2. What Every Product Manager Needs to Know About Finance

Introduction

As a product manager, understanding finance is not only beneficial but essential. As Warren Buffett famously said, learning accounting is as important as learning a new language. In fact, Buffett’s first rule is “never lose money,” and his second rule is “never forget the first rule.” This principle is directly relevant to product management, where the ultimate goal is to deliver value and drive results.

While finance may seem removed from product management, it’s critical to link product metrics to financial outcomes, enabling you to communicate effectively with senior leadership and make a compelling case for your product’s impact on the company’s bottom line.

The Product, Design, and Engineering Triad

A successful product is built on the foundation of three pillars: Product, Design, and Engineering. These areas together contribute to the “magic” that brings revenue. When each component works in harmony, it creates an experience that drives customer satisfaction, adoption, and retention. This trio is at the core of a great product and, ultimately, the revenue that flows from it.

Connecting Product Metrics to Business Metrics

To bridge the gap between product development and business impact, product managers need to understand various product and business metrics. Here are some key types:

Feature Adoption Rate: How frequently a new feature is used.
Customer Activation Rate: How quickly users engage with the product after signing up.
Stickiness: Measures how often customers return to the product.
Retention Rate: The percentage of customers who continue using the product over time, e.g., after 30 days or one year.
Paid User Rate: For freemium products, this metric tracks the percentage of users who convert to paid subscriptions.

These product metrics eventually tie back to financial metrics by helping you understand the product’s impact on revenue and expenses. For example, retention rates can influence profitability, as retaining customers reduces acquisition costs over time. Connecting product KPIs to financial metrics helps demonstrate the business value of your work.

Profit Engine and Revenue Generation

One of the key business metrics to understand is the profit engine: how much revenue your product can consistently generate. This metric represents your product's ability to create a sustainable revenue stream. In financial terms, the revenue generated by your product is what forms the top line of the Profit and Loss Statement (P&L), also known as the income statement.

The cost associated with acquiring these customers—known as Customer Acquisition Cost (CAC)—is another critical metric. CAC includes marketing, sales, and support costs and is recorded on the P&L under sales and marketing expenses.

Understanding the P&L and Key Indicators

The P&L statement is essential for evaluating a product’s contribution to the company’s overall profitability. Here’s a breakdown of its components:

Gross Revenue: The total sales generated from your product, calculated as the number of units sold multiplied by the unit price.
Net Revenue: Gross revenue minus returns, cancellations, or taxes.
Gross Profit: The revenue left after subtracting the direct costs associated with creating and delivering the product.
Operating Expenses (Opex): Day-to-day expenses necessary to operate the business, like salaries, office costs, and administrative expenses.
Net Income (Profit or Loss): The final profit or loss after accounting for all expenses, including both direct and operating costs.

As a product manager, understanding these elements allows you to connect product performance to the financial outcome, helping you assess whether your product is generating enough revenue relative to the expenses incurred. This can guide you to make adjustments that align with financial goals, like increasing revenue through feature enhancements or decreasing costs by streamlining operations.

Deepening Financial Analysis with Real-World Examples

The Gross Revenue to Net Revenue Journey

Let’s take a practical example from a major retailer, Grupo Pão de Açúcar (GPA), to illustrate how revenue moves through the P&L:

Gross Revenue: GPA’s gross revenue is the total number of items sold multiplied by the price per item.
Net Revenue: After deducting factors like cancellations (due to issues such as fraud or returns) and sales tax, we get net revenue.
Gross Profit: Subtracting operating costs—such as logistics for product delivery and store operational costs—from net revenue gives us gross profit.

This process shows how various expenses and deductions affect the net income. The final margin, or gross profit percentage, varies by company and industry, reflecting the overall efficiency and profitability of the business model.

Case Studies: TOTVS and Méliuz

TOTVS Case Study: Cost Reduction to Increase Profitability

TOTVS, a Brazilian software company, provides an example of a mature product that’s focused on cost efficiency rather than growth. For example, TOTVS saw a 1% decrease in revenue but achieved a 15% cost reduction, resulting in a 5% improvement in margins.

This case shows that even without revenue growth, there are ways to increase profitability by reducing costs. As a product manager, you might explore opportunities to cut costs without sacrificing quality—by improving workflows, automating tasks, or streamlining features—to positively impact the bottom line.

Méliuz Case Study: Revenue Growth vs. Cost Control

On the other hand, Méliuz, a cashback platform, saw an impressive revenue growth of 140%. However, the cost to achieve that growth increased by 308%, leading to an overall reduction in profit margins and ultimately a net loss. This example shows that while growth is essential, it’s equally important to control costs to ensure sustainable profitability.

When launching new features or products, consider whether the long-term cost will be justified by the expected revenue. High costs that outpace revenue gains can hurt profitability, as shown in Méliuz’s case.

Building a Financial Mindset for Product Strategy

To make financially sound product decisions, it’s essential to:

Identify Product Metrics and Correlate Them with Business Metrics: Connect product metrics like adoption, retention, and revenue generation to business KPIs, such as CAC, gross revenue, and net income.
Analyze the P&L for Key Insights: Read and interpret the P&L statement to understand how revenue, expenses, and profitability impact your product and the company’s financial health.
Prioritize Product Initiatives Based on Financial Impact: Consider the financial implications of each initiative. Sometimes, reducing costs may have a more significant positive impact than increasing revenue, depending on the situation.
Understand the Product Lifecycle Stage: Different product stages—introduction, growth, maturity, and decline—require different financial strategies. Products in the growth stage may need more investment, while mature products can focus on cost efficiency.
Know the Business Context: Companies and products vary widely in terms of financial strategy. A high-growth startup may prioritize revenue growth over profitability, while a mature company may focus on optimizing margins.

Conclusion

Developing a finance mindset as a product manager enables you to make strategic decisions that align with broader business goals. Understanding financial metrics helps you bridge the gap between product metrics and financial outcomes, empowering you to deliver value and secure stakeholder buy-in.

By learning how to speak the language of finance, you’ll be better equipped to lead a product with a clear focus on sustainable success.