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Every decision has two sides:
The bright side: the events we expect to happen (known and intended consequences).
The dark side: the events we don't expect to happen (unknown and unintended consequences).
The dark side is called dark because we usually don't see it. Even when we do, we often choose not to think about it or ship it off as someone else's problem. It's abstract and distant, and who knows, maybe it will never happen. The events on the dark side creep up on us as second and third-degree consequences that have an outsized effect.
Another name for those negative dark sides is trade-offs, the things we have to give up to gain something else.
These trade-off examples are obvious. We have no problem spotting them, and we mentally wrangle them several times a day (e.g. going to Whole Foods will save me time, but it will be more expensive). We can call them first-degree trade-offs. There are clear, direct consequences from acting on a given decision.
What we usually miss seeing are the second- and third-degree trade-offs. These are the events activated by our decision but in an indirect, often unpredictable way. In some cases, they are so far removed from our actions that we simply call them luck.
It's futile to try to predict every single link on an endless chain of possible outcomes. However, we can foresee second- and third-degree trade-offs. Doing so will help us make better decisions and proactively mitigate risks that arise from them.
It's beyond me to explore in one article the whole science of probabilistic forecasting. Instead, I'll share two approaches I use to identify trade-offs when making important decisions.
Use Second-Order Thinking
I first read about second-order thinking in Shane Parish's blog Farnam Street. Then I saw Ray Dalio describe the same practice in Principles.
The idea is simple: every time you have to make an important decision, map out the consequences in three categories: first, second, and third degree.
To do this, open a whiteboard (or take a sheet of paper if you're analogue leaning) and set up the following template:
Write down a decision you are planning to pursue. Brainstorm the potential trade-offs, starting with the first-degree ones. Once you've identified some, move on to the second- and third-degree categories.
The original template from Shane Parrish asks you to list positive and negative outcomes. You can do both, especially if you are trying to decide between two options. Here I focus only on the downsides because these are the ones we usually miss out.
Practice Systems Thinking
Systems thinking is a way to solve problems by holistically examining the environment in which the issue exists. In the context of a product, the environment may include other items on the roadmap, business limitations like financing, market restrictions like market size or access to markets, or economic factors like inflation, interest rates, etc.
In a complex system, it's virtually impossible to account for all ripple effects across numerous domains. Still, you can try to capture some non-obvious effects through deductive reasoning.
One way to understand the environment is to build a mind map that visualizes the tangible effects of our decisions.
To understand how this works in practice, let's explore how a product manager (or any product leader) at a SaaS company may approach trade-offs.
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A Mini Case Study: What Trade-offs Look Like in Real Life
We are responsible for a SaaS product for the B2B enterprise market. To make it more concrete, let's say it's a CRM software like Salesforce or Pipedrive.
In the latest strategy planning session, the CFO proposed that the revenue goal for the CRM product for next year should be 20% higher than this year's outlook. At the same time, the CFO also wants to increase EBITDA by 10%.
As the product manager, your job is to deliver revenue growth for your product and contribute to achieving the company's overall EBITDA target.
On the surface, these two goals seem complementary—if you increase revenue, you'll automatically increase EBITDA. However, as we'll see, things may play out differently.
Mapping Things Out
To wrap your head around the risks inherent to the decision to increase revenue, you get together with Sales and Marketing and draw the following mindmap:
Overall, the team agrees there are three primary ways to increase revenue:
Increase prices,
Hire more salespeople, and
Increase marketing initiatives
There are certain risks inherent with each avenue, and you can pursue each one simultaneously:
Increase Prices
Increasing prices is the fastest way to increase revenue. But you can't do it universally across the board. You will have to back out the following groups of customers:
Customers with pre-paid subscriptions until the end of the year.
Customers with multi-year agreements with locked-in prices.
Large key accounts with preferential pricing.
Some customers won't renew at the higher prices, which will drive your churn rate up. This is almost certain to happen to some degree. So, your marginal revenue increase has to be higher than the revenue loss from the churn due to the increase in prices.
Another limitation to what you can do with prices is the market. Most competitive markets maintain a range of prices. Where you fall on that range depends on your product's positioning and value offering. If your prices fall outside of the range, you will have trouble getting customers (unless you have some truly unique value proposition).
When doing such analysis, I usually create a model in Excel where we can input specific variables and observe the impact on revenue. We can also do things in reverse: set a revenue target and estimate what numbers our revenue drivers have to hit (e.g. new price target, churn rate, etc.). We can run an endless numbers of scenarios and simulations, however, the key to success is getting the key players across Sales, Marketing, Product and Finance to align.
The other point I want to emphasize here is that increasing prices is not a slam dunk. In most cases, doing it right allows you to move within a small range.
Hire More Sales People
Independent from price increases, you can also hire more salespeople. This approach assumes that the bottleneck to more sales is the number of people actively knocking on doors. Your sales team will have the answer.
In talking with other teams, however, you have to be cognizant of their own interests. They will never be exactly the same as yours. So, if you go to Sales and ask them if more salespeople will help them drive more sales, of course, they will say "yes". It's like asking someone whether we'll take more money.
Instead, in our case, we want to find out:
How much revenue an extra sales person will drive,
What is preventing the current sales team from bringing in this extra sales revenue?
More salespeople may not be the answer if you hear things like:
The current market is saturated; we have a solid market share, and realistic growth is marginal.
Our salespeople spend too much time doing admin work (i.e. updating Salesforce templates) instead of selling.
Our process of closing deals is fraught with friction and delays, which makes us lose customers.
The sales team doesn't understand the product.
As a product person, dealing with these issues will not be your job. In most organizations, you won't have the power to affect them at all. However, understanding them is important because it will inform how you approach solving your problem - growing revenue.
However, you may find out that having more salespeople is the solution. In this case, you may expect higher spending for
higher salaries,
higher commissions,
higher recruitment costs,
higher peripherals (laptops, cell phones, etc.)
These expenses will accrue to the sales team and it will reduce the EBITDA for the company. Thinking holistically for the company, hiring more salespeople pushes you farther away from achieving the second business goal - increasing EBITDA, unless you increase revenue by enough to offset the higher sales expenses.
Again, as a product person in a typical organization, you will have close to zero say in how the Sales team manages recruitment. The key to your success is collaborating with Sales and Finance and influencing the right people to make the right decisions to help you achieve your business goals.
Increase Marketing Initiatives
The trade-offs for this option are obvious: higher marketing spending. Would these extra marketing dollars drive more revenue? It depends.
Any marketing strategy starts with understanding the user, why they buy, and, more importantly, why they don't buy.
For example, your user intelligence tells you:
Many potential customers are not aware of your product -> run an awareness campaign
Users find your prices too high -> find out if it's due to perception or affordability -> if perception, modify the messaging of the value proposition; if affordability, offer discounts or promos.
If users find your product too complicated, create content to show them how to accomplish tasks and go through workflows (you should also work with your design team to address any UX challenges here, but that's outside of the Marketing function).
Whatever plan you decide to follow with the Marketing team, you need to assess the impact on revenue and expenses.
What to Do Next
It's easy to get lost examining trade-offs and ripple effects. This is why we need to focus on two things:
Whatever we can control
Whatever has a high degree of likelihood to occur.
Once you've identified such trade-offs specific to the goal you have to deliver on, the next step is to discuss them with your stakeholders. Chances are they already have a sense of these risks, but seeing them laid out and quantified (if possible) will give them a different perspective and appreciation.
Such alignment is especially critical in cases where competing priorities exist. Even though some leaders will push to have it both ways, one priority always edges over another.
Resources
Second Order Thinking: What Smart People Use to Outperform, by Shane Parrish, Farnam Street
Principles by Ray Dalio