What Is The Business Value Of A Product Manager?

I’m a product manager, and I think a lot about product management, and I study the discipline of product management. I’ve also been a long-time advocate of better tools for product managers, and in fact I used to work on one of those. But we always struggled to explain the value of our tool, and why we needed to charge so much for it.

Vendors of other types of enterprise software tools often have better answers than we ever did for their pricing. For example, imagine you sell a tool that makes enterprise sales people 5% more effective. Enterprise sales people typically bring in around $1 million in revenue per year. If you make them 5% more effective, that’s worth $50,000 per year per sales person. How much can you charge per sales person to deliver $50,000 more revenue? Certainly $1,000 per year. Maybe $5,000 per year.

I think we can say that $1 million is the “business value of an enterprise sales person.”

But no one seemed to have an answer for the analogous question - “what is the business value of a product manager?” If we knew that, we would be able to say how much it was worth to improve a product manager’s effectiveness by 5% or 10%. And that might help vendors of product management tools make more money.

So, I did some arithmetic, and here’s what I came up with:

A product manager is worth between $5 and $10 million of annual product revenue.

That’s my educated guess, a stake in the ground, and a challenge to you.

Simple Ratios

I arrived at that value working bottom-up using familiar financial ratios from enterprise software product companies:

• The normal ratio of development resources to revenue is roughly one developer per $1 million in revenue.
• The normal ratio of product management to development resources is one product manager per 5–10 developers.

Combining those ratios results in one product manager for every $5–10 million in revenue.

I’ve taken a leap and assigned this as the business value of the PM — if you hire a product manager, then you have an expectation that over time your revenue will increase by $5-$10 million annually. (Just as if you hire a sales person, you’re hoping for about $1 million in additional revenue once they get ramped up.)

This Raises Interesting Questions!

Once you put a stake in the ground about the business value of a product manager, you can ask interesting questions.

If you are a product manager, you can ask:

• How well am I doing? Will my actions today eventually lead to $5–10 million a year in new revenue?
• How much would it be worth to the company if I got 10% better at my job (answer: maybe as much as $1 million).

If you manage product managers, you might ask:

• What’s the return on investment if I help my product managers become 10% more effective, and it costs $10,000 per product manager? (Answer: pretty high!)

And here are two questions for you, Dear Reader:

• Does this analysis make sense to you and is it valuable?
• Do you have a top-down analysis — to go with my bottom up calculation — for the value of a product manager?

I believe that putting software product management on a concrete business value foundation could be transformative for the profession.

What is your take on the business value of a product manager? Does this concept make sense to you? Do you think my figure is correct? Way off? Unmeasurable? Let me know.

Originally published at nilsdavis.com on September 18, 2014.

Rob McGrorty and I have a semi-regular podcast about product management called All The Responsibility, None Of The Authority where we talk about this and many other topics. Check it out at alltheresponsibility.com and subscribe on iTunes.