Kill Marginal Products (Before They Kill You)

by Leland D. (Lee) Shaeffer

DO NOT read this article if your company has unlimited resources.

However, if your resources are limited, and you are interested in increasing your assets without spending additional money or hiring new people, read on...

It is common knowledge that most companies try to do too much with too few resources. What might not be obvious are the extent to which the resulting overload is costing the company bottom-line profits and the extent to which the company is unknowingly investing in products that may only be marginally profitable, and more often unprofitable. Worst case, the organization becomes so bogged down in marginal activities that it has difficulty driving important projects to timely completion. The consequences can be disastrous.

How Much Is It Really Costing You?

First, it is important to understand the true cost of loading an organization with too many projects. A too-heavy load causes delays in product introductions, and the delays cause a loss of momentum in the marketplace.

Cost of schedule slips: When an organization is working at close to 100% capacity, work typically sits idle in people's in-baskets while they finish prior tasks. As a simple test, follow a piece of work through your organization and determine how much time is spent while it sits idle in various in-baskets as opposed to actually being worked on. This is often a 3-to-1 ratio - or worse. When on the critical path (as much of it is), this translates into being late to market.

When your product schedule slips, you lose not only the sales that would have occurred during the delay, but momentum as well. Your competitors are being handed an opportunity to gain mindshare, market share and perceived leadership within your market segment. This decreases sales and profits over the entire product lifecycle, and usually means the follow-on and derivative products launch with less momentum as well. It also means that unless you are a monopoly, you will not recover the lost sales later.

For a quick and dirty estimate of lost profits, assume that whatever profits you lose during a period of delay will persist over the entire life of the product. For example, if you are 6 months late and, during that period, you forfeit $900,000 in profit, the total impact over a 42-month product life would be (42 divided by 6) times $900,000 = $6.3 million.

Most product managers and executives estimate the cost of only the sales lost during the initial delay, and they overlook the effect of lost momentum. In the above example, this would result in an estimate that is seven times too low.

Opportunity Cost: Of course, every marginal product kept alive consumes resources that could be used by other, more profitable products. Unfortunately, there is a common tendency to simply pile more into the portfolio, resulting in the severe cost of delay described above.

Where to Find the Marginal Products

Undertaking fewer projects would solve the problems described above, but most executives and product managers are reluctant to say no to potential revenue. The low-hanging fruits are the marginal products - often products that made sense at one time but now have become slightly profitable or worse and represent opportunity cost.

Where do you look for these? Everywhere - they exist at all stages of the product lifecycle.

Ideation/Screening: a good idea generation process will produce many more good ideas than there are resources to work on them. The key when screening ideas is to say "no" early and often. This is easier when the true cost of overloading the organization is recognized. It also requires discipline to shoot down the pet ideas of the top executives. A formalized screening process with established criteria will help greatly.

It is also necessary to reward people for killing marginal ideas - don't shoot the messenger and reward only those associated with successful products. Say you have two people, one who kills an idea and saves the company $30 million, another who promotes a new idea that eventually makes $20 million. Ask yourself who contributes more to the bottom line. Who gets recognized at the company meeting or awards banquet?

Development: Once development begins on a new product, the project often takes on a life of its own. The team becomes emotionally tied to the project and defends it when, objectively, they should be recommending that it be terminated or redirected. Why terminate or redirect? The market changed partway through development and a formerly compelling product no longer hits the sweet spot. Or, new information surfaced that the cost of the product is significantly higher than originally estimated or that the time to develop certain capabilities will be longer than anticipated. Any of these can quickly make a good product marginal.

The key here is a periodic top management review of products already underway - and the willingness to be ruthless. Remember that every marginal product that continues through development represents opportunity cost and delays.

Launch: While it is very difficult to kill a product just before launch, it is certainly better not to spend the money and resources. A hard-nosed cost/benefit analysis of proceeding versus not proceeding, with an objective view of the opportunity costs, is required. Of course, killing the same product earlier during development (assuming the appropriate information is available) is much easier and more profitable.

Maturity: While the product is in the market, it should be periodically reviewed to ensure it is meeting its targets and not diverting too many resources from more promising and profitable endeavors. This normally is the responsibility of the product line manager, but be sensitive to the fact that he/she may be reluctant to kill a product unless that person has a better alternative; nobody wants to lose power within the organization

Retirement/Migration: Ultimately, products are retired and customers migrated to the next generation - or are they? Not always. Retiring a product is a project in itself, and not a very sexy one. As one director of product management told me, "You don't get face time with the CEO talking about obsolescence."

Then there are the customers who don't want to switch - they are buying a little bit of the old product and a whole lot of your other products, so you don't want to tell them no. The products continue to linger on, sucking up resources and diluting attention. Migrating the customers away is done case by case and may incur cost in the short term, but it's well worth it in the long term.

Conclusion

Few people will argue against killing a marginal or unprofitable product, but these products persist. Reasons include underestimating the true cost of carrying a marginal product; a structural organizational bias against saying "no;" and lack of periodic reviews to identify products that once were compelling but have become marginal due to changes in the market or unpleasant discoveries during development.

With proper scrutiny and management, the marginal products can be replaced with those having much higher potential - and everyone will benefit.

Free Product Development and Management Assessment ($500 value). We will meet with you for a two hour consultation to review your current product lifecycle methodologies, in order to identify actionable steps you can take that will address issues you may be encountering. Examples of typical issues include: why development schedules chronically slip, why new products do not perform as well as expected in the market and why the organization appears to become less productive as it grows.

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