Cost of Delay Analysis - What, Why and How for Product Managers
Cost of delay (CoD) is a prioritization framework that allows product managers and teams to choose the sequence of their action items based on their economic impact on the business.
You can use the concept of “cost of delay” for every activity in your day-to-day life. For example, if you start 15 minutes late for work, you might miss your bus. This can start a domino effect which could lead to more delays and missed opportunities.
That is exactly what makes the cost of delay difficult to understand and implement.
Let’s take a closer look to learn about this framework.
What is cost of delay
In layman’s terms, it is the “economic impact” but it goes deeper than that. CoD combines two factors: urgency (how quickly you need to do something) and value (how much will you lose if you delay it).
The challenge is both factors are difficult to estimate by humans. For instance, if you delay the launch of your product by a quarter, then your cost of delay can be visualized as:
However, not everything is directly proportional. For example, what if, during the delayed quarter, a competitor launches a similar product and takes up your space in that market? In that case, the CoD will be exponential and can be visualized as:
This makes it challenging for product managers to calculate or even estimate the CoD of their initiatives such as feature requests, bug fixes, etc.
Fortunately, Donald Reinertsen, the author of The Principles of Product Development Flow, found a way to navigate this non-linearity.
He encourages product managers (and also project managers) to look at each initiative as a rectangular block where the breadth represents the time and the height represents the economic gain.
The area marked in red represents the CoD for the two approaches which helps product teams find out the best approach. The graphs can also be superimposed to find how much one approach is better than the other:
But why should product teams use this framework in the first place?
Why should Product Managers use Cost of Delay (CoD) analysis?
The CoD prioritization framework gives product managers three advantages that help them build better products or add features that users want:
1. It quantitatively supports your roadmap
While adding action items/initiatives to the product roadmap, teams have the following two challenges:
- Choosing which initiatives to accept/reject
- Determining the sequence of accepted initiatives
Performing the above two tasks can be challenging when two (or more) team members have a difference of opinion. The cost of delay prioritization framework simplifies this process by putting numbers in front of every initiative and showing the difference between the two approaches for the same initiatives.
This will also allow teams to quickly reach common ground with the stakeholders while building sprint backlogs.
2. It helps you choose the most rewarding ideas from the lot
As a product manager, there is always something that you can do that will potentially improve your product. But it can be difficult in calculating the margin of improvement for each initiative.
What makes this difficult is that PMs constantly receive feature suggestions from stakeholders, legacy customers, and team members. Now, you will have to not only estimate how rewarding each of those initiatives is but also do so quickly as there are too many of them.
The cost of delay in agile provides PMs with a reliable formula that helps to reject initiatives quickly by weighing them on a common scale.
3. It focuses on two crucial parameters: user satisfaction and revenue
The effectiveness of a prioritization framework depends on how accurately it ranks initiatives based on the key parameters which reflect the success of a product. For most products, user satisfaction and revenue are those key parameters.
The CoD framework does just that. It helps you rank initiatives based on how much impact they make on the user experience and your business goals.
If you compare other prioritization frameworks, like MoSCoW and Kano, with the cost of delay in product management, you will find that the former prioritizes action items based on the product team’s qualitative estimations but the latter does it based on quantitative calculations.
However, that doesn’t mean the cost of delay analysis should be used at every step in the product management process.
When should the CoD analysis be used by Product Managers
CoD helps you quantify your initiatives, either absolutely or relatively, which means you can only use it when you have the necessary data. It will be difficult to put this prioritization framework to use if you are unaware of the impact of your initiatives in terms of value and time.
Furthermore, you and your team should consider the time it might take to collect the relevant data to estimate the cost of delay for each initiative.
Estimating how much of an impact it will have on user satisfaction and revenue is always challenging and time-consuming because you have to look at various performance metrics for your product and business. Hence, it is also hard to use the CoD framework when you don’t know which metrics are crucial for you.
Even when you do have the right metrics, using the framework to rank a couple of action items can be inefficient considering the investment you put in.
Only use the cost of delay in product management when you:
- Have a long list of initiatives that need to be prioritized quickly
- Want to quantitatively justify your roadmap planning to your stakeholders
- Have similar levels of confidence for each initiative
Now, let’s look at how you can put this framework to use.
Step-by-Step process to conduct a cost of delay analysis for PMs
There are five simple steps that you can follow to prioritize your action items based on how much impact they have on your revenue and customer satisfaction:
1. Gather relevant data: value and time
Since the cost of delay framework is quantitative, it is crucial to collect the right data for an accurate estimation. One of the most important questions that PMs need to answer here is — what is “value” for our product?
The answer to that question will help you focus on your North Star metric which will become the foundation for evaluating the relative ranks of your initiatives. After that, you can tie your North Star metric to revenue metrics like average revenue per user (ARPU) to find the value of an initiative.
The second question you need to answer here is — how long will it take to build a feature?
Keep in mind that you are not calculating (or estimating) the time required to build a feature to find how much you need to invest but rather how much you will potentially lose (in terms of revenue).
2. Calculate the CoD
If a feature (let’s call it Feature A) will yield you an estimated $5000/month and it will take you three months to build it, then the cost of delay is $15,000. With every additional month of delay, you need to add another $5000 to the CoD value.
But what if the CoD values are identical for two initiatives?
Suppose there is another initiative (let’s call it Feature B) that will potentially yield you $7500/month and will take two months to build, giving you the same CoD of $15,000. Which of the two will rank first?
In this scenario, you need to focus on another metric called CD3 — CoD divided by duration. Here, you need to divide the CoD by the time required to complete it multiplied by 1000.
For Feature A, CD3 will be 15000/(3 x 1000) = 5.
For Feature B, CD3 will be 15000/(2 x 1000) = 7.5.
As the CD3 for Feature B is higher, it should be prioritized.
3. Assign CD3 scores to ideas and initiatives
The CD3 scores for each initiative should be mentioned in your product backlog. This will allow everyone, from the internal product team to external stakeholders, to remain aware of the potential order of priorities.
Apart from simplifying collaboration, it will also reduce the chances of a mistake by encouraging everyone to verify the value and CoD of each initiative.
However, although rare, there is a slight chance that CD3 scores for two different initiatives could be the same. Consider Feature C which can boost your revenue by $7500/month and only takes one month to build giving you a CD3 score of 7.5, the same as that of Feature B.
In such situations, it is crucial to take the assistance of your team to bring their quantitative insights for accurate prioritization. For example, maybe the developers will recommend Feature B to be prioritized first because that will make the implementation of Feature C into the product easier.
Zeda.io facilitates by allowing team members to “vote” on various initiatives before they are added to the product roadmap.
After voting and a brief internal discussion, you can continue building an efficient sprint backlog.
4. Collaborate with stakeholders and team members to get different viewpoints
A common challenge that every PM has to deal with is to align everyone’s efforts to the same business goals. That is because product teams are cross-functional which means that everyone ranks initiatives differently.
For example, a developer might prioritize an in-demand feature release because it directly increases the breadth of functionalities of the product leading to a higher estimated CD3 score.
However, a designer might prioritize adding a “dark theme” to the product because most of the users use the product in dark environments which would increase the adoption rate leading to a higher estimated CD3 score.
It is also crucial to note that the CoD value and also the CD3 score for initiatives might change over time. For instance, if Feature D has a CD3 score of 5 now, it doesn’t mean it will stay that way after a quarter.
Therefore, product managers must encourage and motivate team members and stakeholders to constructively collaborate to accurately estimate the CD3 scores of initiatives.
This seemingly simple but crucial practice will make all the stages of your product management process agile which will help you be more user-centric than ever.
5. Report the CoD analysis insights and add finalized action items to the roadmap
The last step of this process is to visualize your product’s development trajectory through the roadmap. This will help you see the big picture. You can find more opportunities and decrease the probability of making mistakes as you go ahead.
The CoD prioritization framework also brings a great learning opportunity for you and your team. Looking at each initiative quantifiably will help you understand two things — what makes your users happy and how you can measure their happiness.
In other words, you will know the answers to what product-market fit looks like for you and how you can measure it.
The Cost of Delay helps product teams estimate how much revenue they risk losing per month for not developing a feature. This prioritization framework quantifies each of the initiatives and action items on a product backlog which improves planning and hence user satisfaction.
You should use the CoD analysis method when you have the necessary data (value and time), have similar levels of confidence in each initiative, and justify your roadmap to your stakeholders.
PMs can conduct a CoD analysis by calculating the CD3 score for each initiative by using the formula:
CD3 score = Revenue a feature can yield/(number of months it will take for the team to implement the feature x 1000)
Then just rank the initiatives in descending order to prioritize the initiatives before adding them onto your product roadmap. If two of the initiatives have the same CD3 score, you can have the team collectively vote to agree upon a choice.
The CoD framework also brings a huge learning opportunity for product teams where they can learn more about their users and business goals. To facilitate this, product teams should empower themselves with the right tools.
Tools to help you with Cost of Delay (CoD) Analysis
Zeda.io empowers Product Teams to have constant visibility on customer feedback, prioritize problems, crack solutions, define PRDs, manage capacity, publish release notes, and keep all stakeholders in the loop at every step of the product-building journey.
Use Zeda.io’s native features or bring your existing tools here through integrations.
- What are the three components of cost of delay?
Answer: User business value, time criticality, and cost of delay divided by duration (CD3) are the three components of cost of delay.
- How do you calculate cost of delay in SAFe?
Answer: First you find the North star metric of your product and tie it to your product’s revenue. Then, you need to predict where it will be if you don’t add a particular feature and find its corresponding impact on the revenue. That value is the cost of delay.
- What is CD3 cost of delay?
Answer: CD3 is the cost of delay divided by duration.
- How can we minimize the cost of delay?
Answer: By prioritizing the product roadmap accurately product teams can minimize product delays.
- What is the cost of delay in agile?
Answer: The cost of delay in agile is the economic impact of delaying an initiative.
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