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

Ten

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.”

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  1. […] of thumb” are another set of good heuristics that represent useful mental models. in my Rules of Thumb series I wrote about a few I […]

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