4. Making Projections for Product Management

Introduction

In this section, we’ll discuss how to make projections and connect the requirements for delivering a product and customer experience to financial metrics. This approach helps justify budgets and can support the creation of a new squad by demonstrating a clear link between product activities and financial outcomes.

Understanding budgeting and forecasting is essential for product leaders. Two common budgeting approaches—Zero-Based Budgeting and Historical Budgeting—offer different perspectives. Let’s look at these approaches and how to use forecasts to adjust budgets throughout the year.

Budgeting Approaches

Zero-Based Budgeting (ZBB)

Zero-Based Budgeting (ZBB) is often used when establishing a new company, creating a new business unit, or completely restructuring an existing budget. ZBB starts from scratch, requiring you to justify every expense.

For example, if calculating a travel budget, you’d multiply the number of trips x average cost per trip x number of people traveling to arrive at the monthly travel expense. This approach provides a fresh perspective and ensures that all expenses align closely with current needs and objectives.

Historical Budgeting

Historical budgeting uses past data as the foundation for future budgets. It’s based on the previous year’s actual spending, adjusting for expected changes, such as inflation. For instance, if travel expenses last year were $100,000 and you expect 8% inflation, you’d adjust the travel line in this year’s budget accordingly.

These two budgeting methods can provide the framework for planning the year’s expenses. Once the budget is established, forecasting helps refine projections month-to-month, enabling adjustments based on real-time performance.

Forecasting and Budget Adjustment

A forecast allows you to track performance relative to the initial budget on a monthly or quarterly basis, identifying whether revenue and expenses are on target.

1. Revenue Forecasting: If revenue falls short in a given month, you can use forecasts to project whether you’ll meet annual targets. If you don’t meet expected revenue, you may need to adjust targets or reallocate resources to catch up.

2. Expense Forecasting: Forecasting also allows for expense adjustments. For example, if you budgeted to spend on customer acquisition in March but decide to delay the campaign until May for better results, the forecast reflects this shift, indicating an immediate cost saving and a planned expense increase in a future period.

Practical Example: Zé Delivery

Let’s look at how we applied financial projections at Zé Delivery to guide our roadmap, define focus areas, and determine the necessary squads:

• Customer Acquisition: To increase revenue, we first needed to bring in more new customers. Key metrics included installs, signup success rate, and first-time purchases.

• Usage Frequency: Once customers joined the app, we encouraged them to order more frequently. For a product like Zé Delivery, a weekly use frequency is a good indicator of customer engagement, so tracking Weekly Active Users (WAU) over Monthly Active Users (MAU) gave insight into repeat purchases.

• Retention: Retaining customers after their initial engagement is crucial. By analyzing behaviors correlated with retention—such as customers making four purchases within two months—we could identify and encourage habits that increased retention rates.

By analyzing metrics like WAU/MAU and their correlation with orders in a given city, we found that every 1% increase in WAU/MAU led to 20,000 additional orders. Knowing these connections allowed us to make informed budget requests for squad expansion.

Building a Financial Model to Drive Product Strategy

When building financial projections, consider these steps:

1. Set Your Target Metrics: Define goals for acquisition, retention, and frequency. For instance, aiming to increase first-purchase success by 15% may require specific product enhancements or marketing initiatives.

2. Develop a Simulation Tool: Create a simulator to test different scenarios. For example, if you plan to increase acquisition, retention, and frequency by set percentages, the simulator calculates the expected revenue uplift.

3. Allocate Squads Based on Metrics: Assign squads to focus areas aligned with the financial targets:

   • Acquisition Squad: Focus on onboarding improvements to increase signup and first-purchase rates.
   • Retention Squad: Develop initiatives to increase repeat purchases and foster long-term engagement.
   • Frequency Squad: Implement strategies to encourage more frequent orders among active users.

Each squad’s initiatives are tied to measurable outcomes that influence the P&L, such as revenue per customer or customer retention rate. You can justify the need for these squads by demonstrating the direct link between their work and the expected financial results.

Example of Hypotheses and Projected Outcomes

When setting goals, include hypotheses and projections to clarify your strategy. Here’s an example:

• Hypothesis for Acquisition: “Increasing the success rate of first purchases by 15% will boost revenue.” The acquisition squad will implement onboarding improvements, aiming to increase the WAU/MAU ratio by 10% within 90 days.

• Hypothesis for Retention: “Customers who make four purchases in their first two months have a higher retention rate.” The retention squad will test initiatives to encourage multiple purchases within the first two months.

Each hypothesis connects to a specific outcome, making it easier to justify new hires or additional resources for a squad.

Aligning Product Initiatives with Financial Objectives

When aligning product activities with financial objectives, you create a roadmap that links squad goals to the P&L. This gives flexibility to adjust initiatives without deviating from the overall financial targets, making the team adaptable and aligned with company priorities.

Summary of Steps to Create a Financially-Driven Product Roadmap:

1. Identify Core Metrics: Define metrics that drive revenue, customer acquisition, frequency, and retention.
2. Build Projections: Use budgeting and forecasting to map out expected financial outcomes based on the metrics.
3. Assign Squads to Focus Areas: Establish squads dedicated to key metrics, such as acquisition, retention, and frequency.
4. Develop Hypotheses: Create hypotheses tied to each squad’s goals, outlining expected outcomes and aligning with financial targets.
5. Adjust Forecasts Monthly: Use forecasts to track progress, make real-time adjustments, and ensure alignment with the overall budget.

By following this approach, you establish a clear, financially-aligned product strategy that drives meaningful results.

Conclusion

By connecting product metrics to financial projections, you create a roadmap that aligns product initiatives with financial goals. This approach helps secure budget approvals and ensures that your team’s efforts contribute directly to revenue growth and cost control.

Creating a financial model for product planning keeps your team focused on key outcomes while maintaining flexibility. With a solid framework in place, you can adapt your strategy as needed, balancing agility with alignment to company objectives.

This approach enables you to make informed decisions about resource allocation and achieve a well-justified, financially-supported roadmap for product success.