Measuring and proving Product or Feature ROI can sometimes feel like a wild goose chase. But it isn’t. In this resource, we explain how Product Managers can measure and prove the ROI of their digital products and use it to guide their product management strategy.
Product management is one of the most critical functions in any business. For any business to see continuous growth, your products need to deliver tangible business outcomes for your business and customers.
Why measuring ROI of your digital product is important
Have you been in a meeting where someone suggested a new product feature because they saw it in a competitor’s product? Have you been asked by the engineering team why they should allocate resources to deploy or prioritise a new feature? Have you been asked by the leadership team to push back on a new product initiative?
All these questions boil down to one single question: what’s the expected ROI of a product or a feature?
In a recent LinkedIn Poll we conducted across 155 Product Managers, we found that 42% of Product Managers/Product Owners find Proving ROI to be their biggest challenge.
Determining or estimating the return on investment of your digital product initiatives is absolutely critical. Measuring ROI helps Product Managers:
- Set the right product management strategy
- Prioritise product features
- Create a data-driven product roadmap
- Allocate the right resources
- Guide the organisation towards product maturity
Key Factors When Measuring The Success Of Your Product
When evaluating a potential new product or a set of features, there are a few factors and criteria you should take into consideration. The importance and weight of these factors will vary based on your industry and business model.
But as a product manager, one of your objectives is to create an accurate, simple formula to enable the decision-making process and allow you to empower your organisation to prioritise and invest in the right products and features. In addition, this formula or prioritisation framework will help you pitch and get internal stakeholders on board in a more effective manner.
At a high level, these key factors are part of 3 main categories:
Viability – will this product/feature help the business create more value and generate more revenue?
Desirability – will this product improve the experience of your users and customers?
Feasibility – can your business make it happen, and what obstacles are in the way?
Risk – what are the execution, technical, reputational or other risks
In addition to ROI, there are several criteria to assess product features against.
What other features need to be in place first for this feature to work? Feature dependency is a make-it-or-break-it factor. There’s no point in prioritising a feature that depends on other features that are not there yet. The more dependencies a feature has, the more likely you’ll need to de-prioritise it.
Ease of Adoption
How likely is this feature to be adopted by existing and new users? Perhaps a feature is quite useful, but its adoption may prove to be more challenging or slower than other features. Ease of adoption is another critical factor to consider when prioritising features.
How much will this feature improve customer experience? Word-of-mouth and customer reviews are powerful marketing strategies that will help you increase user acquisition in the long term.
Differentiator in the industry
Will this feature help your brand differentiate itself? Brand awareness and differentiation are key, especially for startups and scaleups. Sometimes, features that set you apart from competitors can have a significant impact on your brand awareness and serve you well in the future.
Does this feature come with regulatory challenges? Sometimes a feature may not have a direct revenue or ROI impact but is required due to recent regulatory changes. And so, they’ll need to be prioritised to ensure your business doesn’t enter a legal jam or hurt its reputation.
Does this feature help you retain existing customers, and by how much? Retaining existing customers is a critical factor to product maturity and overall business success. If customer retention is both a priority and a challenge, you should allocate a bigger weight to retention in your feature prioritisation exercise.
Cannibalization – which other features or products within your org’s offering are users already interacting with which may be negatively impacted – is there a net positive and strategically does this cannibalization make sense?
CLV (Customer Lifetime Value)
How much revenue will this feature add to the customer lifetime value? Sometimes, a new feature or a product may not bring revenue in the first 12 months. But over the span of the customer lifetime, that feature may bring incredible value and returns. So, instead of just looking at ROI in the first 12 months, it’s important to look at it across the entire customer lifetime.
How to measure ROI of your digital product
ROI = (((Incremental usage X Value to business) / Development cost) – 1) X 100
Incremental Usage – how many more users or customers (new and existing) will likely adopt or use this product?
Value To business – how much revenue is your business going to extract from each user when they adopt that product?
Development Cost – how much will you need to invest in the first 12 months to develop and maintain that product?
Operational costs – what costs will the business incur annually to keep this product or feature running
Product ROI Example
Let’s say you’re a PM for an insurance business. You’re planning on releasing a new feature that allows customers to lodge their claims a lot faster and be automatically processed instead of having to wait for manual processing.
You don’t expect this feature to bring more sales from existing customers, but you estimate that this feature will help bring 50,000 new customers over the next 12 months. Every customer is estimated to pay $1,500 per year for their insurance fees.
And to develop this feature, it will cost your business $1.5 Million to develop and $250,000 to maintain over the next 12 months.
In this example, your ROI will look like this:
Incremental Usage = 3,000 new users
Value To Business = $1,500 per annum
Development Cost = $1.75 Million
ROI = (((3,000 X $1,500) / $1.75 Million) -1) X 100 = 157%
Prioritising Product Features
Another challenge Product Managers have is determining features priorities. You might have an extensive list of features your business wants to pursue. How do you prioritise them?
Ultimately, product features should be prioritised by ROI.
However, some product features may not have a direct impact on ROI yet are crucial to build.
You can justify initiatives where a positive ROI cannot be calculated, or where the link to a positive ROI is weak using a different approach. For example, a feature might improve the data privacy of your users. It might not have a direct impact, at least in the short term, but can umltimately a business priority.
But for initiatives which do have a positive ROI, prioritizing them by their ROI so as to deliver the more valuable items first is typically the way to go.
To simplify the Feature ROI assessment, you should group features into buckets (categories) based on the user and business goals they focus on. These could be:
- Customer Experience
- Customer Education
You can further break down these categories into more specific verticals. Some features might end up in multiple verticals, which most likely means they have higher impact and value.
Next, prioritise your verticals using the following steps:
- Estimate the incremental revenue you estimate each vertical will generate
- Forecast how much revenue you may lose if these feature verticals are not implemented
- Add the incremental revenue and the revenue you might lose to calculate the total revenue impact
- Determine the verticals with the highest revenue and ROI impact and prioritise them