Comments on: Breakeven Analysis Is A Product Manger’s Secret Weapon

By: Dr. Jim Anderson

Dr. Jim Anderson — Fri, 14 Jan 2011 15:23:52 +0000

Ajith: You make several very good points. One thing to note in your examples is that, for example, once you’ve translated a product, that cost can never be recovered. Therefore, it really should play a minimal role in your pricing! The decision to spend the money to do the work needs to be based on how successful you think that the product is going to be. If your profits will cover your expenses, then go for it!

By: Ajith Nair

Ajith Nair — Tue, 11 Jan 2011 02:36:21 +0000

Hello Jim!

Many thanks for your reply!

You are right in classifying the Programming of the software as a fixed cost. And you are also spot on about PM’s having to focus on increasing their Product Margin.
However, it can so happen that they would need to consider the fixed costs involved in let’s say Localizing a product. For example, if the product managers of Corel think that localizing Corel Draw in Arabic can provide X amount of sales and Y % margin, they would then find it interesting to invest in hiring translators to do the job.

Also, for including another vendor’s software with every copy of their own software, as a value added pack, could sometimes be a fixed cost (thought it is mostly variable) which they might need to consider.

By: Dr. Jim Anderson

Dr. Jim Anderson — Fri, 07 Jan 2011 19:25:51 +0000

Ajith: Not sure if I fully understand your question (this article talked about changing your product’s price, not fixed / variable costs). However, let me take a try at answering what I think that you are asking. A fixed cost is a cost that does not change based on how many copies of your product you make — such as if you buy a machine to stamp metal. Once you’ve made this purchase, it’s done — no matter how many copies of your product you make / sell, you can’t change this cost. Product managers need to focus on boosting their product’s margin (and total amount of profit made). They don’t spend much time worrying about fixed costs because simply there is nothing that they can do about it after the purchase has been made.

By: Ajith

Ajith — Mon, 03 Jan 2011 13:38:33 +0000

@Dr. Jim, very interesting comment on the software industry.

Could you specify why the Fixed costs of developing the software are not to be included in the PM’s arena for pricing?

Cheers
AJ

By: Dr. Jim Anderson

Dr. Jim Anderson — Sat, 03 Oct 2009 14:05:56 +0000

Robin: good question. However, software (and other digital products) really don’t have the economies of scale that you mention. The reason is that your cost of production (variable costs) doesn’t go down the more you sell — digital products (pretty much) have a one-time cost to create them and then all additional expenses are just overhead (shipping, etc.).

Instead you need to view your software development costs as fixed costs. Your variable costs are going to be minimum for each unit sold (really minimum if it can be downloaded — no shipping!). This means that you’ll have a huge profit margin. Great news. However, remember that the software biz has huge fixed costs also that need to be paid for — but this is not to be included in your pricing.

Hope this helps.

By: Robin Zaragoza

Robin Zaragoza — Tue, 29 Sep 2009 17:46:32 +0000

Jim – how do you apply this when you’re talking about software and there are economies of scale with each new sale? Specifically, your current margin would always be changing. Maybe define CM as the average for the previous month to nail it down temporarily, but keep adjusting it over time?