Product Management Rules of Thumb 1: The “Order of Magnitude” Rule


Always aim for a factor of ten improvement

One of the problems we product managers face is that there are lots of interesting technologies and product ideas, but not many that can be successful in the market. I like to use the “order of magnitude” rule of thumb as a test to help determine if a new product has any chance of being successful. This isn’t the only metric for success, but I consider it a necessary condition — if you don’t pass this test it’s going to be difficult to get a customer to pay attention to you.

The rule says that a new product product needs to improve some significant process — defining “significant” takes some expertise! — by an order of magnitude. That is, it has to be ten times better in some dimension.

In most cases you can’t improve the overall process by an order of magnitude — for example, there aren’t many products that enable an organization to reduce the personnel required for some activity by 90%. Typically, you’re going to be improving some component metric by that factor. The original value proposition for system management and monitoring software was that it reduced downtime by a factor of ten — organizations went from as much as 20% downtime to 2% or less. (Note that you need to look at the improvement in downtime to see the huge benefit — uptime only improves by about 20%, from 80% to 98%.)

Often you can determine the value of your product — which drives pricing — using this rule of thumb, because as a side effect it can tell you how much the customer will save by using it.

For example, if your product reduces the number of failed transactions on a website, and you can relate the number of failed transactions to a number of shopping carts abandoned, you have an excellent basis for pricing your product. “Our product will reduce the number of failed transactions by a factor of ten, resulting in X% more sales on a weekly basis, at an average of $Y per sale. At a price of $Z, the system pays for itself in a few months.”

What Is A Business?

Shoe fixing

Cobblers on the street in India photo credit: yumievriwan

You’ll already know some of the things I’m going to tell you, and there’s other stuff that will seem obvious, but there’s plenty you probably will not have heard, and each of you has a different level of understanding and a different set of knowledge, so bear with me.

What is a business? Businesses come in lots of different forms, large, small, private, public, for-profit, not-for-profit, a single person working out of a little hole in the wall on a street in India, to 50,000 people working on designing and building networking equipment in Silicon Valley. What do they all have in common? They take a set of materials – or perhaps immaterials like peoples’ minds – and with those materials create something that is – hopefully – more valuable than the sum of the cost of the materials.

In this case, “value” has a very specific meaning – that someone will pay for it.

So, as an example, think about someone who makes shoes. They take leather and plastic and thread, and the labor of one or more people, and some machines, and turn those into shoes. They then sell them – if they can, if the “market” thinks the shoes are valuable.

A successful business is one where the value of the thing produced – again, as determined by “the market” – is higher than the cost of the materials (and labor) that went into it.

In a law firm, the material is all immaterial – it’s the brains of the attorneys and their minions, and the product is advice, advocacy, etc. The client of a lawyer feels that the value of that advice or advocacy is higher than the value of the money he or she paid for it. How does this occur? For example, the advice could prevent a lawsuit. Or the advocacy could result in the client being paid a significant sum in damages. Or avoid having to pay a significant sum in damages.

There’s the basic concept of a successful business – take some materials and labor, create something with it, and sell it for more than it cost to make.

Introduction To The Five-Hour MBA

Photo by cryptic_star, CC 2.0 license

After I graduated from college quite a few years ago, I realized that I didn’t know all that much about living in The Real World (TRW). In fact, everything I know about TRW I’ve learned via experience, some hard and frustrating, since college. I had a particularly sheltered life growing up on a farm in the country, but I know from talking to some of my younger friends nowadays that lots of people still graduate from college, especially liberal arts graduates, without knowing some key stuff about living in TRW. Like how to get a job. What that company they are applying to is actually thinking about them. Why a company would want to hire someone in the first place. What a company even exists for. And then, what you have to know in order to get a job in a particular field if you want to work in it.

I always thought there should be a guide, a handbook to “Making It In The Real World,” that there was probably a set of key, basic information that, if they had it, would help liberal arts grads be better prepared for entering TRW, and enable them provide more value to their eventual employers, move faster up the ranks, make better decisions about where and how to work, and generally be more successful overall.

So I’ve had this idea floating around in the back of my head – we’re liberal arts graduates, we’re smart, we’re fast learners, but no one has told us some key stuff that we could probably learn pretty fast. So why not put together a short course, or a short set of blog posts, as I’m doing here, that provides “The Theory of The Real World 101” – or as I often call it, “The Five Hour MBA.”

Originally conceived as a course that might get taught to liberal arts undergraduates as a series of five to ten evening lectures that just orient kids who are new to TRW into what’s going on out there, it’s seeing its first embodiment as this set of blog posts.

So that’s the genesis of the 5-hour MBA set of posts, which I will be publishing over the next few months. The first one is right below, and you’ll see more once or twice a week as I continue to produce them.

I’d love to hear your feedback on this idea, and on the content I’m putting in here as it gets created.

Warning: One Of You Will Probably Drop $5k On A Pair Of These

Vuzix STAR 1200 Augmented Reality Glasses

OK, I want a pair of these, I truly do! I wonder if they work over regular glasses?

Originally saw this on the Technology Review site, in an article from May:

At the 2011 Consumer Electronics Show in Las Vegas hardware company Vuzix has revealed the first clear AR glasses for consumers. The glasses, called Raptyr, use holographic optics instead of video screens to make digital objects appear in mid-air. The approach is challenging, not least the interface has to compensate for (or compete with) natural light. For this reason the lenses can electronically darken to compensate for brighter or darker environments.

Here’s the actual product page for the device. It’s now called the Star 1200 (Raptyr was maybe too game-y?), and it costs $5,000 right now (in pre-order). And it looks pretty clunky. But that it can even be done is totally amazing. And if its price curve follows Moore’s Law – and there’s no reason to think it wouldn’t – we should be seeing it in the $500 range, with a lot better design and much less clunky, in three to four years. That is, unless people start walking into buses while wearing them!

For more on what this all means in the next 15-20 years, take a quick look at Rainbows End by Vernor Vinge. Not his best-written book, but likely a prescient view or what augmented reality is going to become. (And of course, I didn’t read it as a book, but on my iPad, acting as a Kindle. The future is already here!)

They say they’ll be shipping this month (August 2011). You can pre-order now for a downpayment of $2,000, with the remaining $3,000 payable on product release. Free shipping, though, in the U.S.!

So, I know you want a pair of these – but what are you willing to pay, and what do they have to look like before you’d be willing to wear them?


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