The Cost Of What Goes Into Your Product Needs To Be Managed (c) 2006 - urbangarden/flickr

In the current tough economic times we are all feeling the pressure to keep sales of our product either at current levels or to boost them in order to make up for shortfalls in other parts of the company. When  you step back for a moment and realize that our customers, both current and potential, are also feeling the squeeze of tight times, how will a product manager pull off this magic trick?

How To Reduce Your Product’s Costs

This is going to be a very simple lesson (with a lot of explanations to follow): use less costly materials to reduce the cost of your product. We all realize that the cost of one of our products is heavily dependent on what it took to build it; however, sometimes we’re too close to the product to be able to see how these costs can be reduced.

As they teach us in product manager school (you did go to that, didn’t you?) there are two types of costs that go in each unit of your product that is created. Note that this applies to both “real” (you can touch ‘em) and “service” products. The first type of cost is called a “fixed” cost – it doesn’t matter if you manufacture one or a million units your fixed costs will always remain the same. We’re talking about things like salaries for managers, lighting, air conditioning for plants and warehouses, etc. Then there are “variable” costs which are the cost of producing one more unit. This would be the cost of plastic, or a circuit board, or a nice steak (if you were running a restaurant & selling meals).

To cut your costs, you need to find ways to reduce both your fixed and variable costs.

About Those Fixed Costs

The tricky thing about a product’s fixed costs is that all too often we take a quick look at them, shrug our shoulders, and say that there’s nothing that we can do about them. It turns out that this isn’t true.

Fixed costs are often established when we first start to make and sell a product. Rarely do we go back and revisit them when everything is humming along nicely. Have you looked at the economy lately? There are three fixed cost factors that you need to be revisiting right now:

• Manufacturing – Site: where does your product product get created? Does it need to be made there – are there less expensive alternatives? Now may be a good time to renegotiate your site costs.

• Manufacturing – Tools: how does your product get made? No matter if it’s being done by people or machines, looking for ways to use fewer of either can be a big bottom line savings technique.

• Storage: where do you put your manufactured products after they’ve been created and before they’ve been sold? How much is this costing you? Once again this is a great time to renegotiate these types of contracts.

They’re Called Variable Costs For A Reason

The real savings in making a product generally comes from finding ways to reduce your variable costs. This makes sense because every penny you can shave off of a variable cost will be saved over and over again each time you make another unit. Things you should be looking at to reduce variable costs include:

• Housings: most products are enclosed in some sort of housing. This can often be one of your most significant product production costs. Often this component has been over-engineered. Can you make it thinner or make it out of different materials while still keeping acceptable product quality?

• Packing Material: when you ship / deliver your product how do you pack it? Once again, packing solutions are often designed once and then not revisited as improvements in shipping materials and methods are developed. This is a good time to take another look at this area.

• Rework: One of the most expensive parts of any manufacturing process is the extra level of effort that is required to solve special issues that occur while the product is being manufactured. Spending some time to reduce the amount of rework can pay huge dividends.

Final Thoughts

Tough times offer product managers the excuse that they may have been looking for to revisit both the fixed and variable costs associated with their product. However, cutting costs is not all that a product manager needs to do.

In order to maintain profits, product managers also need to find ways to increase their sales. If you can reduce your product’s costs, then you’ll have more pricing flexibility and that will allow you to boost your sales. This is how great product managers make their product(s) fantastically successful.

Questions For You

Are you starting to get pressure to reduce the cost of making your product? Have you started to take a look at your product’s fixed costs? How about its variable costs? Do you have a plan for boosting sales while you trim costs? Leave me a comment and let me know what you are thinking.

Click here to get automatic updates when
The Accidental Product Manager Blog is updated.

P.S.: Free subscriptions to The Accidental Product Manager Newsletter are now available. It’s your product -  it’s your career. Subscribe now: Click Here!

What We’ll Be Talking About Next Time

If product managers ran the world, we’d be able to sell our products to everyone at a very high price. However, since we don’t run the world (yet), we need to adjust and adapt in order to sell our products to as many people as possible for as high a price as is possible. However, when the global economy tanks, we’ve got a whole new set of challenges that we’ve got to deal with…

No related posts.

Who would have ever guessed that a big chunk of the art of product management would revolve around your ability to make good guesses? We like to call it estimating; however, at the end of the day it’s really guessing. The cruel fact of life is that he/she who does the best (most accurate) job of guessing wins the raise, promotion, undying gratitude of the big boss, etc.

So just how does one go about learning this black art of estimating? Well back when I was first starting out as a Product Manger I was working with a coworker named Dave. I can clearly remember working until the wee hours of the night trying to pull together the product business plans for the next year. Dave was doing the same thing, but he seemed to be going home on time each evening. I on the other hand was staying and building elaborate Excel models in an attempt to estimate budget, staffing, and time required to complete these business plans.

Dave and I both reported to the same manager who had been around the block countless times. When we turned in our product plans my boss took a look through Dave’s, grunted, and put them down on his desk. Next he looked through mine, didn’t say anything for the longest time, and then finally looked at me and said: …your estimates are all way too low. Talk about being crushed! On our way back to our desks, I turned to Dave and asked him how he did it. I mean I had put in the time, built the Excel models, and done everything with engineering precision. Yet, somehow I had missed the mark. What was his secret?

Dave then told me something that I have used to this very day. He told me that he really wasn’t very good at estimating anything. However, he had taken the time to study WHY his estimates were wrong. It turns out that his estimates were consistently about 1/2 of what they should have been. How did he solve this problem? Simply by doubling every estimate that he created. Poof – that allowed him to be on the mark every time! I took Dave’s advice, doubled my estimates and took them back to my boss. This time around he grunted and accepted my business plans.

So what does this mean to you – should you just start doubling your estimate? NO! Instead, what you need to do is to pick one or more of your estimates and collect metrics on how that project actually ended up costing. What you’ll find is that you are probably off by the same amount each time (you will always be off!). This is the magic estimate number for you. Some of us estimate high, some low. but we all seem to do it constantly. My friend Dave has stayed with that firm and is now an Executive Director in the Marketing department. I’ve moved on; however, I still use his rule to create accurate estimates.

Does this approach cause chills to run up your spine? Would you be able to create an estimate without a complex Excel spreadsheet to back it up? Speak up and let me know what you think the best way for Product Managers to create estimates is.

Tags: estimates, project management, costs, pricing, staffing

No related posts.