Product Management & Product Marketing

for technology-based products

Business cases

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Objectives
To give you confidence when tackling all aspects in completing a business case

◼ Business Case purpose and approach

◼ Forecasting

◼ Financial analysis and understanding key concepts and terms

When you would typically justify investment using a Business Case

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Product Activities Framework
Strategic Product Activities
working out what the right product is for the business

Insight Analysis Direction

Market research Segmentation Product & portfolio strategy

Customer research Propositions Vision & evangelizing

Competitive research Positioning Roadmaps

Product performance Business cases Pricing

Inbound Activities Outbound Activities

helping the business to deliver the product helping the business to sell the product

Discovery & design Launch

Requirements Product promotion

Project & partner management Sales & marketing content

Operational readiness & trials Sales support

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What is a business case and why should you care?
◼ The business case provides senior stakeholders with what they need to make an
informed decision on whether to invest
 Scope and level of detail commensurate with the risk of the investment
 A common format so alternatives can be compared

◼ Why do you care?

 It’s your way to get the resources needed to implement your product strategies and plans
 It’s a really useful process to stress test your idea:
 Is it different to competitors and will it be valued by customers?
 Do your story, assumptions and numbers make sense?
 Does it align with your company strategy and portfolio?
 Are stakeholders supportive?

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Exercise
◼ You have been asked by your Director to look at a Business Case Executive
Summary which he will be reviewing in a few days' time with the full business case

◼ He is concerned because it has been produced by a new product manager who may
not be very experienced with business cases

◼ What points would you make?

Summary of
key points

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Approaches to business cases
Objective Deliverable Outcome

creative fiction section

Common

Business case assumptions Business case filed away

Get over the next hurdle
flexed to produce desired and never looked at again
no matter what
outcome

Ideal Well understood and

Rigorous assessment of Business case produces bought-into model that can
opportunity based on objective credible and realistic model be used to set product
assumptions from the business direction on an ongoing
basis

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 Business cases
…the big picture

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Understand the process and objectives: Stakeholders

◼ Identify stakeholders

◼ Know what they value

◼ Get a sponsor

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Make a plan and know the deliverables
Jan Feb Mar Apr May

Submit documents 24 21 21 18 16

Review meeting 14 14 11 9

Decision confirmation 19 19 16 14

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Engaging teams across the business
Sales &
Legal
Channels

Finance Marketing

Understand if they:
- need to provide input
- are part of the sign-off
Professional
Procurement - have any history with it
services
- care about it or object to it

Your opportunity to sell the

idea and get buy in
Security & risk
Development
management

Project Customer
management support

Internal IT
systems

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Build, Buy or Partner
◼ Before jumping straight into development think about …

◼ Build products using your distinctive competencies

 The unique value that your company brings to the market

◼ Buy in basic technologies

 Other suppliers have the economies of scale, roadmap, vision
 Often known as Commercial Off-The-Shelf (COTS) products
 Don’t distract the business developing this kind of stuff

◼ Partner for anything else

 Could be to reach new markets, provide a complete solution, use an additional sales channel
 Take partnering seriously – set expectations, agree a plan of action, have an escalation route,
resource up

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 Business cases
…filling in the details you’ll need

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Business case infographic

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Tell a strong story to persuade decision makers
◼ We recommend you cover these points: provide
an appropriate level of detail and evidence
 State the market problem: what it is, how
important it is to your target market and how
you’ve validated these things
 State your proposition, how it addresses the
problem and why customers will buy
 Give an overview of the market size and explain
why your forecast is what it is
 Explain how you’ll make money
 Explain what the competition is up to and why
you’re strongly positioned
 Give your plan of action: from now to launch and
how you’ll successfully commercialize the product
 Have your elevator pitch ready to deliver!

(Detailed Business Case Template or Lean canvas. See Toolbox)

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Build credibility and realism
◼ Validate forecasts and costs
 Make sure you’ve talked to all the areas that will bear the costs
 Get input from other product managers and marketing
 Talk to suppliers, business development/sales & channel managers

◼ Your information needs to demonstrate the alignment of the business case to

company strategy

Technical
Proposition
Approach Timing Company
strategy &
Target Cost Revenue portfolio
markets estimates

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Spreadsheet model

CAPEX vs OPEX?

(See Business case template

example in Toolbox)

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 Forecasting
…predicting the future

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Forecasting and estimating (optional exercise)
◼ To practice making assumptions and top-down forecasting

◼ How much was spent worldwide on coffee pods and capsules in 2017? (retail sales
revenue in US$)

Region Population
(2016, Million)

Africa 1,225
Asia 4,462
Europe 741
South America, 637
Central America, and
the Caribbean
North America 358
Oceania 40
Source : Wikipedia
World Total 7,463

1,000 million = 1 Billion

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Top-down forecast
◼ Laptop PC sales in the UK

Segments Office workers Adults at home Students

Size of segment 15m 10m 0.7m

Who has the need and 8m 1m 0.5m

resources to buy the product
Purchase rate Every 2 years Every 5 years Every 5 years
Annual volume 8m / 2 = 4m 1m / 5 = 200k 0.5m / 5 = 0.1m

Average selling price £ 750 £ 500 £ 600

Market size £ 3,000m £ 100m £ 60m

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Bottom-up forecasting
◼ Another approach to validate forecasts

◼ Start from your customer base & sales forecasts

◼ Talk to relevant sales channels to get a view of the sales they believe they could
make
 Try and sanity check if the figures would be the same if they were added to their sales targets ☺

◼ Extend the forecast based on the requirements of customers with a similar profile

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Forecasting – moderating factors
Example moderating factors
◼ Awareness and perception of product category

◼ Macro trends
Market size ◼ Purchase / re-purchase frequency

◼ Geographic coverage (e.g. people in country,

compliance with regulations…)
Total addressable
◼ Sales channel and support coverage
market

◼ Perception of product (impact of marketing

campaigns, references / case studies…)

Sales ◼ Competitive intensity

forecast ◼ Customer decision making process / roll-out / sales
cycle

◼ Time to train sales channels

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Don’t forget to mention the risks

◼ Talk about the risks that are most ◼ Explain how you will deal with each of
likely and that have the highest the risks you document - what are
impact your mitigation plans?

2
High 1
3
Reduce Accept
Likelihood

6 5
Transfer Avoid
Low

Low High

Impact

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Your objective
◼ To persuade appropriate decision makers to back your recommendations for the
project

◼ You do this by:

 meeting and exceeding the businesses financial objectives
 addressing each stakeholders' specific interests
 being clear, objective, credible and believable

◼ But this isn’t enough. Decision makers know that no-one can predict the future, so
they need to:
 Be enthused by the project potential
 Trust that the delivery team will overcome the problems that every project encounters

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 Key financial concepts …
… and terminology

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Common terms and acronyms
Financial term
Revenue, profit
Break-even point and payback
period
Return on Investment (ROI)
Net Present Value (NPV) and
Internal Rate of Return (IRR)
Earnings Before Interest and
Tax / Depreciation and
Amortisation (EBIT or EBITDA)
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Typical reasons for use
Core objectives for most businesses
Knowing the amount of revenue and profit helps decide if the
investment is worthwhile and aids portfolio planning
Identifies when the investment starts to make rather than lose
money (e.g. each month or quarter) and when the investment
is fully recovered
Percentage figure used to compare investment options
Typically only seen on business cases that span 3 years or
more. It is used to compare the timing of when profits are
generated by different investments e.g. over 5 years does
most profit come toward the end of the 5 years or early in the
life of the product?
Used to compare performance for products in more complex
situations e.g. for a multinational operating in different tax
jurisdictions or for mergers and acquisitions
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 What profit? What costs?
Profit Costs
Cost of Goods Sold (COGS) also
Gross profit = Revenue – Cost of Goods Sold (COGS) known as variable costs, e.g.
materials, direct labor,
Gross margin (%) = Gross profit / Revenue packaging/shipping directly
attributable to the production of
the product
Fixed and apportioned costs e.g.
Net profit = Revenue – [COGS + Fixed & apportioned costs] offices rental, brand marketing,
insurance, SG&A (Sales,
Net margin (%) = Net profit / Revenue General & Admin)

e.g. Product with annual revenue of €1m, COGS of €650k and fixed & apportioned costs of €100k

Gross profit = €1000k - €650k = €350k Gross margin = 350k /1000k = 35%
Net profit = €1000k – [€650k + €100k] = €250k Net margin = 250k /1000k = 25%

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Break-even point and Payback period

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Return on Investment (ROI)
◼ A performance measure used to evaluate the efficiency of an investment or to
compare the efficiency of a number of different investments

ROI = (gain from investment – cost of investment) = profit

cost of investment cost

◼ Simple calculation to get a percentage however it takes no account of

the ‘time value’ of money

Example, where cost of investment is £500k and total gain is £700k

ROI = (£700k – £500k) = (200k) = 40%

(£500k) (£500k)

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Net Present Value (NPV) & Internal Rate of Return (IRR)

◼ The NPV and IRR indicate the size of payback on a product or project and takes into
account the ‘time value of money’

Today Year 1 Year 2 Year 3

£100

£90

£80

£70

Buying power Decline in value depends on many factors

e.g. Inflation, cost of capital, uncertainty

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Net Present Value: example over 5 years
Annual Discount Rate = 15% £ -800/(1.15)1
1 / (1 + Annual Discount Rate)year

Year End Profit/Loss Multiplier (£k)

NPV Calculation

Year 1 £ -800 1/(1.15)1 £ -695.65

Year 2 £ 800 1/(1.15)2 £ 604.91

Year 3 £1,500 1/(1.15)3 £ 986.27

Year 4 £2,500 1/(1.15)4 £ 1,429.38

Year 5 £1,000 1/(1.15)5 £ 497.18

Total £5,000 £ 2,822.09

NPV
Cumulative profit (See example in Toolbox)

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Net Present Value: comparing investments
Annual Discount Rate = 15%

Year End Project 1 Project 2

Year 1 £ -800 £ -800

Year 2 £ 800 £ 1,500

Year 3 £ 1,500 £ 2,300

Year 4 £ 2,500 £ 1,000

Year 5 £ 1,000 £ 1,000

Internal Rate of Return (IRR) is
Profit £ 5,000 £ 5,000 calculated using the same
formulae but changes the
NPV £ 2,822 £ 3,018 Annual Discount Rate to the
point where NPV = £0 over the
life of the business case.
NPV on project 2 is higher than that of project 1 as the money comes in earlier

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EBIT and EBITDA
◼ EBIT stands for Earnings before Interest and Tax

◼ EBITDA stands for Earnings before Interest, Tax, Depreciation, and Amortization
 In business cases, it’s another way of comparing the profitability of different projects without
worrying about company-wide accountancy and financing expenses
 These expenses are paying interest on loans, any tax due, and the standard accounting
practice of writing-off the value of assets over their useful lifetime
 For tangible assets, such as PCs, this writing-off of value is called depreciation, and for
intangible assets, such as Intellectual Property, it’s called amortization

◼ Also used when looking at company financials

 Often the same as the Net Profit in business cases, i.e. the bottom line
 For company profits, EBIT(DA) also includes non-operating income such as dividend income,
investment income, foreign currency gains/losses etc.

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Sensitivity analysis
◼ What happens if…
 Costs overrun
 Launch is late
 Poor quality hits growth targets

◼ Or if…
 Sales achieve double forecast volume
 A new supplier brings down costs
 We launch early

◼ Not all elements in the business case analysis carry equal weight

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Sensitivity analysis – one approach
◼ Use key metric Metric Performance
NPV Profit
Gross £30m

◼ Use percentage weighting for worst, expected and best cases to

generate the ‘most likely’ case

Metric Worst Case Expected Case Best Case

Gross Profit
NPV £10m £30m £40m

Metric Worst Case Expected Case Best Case Most Likely Case
Gross
NPV Profit £10m x 20% £30m x 60% £40m x 20% £28m
£28m

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Showing sensitivity drivers (tornado diagram)
◼ Based on best estimates by the business case team (project specific risks, historic
data, past experience)
Forecast
Gross Profit
-20% +10%
Price change

6 months late 2 months early

Launch date

+15% -5%
Cost change

-20 -10 0 10 20 30 40 50
Gross Profit (£m)

◼ Highlights those factors that need close monitoring

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Business cases
Enabling your business to make the decision on where to invest

Setup for success Pull together your investment case Tell a compelling story

Culture

Sensitivity analysis to deal

with ambiguity

People Tools to communicate

- The opportunity

- The approach

- The numbers An appropriate level of detail

Processes and tools - The risks

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Find out more in the Toolbox

Videos Tool guides

 Lies, damn lies and business cases  Business case contents
 Top 7 tips for better forecasts  Business case Excel template
 Business case Word template

Infographics
 Business case contents

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Key messages
◼ Understand stakeholder motivations and get their buy-in

◼ It’s as much about the ‘story’ and assumptions as it is about the numbers

◼ Only submit your business case when it makes market, financial and technical
sense – credibility and believability are everything

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Business Case exercise - issues
◼ It’s not clear who the customers are, what the proposition is and why customers will value it

◼ New market and product so high risk but no risks are articulated! Also, no statement about why we’ll have
credibility with customers as a supplier

◼ The development estimate is based on an initial high-level investigation – there has been no detailed work

◼ 22-month payback is risky given we have no insight on how competitors will react

◼ 3 months' timescale to deliver – very unlikely given contracts not finalized and integration with billing and
provisioning systems is required

◼ The forecast is unbelievable - immediate & substantial revenue followed by a slow ramp-up, and then a sudden
hike in Year 3 - plus the actual no. of sales is not shown

◼ The presentation of the figures doesn’t include any sensitivity analysis or NPV figure to represent the time value
of money over the 3 years

◼ Mathematical error – the £10m in Year 3, Q4 is suspiciously round! (actual figure should be £7.7m)

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