How to Prove the ROI of Product Discovery

Let’s face it, things aren’t smooth sailing in the tech industry at the moment. You’d be forgiven for feeling a little vulnerable. The fact is, as technology businesses face hard times, every dollar spent needs to deliver decent returns if the company is going to survive. As business leaders are scrutinizing their cost base, it’s more important than ever that you can demonstrate the return you deliver to your employers. If they are investing in you, what return can they expect? 

As product expert Matt LeMay said on our webinar on this topic…

So, that’s what we want to help you do – understand exactly where you add value to the business and how to present that to the leadership team so they are left in no doubt about the ROI they get from your salary! 

One of the major ways you deliver ROI as a Product Manager is through the work you do in product discovery. That’s what we’re going to cover today. But, remember, product discovery is only one way in which Product Managers deliver value and return on investment to their organizations. If you’re looking to craft your argument on the ROI you deliver to your employers, this is only one string to that bow. Be sure to consider every aspect of your role and outline how you deliver impact in each instance. 

As well as the work you do in product discovery, you also have a significant financial impact through:

• Prioritization and decision-making
• Strategic planning 
• Momentum and progress monitoring 
• Outcome tracking and measurement
• Feedback analysis 

Luckily we’ve written a complete guide covering each of these areas and how to articulate the economic impact of your work. The guide also includes five different calculations you can use to put real numbers behind that value and prove the ROI you deliver for your organization. 

For today, we’re going to drill down into the ROI of product discovery specifically. This article is designed to provide you with a clear and effective way to articulate what you do in this area and how it delivers real, financial results for your organization.

So, whether you’re forming an argument for the future of your role, trying to convince stakeholders for more resource, or simply want to feel good about your work, let’s take a look at the very real value that comes from product discovery.  

What is product discovery? 

I ask that question… but then I’m not actually going to answer it. You know what product discovery is – you’re already doing it. What you’ve come here to learn, is how to articulate WHY this work is so important to the success of your business. 

Having said that, if you could do with seeing a definition so you can be certain we’re talking about the same thing, or you want a simple explanation to present to your stakeholders, we have an in-depth article all about what product discovery is, what it involves and how to do it well over in our Product Management Glossary. So check it out. 

But, today’s topic is WHY discovery is important and HOW it delivers real, tangible financial returns to your employers. 

The business value of product discovery

Product discovery is, ultimately, a risk-reduction strategy – a proactive, risk-prevention tactic that mitigates against building the wrong thing and wasting costs, time and resources on outputs that don’t drive business-critical outcomes. 

The discipline of product discovery is about verifying assumptions, validating ideas and refining product hypotheses. In this way, it’s the crucial due diligence that provides assurances and confidence that what you invest in as a business is valid and has the potential to be successful. 

Product discovery de-risks the expensive investments made into product development. No business leader would acquire another business without undertaking due diligence and ensuring the business’ financial grounding is sound. Equally, a business should never invest the considerable costs of software development until the product or feature idea has been validated and the hypothesis has been affirmed. 

No matter how experienced and knowledgeable a team is about their target user/consumer any new product ideas they come up with will always be based on assumptions that are just that – assumptions. All assumptions have the potential to prove invalid. 

An example of product discovery

Let us illustrate this with an example.

Imagine you have a mobile banking app. There is a product idea for a new feature that allows people to scan checks using their phone camera and pay them into their bank accounts. 

One of the assumptions here is that people actually have checks that they need to pay into their account. Imagine not running through product discovery to test the assumption that bank customers needed to pay checks into their account, and finding out, once the design team had spent 3 days designing, the dev team had spent 2 sprints developing and the QA testers had spent a day testing, that none of the existing customers regularly, if ever, received checks. No one wants this feature or cares about it. Usage is zero. No new customers are acquired as a result of this feature. 

Yet some product discovery work could have uncovered that truth fairly quickly with a delve into the data from the in-branch paying-in activity, or a quick survey out to the current mobile app users. 

OK, maybe that example feels like an obvious wrong move, but only the most arrogant and foolhardy risk-taker would throw caution to the wind and forgo due diligence on their loose ideas and hunches. Surely? 

Remember, the output of product discovery work isn’t always a straight yes or a no. It’s not always the difference between a product or feature being built and not being built at all. Product discovery, done well, can help you refine an hypothesis, mature the idea and improve the chances of success. Product discovery de-risks from failure. 

Product discovery as a risk-prevention tactic, is crucial to ensure long-term business stability and growth. Without consistently delivering features and products that answer user problems, customers will cease to find the product valuable and will stop paying for it, thus stability is impossible to sustain. 

Growth (whether coming from new customer acquisition or expansion revenue) is dependent on offering revenue-generating features that more and more people are willing to pay for. The more things you build without thorough validation, the less chance you have that the things you ship will hit the mark, therefore reducing the percentage of your output that is effective and, potentially, revenue-generating. Thus growth will be slower if not non-existent. 

Who is responsible for product discovery?

If you’re putting forward a case for the importance of your role as a Product Manager and the specific value YOU deliver to your organization. Then you should make this clear…

Product discovery needs to be conducted by Product Managers.

It’s as simple as that. Yes other team members can and should be involved – like Product Designers, UX Researchers and even Developers (when it comes to technical feasibility) – but without Product Managers leading the charge, you risk discovery negatively affecting your overall velocity. 

Let me explain. To deliver the highest possible ROI from product discovery work, it needs to be conducted as part of a dual-track agile process. That is, discovery should be running concurrently to the rest of the development work – while one thing is being built, another thing is being researched and validated. This ensures there is always a consistent stream of valid product ideas with the highest chances of success entering the delivery phase. This is how you work smart and move fast.

If Designers or Developers were responsible for discovery work, the ability to operate in a dual track way collapses. If Devs or Designers have to conduct their own discovery before picking up a product idea to work on, velocity plummets and output decreases. 

Let’s also understand the skill-set needed to get the best results from product discovery. Not only do you need significant research expertise, but you also need to be experienced in customer and user communication. This is another reason why product discovery work is best owned by Product Managers. 

How to calculate the ROI of product discovery

As we’ve already outlined, the value of product discovery comes from risk-reduction and prevention of lost costs. The work you do as a Product Manager in the area of discovery is about de-risking product development to ensure maximum return and minimal cost inefficiencies. 

Understanding how to quantify the financial value of that risk prevention is one of the fundamental ways you can present an air-tight argument for the importance of the Product Management function and the impact of your role as PM. 

What is ROI?  

So, if someone has invested in you as a Product Manager, and you’re running product discovery, what results should they expect? 

Return on investment is calculated as: 

Benefit – cost / cost x 100

In this calculation ‘benefit’ can be either revenue or cost saving.  In our case, the benefit is the potential costs saved as a result of the risk-prevention work conducted by PMs. We therefore need to propose what those potential lost costs would have been and center our argument around that. 

Thorough discovery guards against teams wasting time and resource (and therefore money) on a feature or product that no one needs or is willing to pay for. This point is best demonstrated with one specific example where a piece of discovery work gave a significant return in the form of cost saving. 

Can you think of any examples in your recent history where you had a product or major feature idea that was dismissed after discovery? Use that as the basis for your ROI calculation to illustrate your point. 

Here’s how you would go about calculating the potential lost costs should that feature have gone ahead only to find it generated no revenue. 

Essentially, it comes down to the costs of discovery work to find out that an idea is not valid versus the cost of the development, delivery and launch activity, then have the feature generate no revenue. 

1. Calculate cost of resource to take the feature to market

Example: Let’s say there is an idea in your backlog about a significant new feature that you intend to create as an add-on to your current product and charge existing and new customers for it. Let’s map out the scenario where that feature goes ahead without discovery work and is later found to be unwanted and not valuable to your audience. 

*The thinking behind those sales hours is as follows: let’s say you have a team of four Account Managers managing 50 customers each who will be trying to sell this new feature as upsell. They each spend one hour writing an outreach sequence to all 50, then an hour trying to reach the top 10 prospects (2.5 hrs), they book a few of initial calls off the back of that (1.5hrs), from that they book one full demo (1hr), following this they try and close the business over an extended period of time (4 hrs invested). They spend another hour with pipeline management, logging feedback and admin around the deal.  They ultimately sell nothing because the feature does not answer a customer problem. 

2. Calculate costs of discovery work

Now let’s work out the costs of the alternative path where product discovery was conducted and the feature was dismissed as a result. 

Here a Product Manager spends one week in discovery – conducting research, looking at usage, competitors, talking to customers – and concludes that the proposed feature has insufficient demand to make it viable. The product idea is archived and not progressed. Therefore, the total costs of the project are (roughly speaking) only the cost of the PMs time to run discovery.  

3. Calculate the cost saving

That makes the potential cost saving of this discovery work $43,528 (the potential full lost cost of developing the feature without it resulting in sales, minus $2,600, the cost of the discovery time in salary).

4. Calculate the return on the investment in discovery based on the benefit of cost saving 

In our example here, the ROI of that discovery work is:

$43,528 – $2,600 / $2,600 x 100 = 1574%

That’s a pretty compelling return-on-investment. Any business leader would feel confident in their investment in Product Management or a PM role if they were shown to be getting that sort of return.

Therefore, whether you feel you need to present a case right now, or you just want to have some proof points in your back pocket, I would urge you to go and find an example or two from your archived product ideas and run the costs to prove the cost-saving return your product discovery work delivered.

More ROI calculations for Product Managers

That’s one way in which you can crunch the numbers and present a financial result from your work as a Product Manager. But it’s not the only way. As we said at the start of this article, you deliver a return on investment from each aspect of your role. To present the most complete picture of your business impact, you’ll want to cover each area in turn and support them with their own ROI calculation. 

Download your copy of our complete guide to proving the ROI of Product Management and get a step-by-step explanation of five different ROI calculations to help prove the financial impact of your work.