since its inception towards now, the Design Sprint has been iterated countless times and proved valuable for world-renowned businesses and projects, some of them are: Google, AirBnB, Slack, KLM, Prudential, British Museum, Medium and many more.

Why use a Design Sprint?

Design Sprints are used to test ideas with real life customers by rapid ideation and prototyping techniques. You can save a massive amount of money and time by focusing on the Problem/Solution part of the Product Lifecycle (you can read more about Product Lifecycles here .

The Design Sprint can be used to solve a difficult challenge, to test an idea or to enter new markets by validating new business models. Remember, the Design Sprint is held with ALL important stakeholders (CFO, CPO, CEO, all C-suite or representatives where necessary ).

What is a Design Sprint?

A Design Sprint is a 5-day step-by-step process for answering crucial questions through prototyping and testing ideas with customers.From Google products, investment bankers, to high school students, the Sprint process can be applied in any problem context.

When is a Design Sprint useful?

There are some prerequisites for the problem context for which the Design Sprint brings the most value, these are:

1. High Stakes: High risk with a solution that requires a lot of time and money;
2. Not enough time: From the point above, you need something to base your decision on fast;
3. Plain stuck: Lack of information or lack of motivation because loss of momentum.

How to run a Design Sprint?

The Design Sprint is centered on a 1 week process, where each day has an input, a process and an output.

Each day involves certain activities that will provide input for the next day.

The week begins with creating a clear path for the whole week and ends with learning with customers.

Before presenting the overview of the week agenda, we still have to cover certain requirements:

1. You will first need a Challenge: which should fulfill the requirements of the problem context we’ve discussed previously, but focusing on the surface ONLY ( where product meets customers );
2. Then you will need the Team: After presenting the Agile Venn diagrams previously, you might have a hunch that the Design Sprint borrows heavily from other Agile frameworks: team size 7 people or less cross-functional ( CEO, CPO, CFO, sales, marketing and engineers), a Facilitator ( see Scrum Master ) and additional experts for support;
3. Time and Space: in order to ensure that people are focused, the same agenda is going to be respected for 5 days, 1 lunch break and several minutes, all team members in the same location, all meetings facilitated by the Facilitator. This way we make sure nobody gets in the meeting trap (bellow)

Overview of the Agenda

Monday

Monday starts first thing in the morning by agreeing on a long-term goal. The long term goal is the goal of the entire project, it can be 3 months from now or in 5 year.

Next we make a map of the challenge, this can be an impact map of the main actors on the left and the goal on the left, in between actions (or impact) the actors need to take to reach the goal.

The rest of the day is asking the experts about what are the main obstacles in our map and How Might We (HMW postits) achieve the end-goal, the idea is to come with a subset of solutions.

In the end the Decider ( with or without the help of the team ) will pick as target ( one customer and one challenge ) to focus the rest of the sprint.

Tuesday

Tuesday will be more thrilling. The first goal of this day is to get the team to look for already existing solutions by using Lighting Demos, short 3 minutes discussions on how other solutions tackle the obstacles at hand. 

The goal is to have at the end a whiteboard of ten to twenty ideas that might be useful.

The whole objective of this day is to review existing ideas and remix. This is done by either dividing or swarming. If you picked a very narrow focused target then everyone should swarm on the target, else they should divide to see how the ideas you researched solve the targets that you’ve picked.

The last step for today will be for everyone to sketch a solution from your customers perspective. These sketches are going to be reviewed…

Wednesday

Already you should have some solutions sketched up, so the goal of today is to decide on which you’re going to build your prototype on, by pruning and constructively critiquing each solution.

The critiquing stage follows a script and here the Facilitator will be mostly involved by time-boxing the whole process and ensuring that everyone understands each solution.

At the end of this stage the team will vote, getting only one vote per team member and the Deciders getting 3. 

By the afternoon you will have decided which sketches have the best chance of answering your sprint questions and helping you reach the long-term goal. 

The rest of the day is timeboxed for writing the storyboard. In the end the storyboard should contain all the winning sketches and a final prototype for which a customer interview can be based upon.

Thursday

Thursday is the day of “faking” the prototype by building a facade. The prototype must be real enough that you elicit a valuable reaction from the customer.

The important step here is that the product doesn’t need to be real just appear real. If it is an onscreen app, use Keynote, PowerPoint or a website-building tool like Squarespace, if it is on paper use the above tools and Microsoft Word, if it is a service write a script for an interactive play with the customer.

After the Facilitator has divided the roles played in developing this prototype we will need to stitch the independent tasks together. 

After everything is done, the rest of the day is filled up with a trial-run. The goal of this activity is for the one that will handle the customer interview the next day, to get accustomed with the customer interview for the next day.

All the other teams during the presenting of the prototype will contribute at the end, including the Decider, now is the best moment for such interventions.

Friday

This is the day that makes everything worthwhile. One person from the team that had the trial run done Thursday will act as the Interviewer.

The interview should follow a script, a series of steps, that were detailed the previous day and for which the end-outcome will be to capture the customers overarching thoughts and impressions.

It is important to note that the interview takes place in two separate rooms so that the team can monitor and reach conclusions once they watch the interviewer ask questions in the separate room.

At the end of each interview each note should be noted down and be put on a whiteboard under the name of each interviewee.

After all the interviews have ended, everyone should review their post-its silently and write – down any patterns that they see. The final step is to check how the patterns noted come together with the long-term goal.

What is the outcome of a Design Sprint?

Saved money and time before fully engaging on a solution;

You have gained the most valuable outcome there is to get: 5 customer feedback that can tell you if you are on track.

Now you can:

• Share the big ideas that came up after the Design Sprint;
• Tie up every detail from the interview to your existing Customer Journeys and recheck your Personas;
• Prioritize how and when the solution was built;
• What follows next is the regular Agile Release Management process with development taking an Iterative process look, such as Scrum and deciding based on roadmaps what and when to release.

Extra: Running a remote Design Sprint

Here is a nice video on how to run a remote Design Sprint, given the current world-wide situation it’s a must we also incorporate remote teams.

This is a real problem for some projects and companies where remote work has taken the bulk of our activity.

Conclusion

I hope you’ve enjoyed my summary of the Design Sprint, I highly recommend you buy the book and try this technique inside your organization. This is just a taste of the whole process, so maybe even look into some great Facilitators that already have run the Design Sprint.

Now that you know the advantages of the Design Sprint, let’s get a quick glance over some highlights from the post:

• A Design Sprint is a 5-day step-by-step process for answering crucial questions through prototyping and testing ideas with customers;

• Design Sprints are different from other frameworks because they tackle different stages of the problem and can save resources by having early customer feedback;

• They differ from brainstorming because they follow a process with artifacts, roles and responsibilities, coupled with outcomes that define success for each stage of the process;

• Having customer feedback, now the Design Sprints can provide input towards other Agile development approaches.

Useful Links

• The Design Sprint How-To guide
• The Design Sprint Book and checklists for each day

I really dislike using the word NOT to express something, so I would rephrase the title “Product Owner rather than Boss”.

You can read more about where the Product Owner sits in the overall scheme of things, here: https://gabrielrondelli.com/agile/product-management-prouduct-owner/

One such boss figure among classical top-down hierarchies is the Team-Leader ( just as a classical example, the first tier commonly met in “how” organizations for boss titles, just before People Manager title ).

Among the responsibilities of the Team Leader we have:

• Create an inspiring team environment with an open communication culture
• Set clear team goals
• Delegate tasks and set deadlines
• Oversee day-to-day operation
• Monitor team performance and report on metrics
• Motivate team members
• Discover training needs and provide coaching
• Listen to team members’ feedback and resolve any issues or conflicts
• Recognize high performance and reward accomplishments
• Encourage creativity and risk-taking
• Suggest and organize team building activities

Taken from: https://resources.workable.com/team-leader-job-description

And I was recently asked: How does a Product Owner deal with conflicts, thus addressing the point above: “Listen to team members’ feedback and resolve any issues or conflicts”.

I think this is an inherited flaw for organizations who fail to grasp the true meaning of an Agile team.

There is no boss

First, the product owner is not a separate entity from the Scrum Team, he is not a boss. Neither is the Scrum Master, any Agile framework currently implemented does not recognize such titles that are usually assigned with a command-and-control boss roles.

Every conflict that arises in the team is dealt within the team by the team, meaning: Devs, Scrum Master and Product Owner together as a single unit.

As you can see, the keyword here is team not managed team and certainly no boss roles.

The same goes for setting goals, deadlines and delegation.

The goals are set by the whole team, tasks are shared and only the team decides the split, I wouldn’t go into deadlines and everything else, because I think they are redundant in the context of an Agile framework (eg: we don’t have deadlines, the team chooses how much it forecasts to get done by the end of a Sprint).

Thus, many organizations and as well fresh players into the field fail to grasp the true meaning of a self-organizing team. 

Core values and dysfunctions

If someone gives direction, resolves conflicts or sets goals, it means it knows much more than the team that actually sets the goal or that the team is failing in self-organizing.

Going down the above road will lead to abandoning trust which essentially is the core for all other values such as: “Commitment, Focus, Openness, Respect, and Courage”.

Based on the book from Patrick Lencioni’s “The Five Dysfunctions of a team” we can see that at the base of the pyramid, the lack of trust is the most important.

Going forward with other studies on human motivation we can tell the following:

Trust is the basis for the team’s rest of dysfunctions and a sure source of hidden costs later down the road.

Pinning the Product Owner as a goal-setter, a task delegator, a dead-line setter or any such “boss” activity, eliminates trust and will have the team put in a “carrot-and-stick” mentality. Faking progress and hiding mistakes just to get in “good-terms” with the “boss”.

I’m going to leave you with a small quote from the book called Freedom .Inc, which delves further into the abyss of the human psyche and economic science:

(…)Raiman’s last statement echoed one of Zobrist’s remarks, that his daily tours of the shop floor to listen and converse with operators were his quest for bonheur, for happiness or joy.

But it was his reflection on the relationship between fairness and performance that intrigued us. Indeed, Raiman used two different meanings of fairness: economic and moral. While talking about the trade-off, he refers to the economic unfairness of the competition that—since Adam Smith—has been viewed as the basis of a country’s economic performance. But when he talks about fairness as a basis for the company’s performance, he refers to moral fairness, to the way a company and managers treat people.

In the first case, he mentions the simple notion that underlies Smith’s market economics: Material self-interest drives economic action and performance. In the second case, Raiman formulates a more complex precept: The satisfaction of people’s need to be treated with moral fairness leads to their enhanced effectiveness and to enhanced company performance.

This enhanced economic performance—gains in productivity, profits, and so forth—then, in turn, paves the way for providing economic fairness to people through profit sharing, bonus, or ownership schemes. It may seem hard to believe that fairness and respect can be appreciated by people even more than a bigger paycheck. Needless to say, in a perfect world you would want all three—fairness, respect, and maximum remuneration. But we do not live in that world, and so we have to make choices. On at least two occasions that we know of, unions at liberated companies, when given the choice, did, in fact, choose fairness and respect over their pocketbooks.

Freedom .Inc: How corporate liberation unleashes employee potential and business performance

I would go on citing from Daniel Pink’s “Drive”, but it goes through the same patterns: human motivation is tied towards rewards up to a certain point, the rest of the way is composed of something more…

First, and foremost, the Product Owner with the help of the Scrum Master should ensure trust among the team to build on the next values. Trust that the team knows what to do, they desire to do their best and are willing to do it as best as they can.

Remember, nobody gets up in the morning desiring to do an awful job. This shift in mentality is the first difference from the usual monitoring and supervision theory.

The second dysfunction is “fear of conflict”, this is tied with the Scrum values: courage and openness.

It takes courage to admit a mistake, be it your own or of a colleague.It takes openness to address the challenge and be open to discuss it. This is easier said than done.

Most people don’t want to debate or put mistakes out in the open, because they are afraid of repercussions. 

This ties directly to the first point of “trust”.

It also goes against the responsibilities of the Team Leader or any “boss” title.

Metrics can be faked, if fear of repercussions and of conflict, people will hide mistakes and inflate metrics, just to “look good” “on paper”. 

Businesses are complex endeavors, with many unknowns, it is impossible to know every variable early on.

There are even entrepreneurs that council others to “fail often, fail fast”. Why? Because given the statistics most start-ups will fail. Failing early, will ensure a quick recovery. So you can replace the word “failure” with “learning”.

Creating a culture of accepting mistakes and learning from them early on, is a culture that enables innovation.

Here’s an example from Gore company from the same book Freedom .Inc.

Individual initiative and risk taking have always been strongly encouraged at W. L. Gore & Associates. Bill Gore was known for asking associates on his daily plant tour: “Have you made any mistakes lately?” And if the answer was “No,” he would say: “You haven’t been taking enough risks.”

Needless to say, if the risk is that you might fail to keep a commitment, you should warn others immediately. If you don’t, you’ll punch a hole in your credibility bucket. For Gore’s associates, the result is a company where they feel uniquely free to pursue their own interests within the framework of a fulfilling job—or, rather, commitment.

But for the company as a whole, the proof is in the results. And the company has been eating its freedom pudding for fifty years now. It still tastes as great as ever. In the early days, Bill Gore started out with an unloved little compound called PTFE and one product—coated wires and cables. Today, Gore takes in more than $3 billion in sales and has averaged better than 10% annual growth over the past decade. It not only makes the most famous waterproof membrane in the world, but it continues to innovate in ways that no five-year plan could foresee.

Freedom .Inc: How corporate liberation unleashes employee potential and business performance

The next dysfunction is the commitment or lack of it, fear of conflicts leaves people to not commit to anything, because of fear of repercussions. 

Commitment is something voluntary, chosen, not a job imposed by somebody else. Commitment is something that you take from beginning towards the end, because you believe you can do it. See the difference?

The last two dysfunctions follow: accountability and lack of interest for results.

If we take these two away, you can imagine what will happen to the Product Vision. When the team does not hold anyone accountable and there is a lack of interest towards the end-result, you can imagine what happens to an iteration.

With each Sprint, the goal will be farther and farther away and as such will deviate from the Product Vision.

Conclusion

As a Product Owner you are part of the Scrum Team and as such your first duty is to eliminate yourself as the “boss figure” by instilling a culture of trust.

This is done on a continuous basis, by ensuring the Scrum values mentioned above are respected: Commitment, Focus, Openness, Respect, and Courage.

Whenever a conflict arises, ask yourself if it is treated constructively. Watch out for the 5 dysfunctions and involve the whole team in treating them, especially the Scrum Master.

Useful links

• Freedom .Inc, a book summary
• The Five dysfunctions of a team book summary
• Daniel Pink a book summary on motivation
• Scrum values
• Scrum.org a managers role

The great entrepreneur and author of Lean Startup, Eric Reis said: “People are metrics too”. He is not even the first one to do so, Steve Blank in his “Customer Development” framework that came before the Lean Startup movement, is based on “Get out of the building” motto in discovering who your customers and what their needs are. The common theme is that customer interviews play a pivotal point in your product development.

Here’s a nice story from Steve Blank:

Picture the scene: the entire company (all 15 of us) are present. For this startup we had assembled some of the best and brightest hardware and software engineers in the computer industry. My boss, the CEO, had just come from a string of successes at Convergent Technologies, Intel and Digital Equipment, names that at that time carried a lot of weight. Some of us had worked together in previous companies; some of us had just started working together for the first time. 

I thought I was bright, aggressive and could do no wrong as a marketer. I loved my job and I was convinced I was god’s gift to marketing.

Now in a voice so quiet it could be barely heard across the conference table our CEO turns to me and says, “That’s what I thought you said. I just wanted to make sure I heard it correctly.”  It was the last sentence I heard before my career trajectory as a marketer was permanently changed.

Get Out of My Company
At the top of his lungs he screamed, “You don’t know a damn thing about what these customers need!  You’ve never talked to anyone in this market, you don’t know who they are, you don’t know what they need, and you have no right to speak in any of these planning meetings.”  I was mortified with the dressing down in front of my friends as well as new employees I barely knew.

Later my friends told me my face went pale. He continued yelling, “We have a technical team assembled in this room that has more knowledge of scientific customers and scientific computers than any other startup has ever had. They’ve been talking to these customers since before you were born, and they have a right to have an opinion. You are a disgrace to the marketing profession and have made a fool of yourself and will continue to do so every time you open your mouth. Get out of this conference room, get out of this building and get out of my company; you are wasting all of our time.”

I was stunned by the verbal onslaught. At that moment I felt so small I could have walked out of a room underneath the crack in a closed door.

Facts Not Opinions
The shock quickly wore off as I processed the gist of what he told me. He was right.  I personally didn’t have any facts, and if we were counting opinions, there were a bunch more educated opinions in that room than I had. All I had been doing was filling the air with marketing noises.

I was convinced that I had just been humiliatingly fired – 90 days into our new company.

Get Out of the Building
As I got up to leave the room, the CEO said, “I want you out of the building talking to customers; find out who they are, how they work, and what we need to do to sell them lots of these new computers.” Motioning to our VP of Sales, he ordered: “Go with him and get him in front of customers, and both of you don’t come back until you can tell us something we don’t know.”

And he was smiling.

My career as marketer had just begun.

Steve Blank – https://steveblank.com/tag/customer-development/

Nice story isn’t it? Now imagine yourself in Steve’s shoes for added motivation to hold some customer interviews.

Besides these authors, several movements of placing the customer at the pinnacle of any product development have arisen: “Design Thinking” and “User-Centric design” all place a high priority in talking to your customer and holding customer interviews. I recommend you study these further, links at the bottom of the post.

Given that customer interviews are a sure bet, then why do we not do them more often? Some reasons come to my mind:

• Because customer interviews are hard: you cannot just ask the customers what they want, you have to dig a little deeper and this takes skill, skill which comes with practice;
• Because vanity metrics gathered from analytics are easier, short/sweet not actionable but ego-inflating, this can tend to shadow the previous point and more often than not, these are correlated with “in-house” marketing studies.

When are customer interviews useful?

Customer interviews are useful no matter the stage of the product ( read more about product lifecycle phases here ) you’re finding yourself at :

• If you’re at the beginning problem/solution stage of the product, customers are more called prospects;
• If you’re at the market/fit stage of the product or beyond, these might be called user interviews, because the customers actually use or have purchased your product and you want to validate or find out new personas, journey maps or feature ideas.

Right now this post is going to focus on customer/prospects interview process.

More on customer interviews

Customer interviews are one-to-one sessions between you and a potential customer.

The potential customer is chosen based on the problem you want to tackle. For example, you want to validate a hypothesis that for a given problem, this customer segment with general demographics attributes like: age, gender, occupation, etc. and behavior attributes ( we’re going to deep dive on gathering behavior attributes and techniques in another post ) has a need for a solution.

After you have an initial hypothesis and customer segment sketched out as demographics and behaviors, you will search for prospects, but should be prepared in advance with a script for holding the customer interviews ( more on this below ).

The prospects are found by using the communication channels that are valid for your product/service.

For example, your initial hypothesis is that your product/service will be targeted towards professionals on social networks, so in order to also validate the channel hypothesis you start cold-messaging ( a technique of messaging people not in your near social group ) on LinkedIn and asking them if they are willing to help you out with validating your idea by having a short 30 minute discussion.

The channel can vary as well and it depends on your targeted customer segment and your initial hypothesis.

It can be anywhere from already established social groups and having an on-the-spot conversation, to phone, Instant Messaging or video-conferencing customer interviews.

The common theme for all customer interviews: is to be prepared, be authentically curious yet professional and be respectful of the customers time.

• Be prepared: You’ll never know when a customer interview opportunity arises, be prepared with an elevator pitch to elicit curiosity and a customer interview structure ( detailed below with examples );

• Be authentically curious: Don’t directly ask the customer for what they want, because of the Heisenberg and Hawthorne bias the mere act of asking is going to elicit answers that are not valid for you ( like them recommending features they are not actually going to use ). Instead, focus on what the customers problems are on a day-to-day basis relevant to your product. Open ended questions, broken questions and other techniques that are not leading are the key here;

• Be professional: The customer interview has a scope, talk formally and stick to your objective.

• Be respectful of the customers time: The customer interview should at most take the time that you’ve allocated for the interview, no more, no less. This should be communicated clearly towards your prospect/customer in the elevator pitch or in the initiating communication and agreed in advance.

Remember: This prospect and/or customer will recommend or help you with feedback later ( or even better, become a user ) based on this initial customer interview.

Before diving into the process with real life examples I’ve used for customer interviews, let’s put in place some tips&tricks to get the momentum going.

Tips&Tricks

1. Start with whom you know: Starting with whom you know will provide early feedback on your pitch, on your customer interview script and will help you with how you time-box and document the results. Let’s not talk about getting the emotions out of the way, by talking with someone familiar rather than a complete stranger.
   
   Remember, your emotions will likely translate in what the other person feels as well when face-to-face. If you feel comfortable, it will help the other person to feel comfortable as well, so it’s best you have many 1on1s with whom you know before actually talking to strangers;
   
2. Prefer face-to-face, but don’t be rigid: I started having a strict policy for face-to-face and was very rigid on it. After losing some prospects, I’ve started doing customer interviews via chat, via video-conferencing, via phone and so on. Even thou it is not ideal and each medium has it’s own techniques ( like in chat delaying the question or using … suspense … or being more vague ), it can prove to offer meaningful answers which otherwise you might not get, so be flexible and ask for medium that customer is comfortable with if he/she is reluctant for a face-to-face interview;
   
3. If the interviewee agrees to meet with you for a coffee: choose a neutral location or let the interviewee choose one. A public yet quiet place, so you can hear each other, is perfect. Think a familiar table coffee shop;
   
4. Dress appropriately, have an even warm tone, smile and be friendly ( even on the phone, a genuine smile can change the tone of voice );
   
5. Give something back ( no, I’m not talking about paying for the coffee ), have the interview appear on your blog post, your video or just mention you’re going to give some premium once the service is launched;
   
6. Always thank the interviewee for his/her time at the end.

The customer interview script

You either meet someone who might be interested or you’re going to cold approach someone.

Both situations need you to have a customer interview script that is refined and prepared ahead of time with someone you know or by practicing on your own.

The elevator pitch format is a must for both cold-approaching online or offline, but for offline it is mandatory to keep it under 45 seconds, because it takes even less to make a good first impression and to capture someones attention.

Here’s the format that I use for most of my customer interviews:

Introduction: Greetings and who you are
Who: What you do and who your customers might be
Problem: What problem you’re trying to solve
UVP: What sets you apart
Call to action: Prompt for setting the interview

Here’s an example pitch I’ve used that has got a decent response rate:

Hello,
My name is Gabriel Rondelli [and I have noticed your passion for sustainable fashion.]

I’m researching a product idea that looks into [how sustainable fashion can be made more popular] by [using network effect of mobile apps].

Currently I’m trying to figure out if this idea is worth pursuing and would love to get 20 minutes of your time to help me understand what your flow is [when shopping online for sustainable clothing].

I’m not selling anything, just looking for advice.

Thanks,

Gabriel Rondelli

Actual pitch example

After you go through several iterations of this elevator pitch, you will spot one with a higher success response rate. It helps to keep all other versions to have a history of improvements and track a pattern.

Next comes the Interview Script, this follows these lines:

1. Welcome;
2. Collect attributes ( demographics );
3. Tell your products main story;
4. Rank problems;
5. Open discussion on customer journey;
6. Thanking the customer and asking for future feedback sessions and referrals;
7. Document the results.

Example:

Welcome:

Hello Helen, thank you so much for taking the time to speak with me today. As I’ve mentioned I’m working on a product that will build a mass-following around sustainable fashion through the use of a mobile app.

I’ve got the idea after talking to many friends who have a lot of clothes they don’t need or want any more and don’t know what to do with them. But before we get ahead of ourselves I wanted to make sure if other people share the same problem.

The interview will work like this: I’m going to ask a few general questions about yourself and then discuss some problems we’ve identified and see if you resonate with those. I’d like to stress that I don’t have a finished product yet, my objective is to learn from you not to sell or pitch anything to you. Does that sound ok with you?

Actual interview with names replaced

Gathering demographics:

Before we go into the problems, I would like you to answer a few questions about yourself:

How old are you?

From a scale from 1 to 5 how much does the opinion of others matter to you when choosing clothing?

Have you ever copied a fashion style from others?

How important is the brand for you?

Have you ever borrowed or given clothes to your friends?

How important are recommendations in terms of clothing style?

What online products do you currently use for fashion advice? What about shopping?

Did you ever make your own clothing?

Actual interview

Tell the products main story:

Okay, sounds good. Thank you, now let me deep dive into the problems I want to tackle.

In my own experience, I and my friends work a lot and don’t really have time to go shopping for new clothing. Also, my daily commute makes it difficult to pass by any clothing stores that I like.

For those that are in my way, most of them are brand clothing. Having worked in the clothing industry, I know that major retailers charge too much for the fabric the clothes are made of.

There is also the issue that having a lot of clothing occupies space and some of them are brand new, but just don’t like them anymore. With those types I really don’t know what to do with them. Do you identify with some of these problems? If yes, how did you tackle them?

Actual interview

Rank problems:

(During this time you notice on how the interviewee reacts and note down some reactions, mentally if not in writing. You will see that maybe he/she will already answer on how they treat those specific problems) Great, now from your point of view how would you rank from 1 to 3 the problems I have just stated. 1 being the most painful and 3 not so much (if necessary, re-iterate the problems).

Actual interview

Open discussion on customer journey:

(This is where he/she will do most of the talking)

Thank you, now please tell me what your process for choosing the clothing you want?

How do you shop today?

Etc. ( Questions are based on his/her answers and reactions, open-ended, to find out more or anything new you haven’t thought about )

(Tricky part follows) If you’ve had a magical wand that would change any aspect of … (pattern you have noticed) what would you change?

Actual interview

Thanking the customer and asking for future feedback sessions and referrals:

Thank you, your feedback will prove to be very valuable in treating these problems. As mentioned previously, we are working on a product to treat these specific issues. The best way to describe the concept is “Match making for clothing”.

Would you be interested in seeing the product once we have everything ready? ( Wait for a yes )

Cool, thank you, would you like to help me get in touch with other people like yourself to interview?

Thank you for your time, it was a pleasure. Have a nice day!

Actual interview

The outcome of this interview should be:

• Validating the top 3 problems you’re trying to solve / Invalidate them;
• Find out other problems your customer have that might prove valuable for you to pivot on;
• Validate the channel, e.g.: Do you get a good response rate from approaching on this social network?;
• Validate customer segment and type.

This were the broad strokes of most of my customer interviews for an idea that I’ve had. I would recommend to also bring someone else with you who will generally take notes as you go, if not possible ( because 20 interviews of 30 minutes, not everyone can book the time ), follow the next tips.

TIP: I recommend taking notes only upon finishing the interview. After going through 10-15 customer interviews, I’ve found out that writing is slow for me and lost a few ideas along the way, so what I suggest is taking voice memos ( there are even some apps that have speech to text capabilities, so look into those ).

At the end, it is very important for you and your team, to have these documented somewhere else, preferably in a secured online location that also offers collaboration features.

I recommend Google Docs, a shareable Google Spreadsheet with standard columns and rows ( problems, demographics and behaviors specific to your customer segment and a row for personal insights ). I have shared the same column and row format between spreadsheet and kept each customer on separate sheets.

One final note: Keep the customer interviews to a 5 minimum at first. Once you spot a pattern, re-adapt the interview process and start anew. Don’t stick to the same interview process for the whole 20 interviewees. Change your customer interviews according to the feedback that you receive in small bulks of 5.

Conclusion

Validating your product’s problem hypothesis is very valuable early on. Be it a new product or an existing one. If you apply design thinking or run this experiment in a Design Sprint, the same theme applies: testing as soon as possible with your customer.

The script I mentioned above can be followed at any stage of the product, be it customer interviews to test a problem hypothesis or a solution. Your major breakthrough will be by carefully observing the customers reactions and answers. Their input can provide unique insight for future development or for pivoting in another direction.

Hope you’ve enjoyed this read, please find below some of the links and books that inspired me in my journey for holding great customer interviews.

Thank you!

Useful links

• Running Lean – Iterate from Plan A to a Plan That Works
• Lean Customer Development – Cindy Alvarez
• IDEO – Design Kit: The human centered design toolkit
• The ultimate guide to doing kickass customer interviews

A product goes through several lifecycle phases from launch to maturity and then maintainance.

There are some guidelines put in place, but not all are appropriate. Instead of being one product lifecycle, there are many. We will need to understand these first, because the milestones put forward by some of the frameworks can and will impact the product’s success.

Let’s now discuss the problematic frameworks that were put forward to help the entrepreneurs guide them towards a long lasting sustainable business. Keep in mind, these were developed to solve a particular problem at a specific time, no framework that can snapshot a business can guarantee success.

This is going to be a long post, so if you want to skip towards the metrics directly, you can use the TOC above and skip right to: “Stages of a lean product lifecycle“

The Product Development model

The Product Development model had a wide acceptance during the 1950s and gained a lot of traction during the 20th century. As we’ve discussed in other posts, you might already have a hunch what’s wrong with this model. HINT: it’s old!

Not that it’s old, but mostly because other than showing a structured way of looking on the entirety of the product, it doesn’t help the new entrepreneurs at all, because it’s structurally wrong. First let’s briefly describe the process:

• Concept / Seed round: here the entrepreneurs think of what their product and service is, how their business plan looks like and LASTLY who their customers are and how to reach them. With this in writing, they go to potential investors to back up the business plan and financial model with money;
• Product Development: This is the step for engineering blueprints and marketing prepares a Marketing Requirements Document that is being delivered towards the engineering team. Sales and PR starts at this phase as well;
• Alpha/Beta test: The testing of the product ensues, Marketing develops a communications plan and Sales takes the lead. Investors are happy;
• Product Launch: Sales is scalling, Marketing is already developed and product measurments starts, of course by comparisson with the already set in stone business plan ( all the way up to Concept ).

What’s wrong with the model:

1. Customers if present, are designed on paper, by the marketing department ( aka never leaving the building );
2. Investors invest without relevant data, only a business plan “back of the napkin” and measure expectations on the last phase “Product Launch“. Until then…money is spent;
3. The whole plan is centered on executing: Engineers building, Marketing researching and Sales…well selling. Where is the learning? There isn’t any. As point 2 above, everything is assumed from “Concept / Seed round“. Assumptions are never challenged against the market;
4. Lack of proper milestones for Sales, means that until the “Product Launch” phase, you won’t have any idea if the sales strategy and plan actually work;
5. Lack of proper milestones for Marketing, the materials are built in “Product Development” by never leaving the building, real customers are if consulted or seldom.

And now to top it off, imagine you were the founder or an investor, with stakes in said company, what will happen if “Product Launch” doesn’t deliver?

The Chasm: meet your wildest dreams

The Technology Adoption lifecycle model is another product lifecycle framework developed in the 1990s in tandem between Everett Rogers and with the “Chasm” theory popularized by Geoff Moore.

Now imagine you’re an entrepreneur and you’ve started your business and now you have the below graphic to guide you.

It promises that once you reach the mainstream market, by hopefully crossing the chasm that separates early adopters from the early majority, then and only then you will reach success.

Now, with only that information in mind, what do you think will happen in the fresh entrepreneurs mind.

Here is a rough thinking process:

1. You will start building as soon as possible;
2. You will focus on getting the “Innovators” and “Early Adopters” as fast as possible.

Hope you’ve identified the problems that arise from this model as well. First, customers NEVER fit in a nice looking curve. Who do you think plotted the percentages, what was the size of the statistical group ( companies big and small should fit in this ), who interviewed the customers, etc? Neither the customer segments or the customer growth function will fit on this nice looking curve except in text books.

Second, it doesn’t speak about the customers problems, what exactly the entrepreneur is trying to solve with the said product.

Third, the “Innovators” and “Early Adopters” are the first customers that jump on board, because your product solved a problem for them, they are by far the most paying customers and the ones that can tell you something about the market, rushing over them doesn’t sustain “learning”.

You cannot create a market or customer demand where there isn’t any customer interest

The Four Steps to the Epiphany – Steve Blank

The alternative: Lean Start-up and precursors

Customer Development

The Customer Development framework are one of the frameworks that rose during the 1990s. The author, Steve Blank popularized it in his book “The Four Steps to the Epiphany”. His motto is “that no business plan survives first contact with customers”.

He argues that before you even start describing and writing the business plan, you first have to document your hypothesis and validate these hypothesis. After the hypothesis are validated, only then you write a business plan, with the lessons learned from the validated hypothesis.

The book and resources on the topic is very vast, due to the shift in mindset from the old way of doing ( previous topics ) to the new ones.

Please check Steve Blank’s blog here (https://steveblank.com/category/customer-development/) .

Also this video here is a 2 minute watch that does a quick explanation of the phases of Customer Development process:

Eric Reiss: The Lean Start-up movement

Picking up “Customer Development” product lifecycle from Steve Blank at UC Berkley and combining it with his prior knowledge of lean manufacturing and lean software development, he began to document this on his blog in 2008 and what follows is a book that was published in 2011 called: “The Lean Startup”.

The whole product lifecycle in the lean startup, follows the build-measure-learn phases described below:

• The “Ideas” phase: Here we define the idea that we want to implement and hypothesis to validate our idea. We also define how to measure our hypothesis and how to gather this data: customer interviews, surveys, data analytics can all be part of this process;
• The “Build” phase: Based on the previous step we build an MVP ( Minimum Viable Product ), you can read more about different types of MVPs here: https://devathon.com/blog/top-10-best-examples-of-mvp-minimum-viable-product/ . The idea behind a MVP is to have the minimum subset of features, that measure your original hypothesis and test how the customers behave. It can be a landing page, it can be an email list. For example, you can have a landing page that shows some photos of a product and everything else like payment and delivery can be done manually OR you have a great idea to launch a toy selling shop for the fresh parents in your neighbourhood, you launch a site with various toys ( that you don’t neceserally have ) and just track the interest in each category ( by measuring clicks ). On the toy page itself, you can just display, coming soon and get the users email for priority processing. Now you know what to order ;
• The “Product” phase: Was briefly discussed in the previous point, the “Product” is just a minimal subset of the whole product to be developed;
• The “Measure” phase: We measure the outcome of the “Build” phase. How does it measure compared to our initial hypothesis, do we have relevant data to continue our business? What can we …
• The “Learn” phase: learn from our “data“, do we continue, or do we Pivot? Pivoting means that the data that was collected from the MVP disproved your hypothesis, BUT you’ve gained valuable insight on how to continue next. You can implement the lessons learned in a next MVP by adding features that support the lessons learned ( or removing features ). So the whole loop repeats itself.

The advantages of this product lifecycle model is that it reduces waste, you don’t waste time and money building something nobody wants and instead you get data very close to the inital planning phase of the product ( compare this with the classical Product Development model ).

Stages of a lean product lifecycle

Now that we have an overview of the available product lifecycle frameworks ( this of course is no definite walk through ), we can concentrate on the latest ones. All of them will start with:

Problem/Solution fit success metrics

The Problem/Solution fit starts with defining the hypothesis (the problem) and ends with an MVP (or a demo/ the solution). On this stage, most of the metrics are evaluated qualitatively. Onward from now, I’m going to present an example and for brevity’s sake, we’re going to stick to the happy-path resolution, if you’re interested in more, I will happily make another post covering all scenarios.

In order to setup the Problem/Solution success metrics, you will need to setup the hypothesis and arrange them, based on categories.I prefer using a graphical representation. Ash Maruya in his book “Running Lean” proposed a hybrid model from Alex Osterwalder’s business model canvas , which is more customer centric. Below you will find an example of how it looks like and order of completion (post-its added for order).

You can read more about the Lean Canvas here: https://leanstack.com/lean-canvas

Even if at this stage the metrics are qualitative, they should be actionable, not vanity metrics ( time spent on, number of downloads, click rates, etc. ). Vanity metrics by themselves don’t tell the bigger picture. Other criteria that they need to satisfy is: accessible (simple reports) and auditable(anyone can trace down source data and generate them). Also, metrics are people related.

The three A’s of metrics are: Actionable, Accessible, and Auditable.

“metrics are people too”

Eric Ries – The Lean Startup

The Problem

Coming back to our process, we have the following actions to take before measuring anything:

1. Define problem that you’re trying to solve and existing alternatives on the market that addresses this problem ( competition ), it’s best if you have 3 TOP problems;
2. With the problem in mind, think about customer segments ( identified by personas and behaviours first, later add general demographics like age and gender, follow the 80/20 rule ) that might have the problem that you’ve identified;
   1. Out of this broad segment of customers, duplicate the characteristics of what you think the Early-Adopters are. CAUTION: Don’t think about this too much, you will hone in on them after the whole process is done and/or repeated. As a general rule of thumb, early adopters are the ones who already pay for an existing alternative to settle their need ( answered their problem );
3. You define the Unique Value Proposition, what sets you appart from the competition, what extra value you offer and a High Level Concept. The High Level Concept is a very shorthend pitch of the Unique Value Proposition to help you clarify the idea when presenting this to your customers, eg: It’s like google for shoe-laces;
4. A rough sketch ( as you can see, we don’t start with “Execution first” ).

For the sake of an example and to have this business model more settled in, I will use our shoe-laces example in my Miro board:

Next we define our falsifiable hypothesis. Preferable to be a ratio of 1:1 for each problem and customer segment, so in the spirit of our example, we will start with our Problem and Customer Segment:

[Specific repeatable action] will [Expected Measurable Outcome] eg: Searching for custom shoe-laces takes a lot of time for 80% of teenagers

We repeat this step for each Problem we’ve identified + Key alternatives.

Next we conduct a problem interview with a set of potential customers and document the results based on our initial hypothesis.

Do we have it validate the initial hypothesis? If not, what were the other concerns of our customers? Were the customers in our target customer segment? Was this problem a major pain problem for them? Do they currently use any alternatives? If yes, were these alternatives found in our list?

In this step it is very important to quantify the results, even if they are in percentages. For each question above, after the problem interview, document percentages.

If the problem is relevant and you’ve validated your major hypothesis, next we will document the solution.

The Solution

After you’ve validated your customers main pain points, your main problem/s that you want to tackle, you’re now ready to define an MVP/demo ( different authors use different terminology, what is important is that it does not have to be a real-life technical solution, it can even be a sketch ).

In this step, you validate the features and the pricing model ( see below example ).

Let’s assume that after you have your first Problem Interview, you have reached the following conclusions:

• Your customer segment was on spot;
• Your customer segment wanted something that matched their preferences;
• Your customer segment wanted to also promote their own products;
• The customer segment that wanted to promote their own products didn’t find anywhere this possibility ( early adopters ).

So, in Purple post-its I have highlighted the new findings and have added the solution and the pricing model we want to base our Solution Interview on.

Please also note: that I have defined the Cost structure and Breakeven for both of the customers. Preferably, the two customers should be put on two Lean Canvases separately and the risks and benefits weighted as such, but for brevity’s sake I have kept them on the same canvas. The numbers have been rounded up.

Now, continuing with the process, you will contact the first batch of the problem interviewees and present them with a sketch of the designed solution. With this sketch, you will try to find: if the Early adopters are satisfied, if the problem has been solved, some minimal features to solve the problem and most importantly – if they are willing to pay the price you have calculated ( roughly ).

Potential outcome of Problem/Solution fit

• At least 10 customers wanting a MUST HAVE solution for their PROBLEM;
• At least 10 customers saying they MUST HAVE your SOLUTION;
• At least 1 FEATURE and 5 early adopters that will pay for it.

With this setup you’re ready to move forward with a first implementation of the features as an MVP. Note that I’ve used sketch in the previous paragraph, you can have a drawing, a presentation, a video, whatever, what is important to have is the pricing feedback and a list of minimal features to schedule your first release, let’s call it, your first MVP.

There can be multiple types of MVPs, here are some examples.

The “pirate” metrics

During each stage of the process, be it problem/solution fit, product/market fit or scaling, you will need to focus on some macro-metrics to improve, specific to the product lifecycle stage you’re in.

The macro-metrics that don’t require a lot of knowledge and can easily tell you where the blocking points are, are the Pirate Metrics. They are called like that because of their acronym: AARRR ( Acquisition, Activation, Retention, Revenue and Referral ). See below a graphical representation of such a funnel.

On Product/Solution fit, you should focus on Acquisition and Activation, because now your main goal is learning and validation.

We will assume Revenue, as we presume you charge from this stage. It will remain assumed for the rest of the stages, but they are not the main criteria. I bet you can think of a product that is payed but simply not used :).

Product/Market fit success metrics

There are many definitions of the product market fit, Marc Andreessen coined the term in his post The only thing that matters .

The definition that Marc Andreessen brought forward is:

Product/market fit means being in a good market with a product that can satisfy that market.

Marc Andreessen

The Product/Market fit is a constant process, the same as the Problem/Solution fit. You have to do anything that is required to stay in this stage, all the while keeping a watch on the market competitivity .

Another quote from Marc Andreessen

Do whatever is required to get to product/market fit. Including changing out people, rewriting your product, moving into a different market, telling customers no when you don’t want to, telling customers yes when you don’t want to, raising that fourth round of highly dilutive venture capital — whatever is required.

When you get right down to it, you can ignore almost everything else.

Marc Andreessen

Metrics

1. Sean Ellis survey method;
2. Cohort retention;
3. Net Promoter Score;
4. Lifetime value to customer acquisition ratio (LTV/CAC).

I will not cover points 1,3 and 4 ( will discuss all of them in another post ) but for now I will focus on point 2, the Cohort retention, because during this stage, the pirate metric that is most important is Retention. A cohort is a group of users that share an attribute in common, like: “join date”, “logged into account”, “personal plan”, “retailer plan” ( in our shoelaces example ).

There can be Behavioral Cohorts or Acquisition Cohorts. Behavioral Cohorts target users that do a specific action inside your product, like “users who made a custom shoelace design during a day”, “users who shared their design on social media”, etc. ( using our shoelaces example ).

Acquisition Cohorts use the attributes that are part of the Acquisition metric, like: “join date”, “register”, etc.

Here is an example of Cohort Analysis table from Google Analytics demo account:

The Cohort Analysis table is read column by column. In our example, for the users who have “first touched” the app ( our Acquisition sub-metric ), on the date Mar 14 – Mar 20, 2021, in week 1 after they first touched the app, only 11% (280) have returned to our app and have did a touch in our app. The percentages continue to drop for the same users for the following weeks.

Your target during this stage would be to increase the retention rate, using various strategies ( that I will discuss in another post ) to increase the retention rate overall until week 4 ( in our example ).

Scaling success metrics

Once reached this stage, usually this is the time to acquire more capital to ensure your product has more distribution channels, reaches more customers and works to retaining the existing ones. An important pirate metric to focus on this stage is Referral.

You can use the same cohort analysis from the previous stage to improve on Retaining and reducing Churn rate of your customers on different flows. Also focusing on Behavioral Cohorts for increasing Referral actions.

Also in this phase, as you make more revenue, it is important to implement strategies to automate your marketing and brand awareness strategies. So measures regarding the revenue and marketing campaigns also take place at this stage.

It is very important that at this page, you will have to measure the growth rate of your channels and automate the process by measuring the growth rate on each of these channels.

Conclusion

We have discussed the stages of the product lifecycle and frameworks that were put forward to address the problems of growth throughout history. It is important to remember, that independent of the framework adopted, there is no silver bullet.

Stages of product growth are in the end, human made and conceptual, in the end, your customers matter because they are the ones that bring in the money. Remember to also think of stages as dial buttons not on/off switches, the stages intertwine and are never neatly separated ( only in textbooks and 5 year plans ).

While measuring the product success, remember to also keep a close watch on the competitive forces of the market and where exactly your product positions itself. Growing and scaling a product is more an art than an exact science. Different specialists measure differently success and I invite you to research what works for you ( depending on customer base, product specifics and so on ).

Hope you’ve found this post informative and give me a heads-up if you want me to write more on the subject.

Useful links

• The four steps to Epiphany by Steve Blank
• Running Lean – Iterate from Plan A to a Plan That Works
• The Lean Startup – Eric Ries
• Marc Andreessen – Product/Market fit blog post

Have you ever thought about what makes a great business? Or what keeps a great business great?

Besides the product, there are other forces that come into play in keeping the business afloat. Even great and world renowned businesses that fail to ride the wave of the market will surely fail, by having to constantly keep watch over some of the market forces they can prevent that.

As we can see, the process of defining economic moats is a live process, ever changing as the market does, but it is defined in the Business Model since the inception of the Product. It serves to guide the business from the fit of the solution to after the business has achieved product / market fit and is now in the process of scaling.

The competitive landscape becomes even more pregnant when the business has achieved scale, because a bigger organization will have increased overhead of adapting to change, due to new organizational structures. The more you add, the more the decision process will take.

Many organizations have struggled with this aspect, trying to have the same flexibility as a startup while scaling further and further, some of them have managed just that, but we will talk about that in a different post.

Coming back to our competitive landscape and what drives the forces that in the end decide what strategical “position” you take within the market ( aka economic moat ), we will now try to define what exactly is an economic moat and what to look out for.

Porter’s Five forces

As a brief history, Harvard Business school professor Michael E Porter in 1979, developed a framework of classifying the competitive landscape into 5 forces. It was a period when businesses sought to position themselves in an industry for long lasting success.

Before diving into economic moats, let’s clear the variables, the building blocks that each business has to play with, the bricks that define all Porter’s forces. These are:

1. Real product differentiation: Think of superior features, think of the Kano model;
2. Perceived product differentiation: Brands, perceived need, think of bottled water, think Tiffany’s;
3. Driving costs down: offering the product at a lower price;
4. Locking in customers: by creating high switching costs for the customer, usually that means time, think anything that a customer needs training for, think dentistry equipment, medical equipment and something more closer to our heart, think smart homes and smart home equipment providers;
5. Locking out competitors: high barriers of entry, think patents, think regulatory exclusivity, think exclusivity contracts with a vendor for eyelashes glue for cosmetics, if a contract is settled, practitioners of cosmetics, will not be able to make cosmetics improvement for their clientele unless they buy the glue from a specific vendor, who has monopoly.

Now that you have an idea of what builds these forces, let’s go one step higher. We’ve discussed particles, now we’re zooming out with a proverbial microscope and we will be discussing atoms or what makes an economic moat:

• Threat of new entrants: This happens in an industry which has low barriers of entry. These markets are called Monopolistic Competition, like your favorite brand of restaurant. If you are hungry, any restaurant might do and the brand will not prove any longer a distinguishing feature. An example of huge barriers of entry are the Utilities companies or Pharmaceutical industry. Think of patents for pharmaceutics;

• Threat of substitutes: When trying to figure out what the substitutes for your product or service might be, you’ll have to get creative. For example, if you offer financial education as a digital service, a substitute would be Google’s search engine. Coming back to food, if flour gains in price, a slice of pizza might cost more to make, so a substitute would be a sandwich or a hotdog;

• Bargaining power of buyers: Think of airline industries, here, in order to provide the best service or more quality service than their competitors, a business will have to focus on driving costs down. Think of airline industries, think of major food retailers. By using the advantages of economies at scale, the bigger the size, the lower the price. In the case of airlines, think of logistics of fueling, seat placement and services offered;

• Bargaining power of suppliers: It’s one of the driving forces of the cost, it influences the previous point. If we think of airlines and of huge food retailers, we should think of the vendors of oil for the airplanes, seats, food, maintenance, etc. if we think of food retailers, we should think of individual farmers, importers/exporters and so on. A sudden change in their price, will affect the cost which is going to be reflected in the final price for the customer. In the case of a higher price for the customer, he/she might be predisposed of going to another provider of product/services which has other deals with other/the same suppliers;

• Rivalry among existing competitors: Is your business in a blue ocean or is your business in a red ocean? Think of the number of competitors in an industry, their number, their size, product differentiation perceived or real, etc. If you want an example, think of the entertainment industry, think of circuses and think of where “Cirque du Soleil” sits, by combining ballet, music and great costumes and shows, they developed their own niche, thus they are in a blue ocean ( a low competitor market ) distinguishing themselves from the other circuses on the market.

Disadvantages of Porter’s Five Forces

• They are backward looking. The best you can do is assess the current position in the market, but it provides more clearer view on what the market WAS, not what the market will be, it is a snapshot in time, more like the balance sheet if you will;
• It is very difficult to do the same analysis for the companies which have multiple product lines that spread over multiple markets.

As this framework was designed in the 80’ and currently the market is fast changing due to technology and globalization, this framework is good to be kept in mind and used with other tools.

Porter’s Five Forces can be made useful and relevant by using several streams of automation and digital data gathering, that gives you a rough idea of the overall market of the industry where you’re activating.

For public companies there are data providers called Data Vendors that offer company financial data, a wide range of financial indicators and ratios. This data can be aggregated and by using a graphical tool and looking at some metrics ( to be discussed further ) we can have a relevant view upon the market and industry.

This data is of course, gathered by the Data Vendors at the time of the companies make available their quarterly statements, so the image of the market will be quarterly.

For private companies, it will take a little bit more effort to gather data for an economic moats analysis.

Not required to make their financial statements public, all that can be done is to gather data from multiple statements and make assumptions and estimations.

Some countries require some sort of data to be posted by private companies, but they are not sufficient to make relevant observations, either by lack of or the frequency required by the fiscal policy makers in each country where the analysis is made.

If you’re interested on what data to gather from financial statements to have a rough overview of whether or not a company has achieved an economic moat, I have written an article regarding which financial indicators give more insight into economic moats here.

Economic moats

You can think of economic moats within two dimensions:

1. Width: How wide the moat is, if you look in the image above, we can say the moat is wide enough to keep the attackers at bay. The breadth of the economic moat represents how long a company can show high net margins on a consistent basis, meaning keeping competition at bay;
2. Depth: How deep the moat is means how much money a company can make.

Given these two dimensions we can have endless combinations ( being a real number, think of ranges/sliders that can be adjustable in both the width and depth as independent metrics ).

Example businesses use-cases

For example, technology companies can have a narrow and deep economic moat. You can think of the image on the left as Intel.

Why? Because as we’ve previously mentioned the 5 factors that make Porter’s five forces, technology companies usually set themselves apart from their competitors by: real product differentiation aka superior technology and features and by driving costs down by using mass-scale production, automation or by investing in technology to reduce the costs.

The moat using real product differentiation and by driving costs down is usually a short-term strategy, so a narrower moat. Superior technology can be rapidly caught up by the competitors and in the case of Intel, this is exactly what happened when Apple decided to make it’s own chips, thus taking a huge bite of Intel’s market monopoly as a chip maker.

Following an example from recent news:

Apple started using Intel’s processors in 2006 and a year later all Mac computers featured its chips. Since then, Intel has made chips for other Apple products such as modem chips for its iPhones.

Apple has always relied on outside suppliers for its modem chips, a crucial part that connects devices like the iPhone to wireless data networks.
In a bid to make its own chips, Apple bought a majority of Intel’s modem business last July for $1 billion and settled a long legal battle with supplier Qualcomm Inc (O:QCOM) over the chip-maker’s patent licensing practices.

Apple’s Mac computers generated $7.16 billion in revenue in the last reported quarter while Intel’s PC unit that includes modem chip sales recorded $10 billion in sales in the last quarter.

Apple was planning to use its own chips in Mac computers beginning as early as 2020, Bloomberg had reported https://in.reuters.com/article/apple-mac-intel/apple-plans-to-replace-intel-chips-in-macs-with-its-own-bloomberg-idINKCN1H91N8 in April 2018.

https://www.investing.com/news/technology-news/apple-plans-to-sell-macs-with-its-own-chips-from-2021-bloomberg-2148876

Another big company that is faced with decisions regarding it’s economic moat is Procter&Gamble. A world-renown company which has some good perceived need like brands that everyone had at least once in it’s house hold, brands like: Pampers, Ariel, Tide or Gillete.

P&G may have good perceived value but one aspect where it needed covering was real product differentiation by having a presence in the online. P&G was mostly a brick&mortar business, having no real stake in the online business, some of the competition began taking a share out of some of P&G brands, like Gillete. Brands that offered shaving products for men that we’re heavily rooted in the online industry, took P&G from 70% in 2017 to 50% for the US market. And these were not even big names: Dollar Shave Club and Harry’s.

Fortunately they’ve made a change, with the relative new CEO David Taylor ( November 1, 2015 ), the company now is steering more towards e-commerce than ever before. In 2019 it shifted most of their energies to promoting their products online and even using Google Cloud’s artificial intelligence tools to calibrate their marketing messages.

And just in time for the pandemic, right? People were stuck at home with remote working and were less inclined in “browsing the aisles” of a crowded shop, preferring ordering online vs in-person shopping.

With the result of this bold move, P&G doubled it’s revenue from it’s online e-commerce activity.

Conclusion

Although there aren’t any guidelines or good recipes for how to succeed in a highly competitive market place, a good rule of thumb will be to always take note of the market forces that could potentially disrupt your business, keep developing your moat and be on the lookout for other economic moats developing in your industry.

Simply by knowing these forces and planning in advance you can secure your position in the market and maintain your profits for a longer time, all the while building a heavy brand.

Gathering data dynamically and putting forward a plan to secure an economic moat early on, can make a huge difference for when the business scales.

Once at scale, keeping a constant look on the competitive advantage and leveraging data and other practices ( such as Lean and Agile ) can help you retain the competitive head-start even when you’re company has reached a critical level.

Useful links

• Porter’s Five Forces explained by the Corporate Finance Institute
• Warren Buffet on Economic moats
• The little book that builds wealth – Pat Dorsey
• Morningstar on Economic Moats
• Positioning: The battle for your mind – Al Ries
• Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant