Product Management Toolkit (Part 2)
How do you take your product management to the next level? In this Product Management Toolkit (Part 2), we're going to review some of the top tools that product managers at companies like Tesla, Airbnb, Apple and Virgin Atlantic use to manage their products. We'll explain everything from how to create a price sensitivity matrix, define your total addressable market, conduct a cost benefit analysis, evaluate your product ideas with a MoSCoW feature prioritization, and make use of a KANO diagram to produce successful products.
With this explainer, you'll learn some advanced tools to manage product development like the pros. You'll hear some real-world examples of how these companies weigh the costs and benefits of an upcoming venture, prioritize important features and build delight into everything they create. As usual, you can download this framework to use in your own product management process. Plugin your own data and customize each slide according to your needs.
Price sensitivity matrix
As a product manager, you need to develop a product with features and price
When Tesla decided to lower the price of all its North American electric vehicles in May 2020, the market initially saw this as bad news. Traditionally, automakers use discounts as incentives to increase sales during periods of low demand. However, because Tesla is a tech and automotive company, Tesla wanted to reduce costs to increase its product availability. Because price sensitivity is a huge factor to EV adoption, lower prices dramatically increased the amount of cars Tesla sold in the US in the following months.
To determine how sensitive your customers are to your prices, you need to divide demand quantity by the percent of change in price. The difference is your customer's price sensitivity. PMs will often introduce discount codes to check conversion on a decreased price to determine their customer's price sensitivity. (Slide 9)
A price sensitivity matrix helps PMs determine how many people would use a discount that's hard to get vs those that will buy your product at its current price. While all customers will pay less for a product, some customers will wait a longer period of time to buy. This waiting tells you about demand. Other customers may not value a product if it's considered too inexpensive and will pay top dollar to get it as soon as it's available.
This range of acceptable prices is what product managers need to know to price their products in an optimal way, and can be used to create a gradient of different price tiers with different features that are attractive for each customer type.
TAM - total addressable market
Knowing how to price your product for the market is vital… and so is knowing the total size of your market to begin with.
In 2008, Airbnb was a startup trying to raise money from investors across Silicon Valley. The company estimated it could grow to $2 billion in revenue in three years by capturing 15% of their total addressable market, or TAM. Airbnb was rejected by nearly all the investors it pitched because its assumption that it could capture 15% of its TAM was too optimistic. After an initial seed round and some promising years of growth, in 2011 Airbnb ended up raising $100M at a $1.3B valuation — a dramatically smaller valuation that assumed the company could capture 2% of its TAM.
To calculate your own TAM, follow this formula: take the total number of customers times the annual revenue value each could bring. (Slide 4)
For example, your market could include 600 million Excel users, 225 miilion cloud CRM users, and 20 million accounting users. You can then use the TAM formula to determine how many customers are serviceable and available, and how many are obtainable right now.
Since TAM is calculated differently across various geographies, like a domestic company that operates in different regions or an international company operating in different countries, don't forget to take each region's purchasing power parity -- also known as PPP.
For instance, if you capture 1 million customers in India, the total revenue value is quite different from capturing a million customers in the UK -- based on each country's PPP. You can then break down your total available customers into additional segments as needed. (Slide 5)
As product managers prepare new features or developments, they need to account for the associated cost and weigh it against the potential benefit to determine if they should move forward. Nowhere is that more true than with the battle to fight climate change.
Over 110 countries that account for over 70% of world GDP and carbon emissions have net-zero targets by 2050. Unless all emissions are limited to 400 gigatons, the temperature on earth could rise above the 1.5 degrees Celcius tipping point within a decade. To meet these goals, the IEA has projected that a total of $5 trillion annually must be spent in energy investments for a total of $35 trillion by 2030. With so much money on the line, how can each government figure out how much they need to invest to reach their country's pledge? The answer is a cost-benefit analysis.
Cost benefits analysis can be used by PMs to determine if a new product or venture is worth the cost of investment. To do a cost-benefit analysis, calculate the costs associated with hardware, labor, and training required to produce the product or feature in question. Then, add up the total potential benefits, either in cost savings, improved sales conversions, better customer retention and loyalty, or enhanced productivity and workflow efficiencies. If the costs outweigh the benefits, definitely don't proceed. But if the benefits outweigh the costs by a substantial amount, then you have a clear path to move forward. (Slide 11)
You've run a cost-benefit analysis and you decide a new product is ready to go. So how do product managers determine what features a product should and shouldn't have?
In 2009, Apple's video editing software Final Cut 7 had a 50% market share. But when Apple launched its Final Cut X in 2011, the new version clocked in over 955 negative reviews and instantly became the lowest-rated Apple application. So what did Apple do so wrong? They didn't prioritize the right product features.
There are a few important tools PMs can use to decide which features they should pursue and which they should not. A MoSCoW Prioritization tool helps PM prioritize according to "must-have", "should have", and "could have" features. (Slide 13)
A product idea evaluation can be used to analyze an entire product across metrics like financial feasibility, strategic alignment, customer usability, market demand, and value created for its customer. Each category can be weighted according to its relative importance to your company or department, and then multiple product concepts can be rated against each other for a total score. (Slide 7)
Last, a product feature prioritization matrix can be used to determine which features are the most feasible and the best strategic fit. If a project has low feasibility and low strategic fit, then it's a low-value project, while a project with high strategic fit but low feasibility cost, is a low hanging fruit and should definitely be implemented. (Slide 6)
So if new product and feature development is all about the customer, how do you know when your customers are satisfied?
When Richard Branson started Virgin Atlantic in 1984, the airline world was largely expensive, lacking in choice, and put very little emphasis on customer satisfaction. In fact, Branson started Virgin Atlantic because he himself was an unsatisfied customer with a canceled flight. By 2000, Branson transformed his business from a single leased Boeing 747 into a multi-airline empire worth at least $1.2B. How did Virgin compete against so many legacy competitors that already dominated the market? Branson's focus on customer delight.
You can use a Kano Diagram to compare new features against one another and control for customer delight. The Kano matrix measures customer satisfaction on the y-axis and customer expectations of a product's functionality on the x-axis. (Slide 15)
The threshold line is the baseline level of functionality a product requires to meet a customer's expectations. The performance line indicates a product meets expectations and is satisfying. The excitement line measures products that not only meet a product's basic needs but add an additional layer of magic. As a PM, you can use the Kano Diagram to decide between features that add value vs excitement for customers.
When you download this framework, you'll gain more analytical resources like product vision boards, BCG growth matrices, product release plans, customer cohort analysis, KPI dashboards, and more. For more tools to help make product managers successful, check out our Product Management Toolkit (Part 1).