Financial Analysis ... It Pays to be Proactive

Doing regular financial analysis of your product(s) is an important part of a product manager’s job. With everything else going on around you, it’s hard to do it in a disciplined manner though. In the early part of my product management career, I tended to be more reactive – GM asks for reports about how we did in a certain vertical or in a specific geo in the recently concluded quarter and I would scramble to get the reports out of the sales system. A few years back, I was entrusted with the responsibility of leading a product management team to nurse a product suite back to financial and functional health. Through that experience I learned the power of doing proactive financial analysis and powerful insights you can get through data driven analysis.

So what kind of financial analysis would you do and how frequently should you do it?

Let me use an example from the enterprise software industry with a licensing based revenue model. There are certain analysis you would do irrespective of your how different your product or the market condition is from the rest. For example:

• Quarter over quarter revenue trend (e.g., Q1 revenue last year vs. this year)
• Geographical distribution (e.g., Asia Pacific revenue vs. North America revenue)
• Vertical industry distribution & trending (e.g., Financials account for 20% of revenue while Telecommunications account for 15%)
• Deal pipeline analysis
• ...

There are other kinds of trending that could be of interest to you:

• Average selling price (e.g., did the ASP drop significantly from the same period last year?)
• Discounting (e.g., was average discounting significantly different from the same period last year?)
• Seasonality ( e.g., does your product tend to have higher revenue in Q4 than the other quarters?)
• Deal distribution (e.g., how many deals in less than 100k range vs. between 100k and 200k range)
• Sales rep analysis (e.g., who are your top selling sales reps?)
• Win-loss analysis (e.g., how's your win rate trending against your major competitors?)
• ..

Depending on your product and the market you play in you would probably need different ways of slicing and dicing your data to get insights that will help you make critical product decisions. For example, if you are managing a product suite you probably want to know how do individual products in the suite stack up against each other (e.g., is there a long tail phenomenon for your products). The product suite I managed in the scenario mentioned above, had a tight integration with our flagship product. My team also closely watched the trend in the correlation of the sales of our product suite with that of the flagship product (e.g., there was significant dip in revenue in our product suite this quarter even though revenue for the flagship product went up - normally they move up and down together).

The important thing to remember is - as the owner of your product you need to have financial data about your product at your fingertips. You should do good analysis of financial data about your product(s) at least once every quarter.

Couple of key things to keep in mind:

Be Proactive: Your sales system might have analytical components that already does a lot of reporting. More often than not though, you will probably need to integrate the relevant data from multiple sources. It's important to take a periodic look at your data so that you and your product management team can make useful contributions in the selling process as and when necessary.

Use Quality Data: To get the right insights you need data with the highest level of fidelity. It’s ok to use the raw data from your sales system to do some preliminary analysis. However, to do the final analysis, make sure that you get the "scrubbed" data (e.g., data that your company uses to do financial reporting every quarter if it’s a public company).

Data driven analysis on a regular basis will help you make better strategic and operational decisions. Not doing that in a disciplined manner could force you to make numbers up :-(