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Product Management Financial Literacy

It continues to be a tough market to sell technology products and services.  Recent Q3 earnings announcements help to reinforce that the recession is still impacting the top lines of technology companies.  Consider the following:

If these tech heavy weights are having a hard time growing revenues it would not be too surprising if your company was struggling as well.  One of the most common complaints cited by sales teams and sales management is that prospects simply cannot appreciate the value a company’s offerings bring to the table and the significant economic benefits they could achieve if they simply implemented your solutions.  Often, the root cause of these problems is that product managers and product marketeers lack the financial literacy skills needed to express compelling value equations for their products and services.

Being able to express the value of a product or service using financial and operational metrics that make sense to prospects is tough.  Most product managers have some academic training in basic financial and operational analysis techniques.  As a result, they tend to rely more upon technology feature/function benefits to communicate value equations versus well thought out business cases.  To gauge the relative financial literacy of your product management team, have them complete the following exercise in less than 60 minute:

  1. Pick 3 of Your Customers/Prospects That are Public Companies. We want to make this easy for your test subjects.
  2. Give Them 30 Minutes to Answer the Following Five Questions:
    1. For the last 3 fiscal years what have been the trends in Company A, B, & C’s total revenues?
    2. What was Company A’s Gross Margin for the past three quarters?
    3. How much Operating Profit has Company B generated so far this year?
    4. How much did Company C’s cash change so far this year? Are they building or burning cash?
    5. What are Company A, B, and C’s enterprise value?
    6. Give Them 30 Minutes to Answer the Following Five Questions:
      1. Which group of customers is the most profitable for your company and which are the least profitable?
      2. For the three largest deals that have closed this year what was the return on investment each customer should have expected to receive from the purchase of your products and services?
      3. For companies with SaaS offerings, what was the number and dollar value of customers who attritted in the most recent quarter, and the number and dollar value of new customers in the same period?
      4. For companies with maintenance revenues, what is the year to date attrition rate and dollar impact?  How much maintenance was generated from new customer licenses?
      5. What were the top three types of sales transactions that generated more than 50% of sales to new customers on a year to date basis?

I have conducted these types of assessments on over 50 product management organizations that I either managed directly or assessed as part of various M&A projects in the past 10 years.  Generally, the results are poor – most product managers simply do not have the skills or experiences to answer these types of questions and frequently they do not have access to the internal data needed to complete these types of analyses.

Here’s a simple case in point.  A service provider had a long standing relationship with a company where they provided a value added outsourced solution that cost over $1.5 million a year.  After a change in management, the customer decided to re-examine their investment in the outsourced solution.  A new executive wanted to bring the solution in house.  To do so, this company would need to invest over $750,000 in equipment and software, plus set up a group of employees to do the processing/value added services the service provider had been doing.  If they brought the business in house they believed they could save $500K a year.  The sales person on this deal was petrified that the customer was going to take the solution in house.  As a result he thought of offering to cut the monthly fees by 50% so that the customer would not even consider taking the solution in house.  Fortunately one of his team members did a little research on the customer.  Even though it was a large company with greater than $200 million in revenues, it had some serious financial challenges.  At the time they were ‘considering’ insourcing the solution the company only had $5 million in cash on their balance sheet and a limited revolving credit facility.  Once the sales team realized that the company would have to invest about 20% of their existing cash balance to make the project work, they came to the conclusion that they were not serious about insourcing.  Instead they were really looking to get a massive price reduction.  Armed with this knowledge they were able to structure a win-win deal for all parties that did not result in a 50% revenue reduction.  This is a classic example of how financial illiteracy can directly impact your top and bottom lines.

Here are a few posts that can help your product management team close their financial literacy gap:

If you are looking for some help in developing your team’s financial literacy, check out this structured consulting offering, Product Management Financial Literacy.

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2 Responses to “Product Management Financial Literacy”

  1. FinancialTales Says:

    Thanks for the article.

    I run the Financial Tales blog and wanted to offer a few of my Financial Tales, written specifically for your audience, as lessons.

    If there is anything I can do to promote or help, let me know.

    Thanks.

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