In Part 1 of this blog series, we discussed that all product managers should be growth oriented. To recap, we had defined growth as top line growth i.e. revenue growth or bottom line growth i.e. reduce cost to maximize profit.
In Part 2, we discussed how a product manager can help grow the top line. In this part, we will discuss the levers product managers can use to reduce costs and improve profits.
First a caveat. There is a limit to how low one can reduce costs. They can certainly never be zero. For fast growing companies or high margin businesses, revenue is still king and that’s where product teams should focus on. These companies prioritize revenue at any costs.
There are a few occasions where there is pressure to reduce cost. Perhaps there is a recession and the companies are being asked to conserve cash by their investors. Or a company got acquired by a private equity firm and the new owners want to keep the margins high. Or if the company is in a mature market where revenue growth is flat, the investors may pressure the management to increase profits.
There are four areas where the product management teams can help reduce or optimize costs (in order of impact) –
- Cost of goods sold (COGS)
- Research and Development (R&D)
- Customer Support (CS)
- Sales and Marketing (S&M)
Let’s examine each.
Cost of Good Sold
COGS includes costs that are in direct proportion to the sales or number of customers. For example, assume you need 1 server per customer. For 1000 customers you will need 1000 servers. That’s an example of COGS. (Of course in reality you can run a large number of customers per server, but after a certain time you will need to add capacity i.e tiered cost). COGS includes hosting, database, 3rd party APIs etc. Any infrastructure, services, APIs required to service the customer.
There are opportunities to optimize infrastructure costs. You can, for example, optimize database hosting. Or you can optimize the number of servers or the types of servers needed. Much of this function is carried by the cloud engineering teams but a product manager should be able to help analyze the opportunities and the trade offs. Cloud intensive applications consume significant resources especially where there are large volumes of data or streaming involved. Working with cloud providers is often the best way to find opportunities to reduce cost without impacting customer experience.
Bear in mind, optimizing costs does not mean going cheap at the expense of customer experience. In fact, in certain cases you may want to spend extra to make sure there is no customer downtime or performance degradation.
Sometimes cost of goods sold will also include payroll cost of operational teams who are in charge of keeping up the servers and guaranteeing the uptime. As a product manager, you should seek to automate many parts of the operations and reduce labor cost.
Research and Development
By far the biggest area where product managers have an impact is in R&D. R&D consists of all the costs associated with designing, creating, building, managing and launching your product. So mostly it is time spent on bringing products to market. There are numerous reasons where the time spent on product can bloat up.
- Not working on the right things and spending cycles to get the right thing out. For example, let’s say the product team decide to work on something which they think is what the customer wants. But when the customer sees it, the team realizes it needs more work or worse it was not the right thing to build. Back to the drawing board. A good product team should be careful with what they are building and get it right, perhaps even test it out first. Granted, often times product fails but having a structured process minimizes the risk. As a PM, you need to keep thinking of de-risking your product or product area.
- Spending way longer to build. This typically happens when there is a lack of proper product discipline. Teams will spend time in circles, endless meetings, executive overviews, layers of indecision, approvals and so on.
- Many product teams lack an operating system unlike their brethren in engineering or release management. Even mundane things like gathering usage data takes a long time. If you are B2B product manager, try this exercise. How many active customers do you have? Of those, how many active users are there and which customers are fully adopted? You have 15 min.I am sure you can get the data. It’s out there. My point is you will likely be spending an inordinate amount of time to gather data and then analyze. Something that should be on your fingertips. A waste of time on mundane things also makes the product development process inefficient.
There are other opportunities to do more with less. Could you use a different library that does the same job at a lower cost? Can you combine vendors ? Should we reduce our cost by outsourcing certain aspects? Is there a better tool to handle the manual work? Can the set up process be automated?
Cost of Good Sold
Customer support or success or operations as the name implies is cost to support existing customers. (This could also include customer success teams but sometimes they are clubbed in sales and marketing.) An area to reduce cost is to look at support costs. Where is support spending more time to resolve issues. Then find a way to optimize the product that helps reduce the support tickets or even better, add self service so that customers can resolve themselves.
Product managers should also work with the customer success teams to create a seamless onboarding process. This helps reduce the back and forth with customers and allows the success team to service a larger number of customers.
The biggest lever of course is to avoid customer churn. You can work with customer success teams to identify customers who are at risk and proactively engage, rather than waste time later trying to save them.
Sales and Marketing
Sales and Marketing includes your sales team, marketing team, demand generation activities, events, advertisements, promotions, discounts etc. Indirectly, product managers can also help reduce the cost of sales and marketing by bringing value clarity. When the value of the product is clear, it allows for clear messaging and helps the sales team to position the product better. It can help reduce sales cycle and remove customer objections.
To summarize, there are many levers a product manager can use to improve the bottom line for the company. Work with the finance or other stakeholders to get a break down of costs and see where you can find opportunities for improvement. Or just start within your product area.
Ultimately, it’s all about the bottom line.
