We all come across various concepts. Sometimes they are easy to understand. Sometimes, you need an example to understand them better. In this space, I would blog on product management related concepts which are worth expanding and understanding them in a better way with examples.
In an Agile software development environment, a part of the Scrum framework, Sprint is a time-boxed event for the scrum team to deliver a small product increment which is typically a releasable product. Usually, Sprints are one to four weeks long. Every sprint, the scrum team picks up a number of product backlog items and make a commitment to move them to a done state as per the definition of done. The size of each product back item is generally expressed in terms of story points. They are like units of user stories that can be addressed in a sprint. A number of story points completed at the end of each sprint provide a very good understanding of the team’s capacity or WIP (work-in-progress) limit. Depending on the complexity of sprint backlog items and level of productivity, the team can complete a varied number of story points at the end of each Sprint. In order to estimate the average velocity of the Sprint, the Product Owner simply uses the arithmetic average formula. See the below example.
Let’s say we have completed several sprints and we have a record of the number of story points completed in each sprint.
Sprint Backlog Items = 5
Total Story Points Targeted = 22
Total Story Points Completed = Sprint 1 Velocity = 18
Sprint Backlog Items = 6
Total Story Points Targeted = 24
Total Story Points Completed = Sprint 2 Velocity = 20
Sprint Backlog Items = 7
Total Story Points Targeted = 32
Total Story Points Completed = Sprint 3 Velocity = 24
Sprint Backlog Items = 6
Total Story Points Targeted = 26
Total Story Points Completed = Sprint 4 Velocity = 26
Average Sprint Velocity
Total Sprints = 4
Average Sprint 4 Velocity = (Sprint 1 Velocity + Sprint 2 Velocity + Sprint 3 Velocity + Sprint 4 Velocity) / Total Sprints
Average Sprint 4 Velocity = (18+20+24+26)/4
Average Sprint 4 Velocity = 22 Story Points
For product managers, understanding the concept of break-even point for a product’s or a feature’s profitability is very important. It’s a point where a company’s revenues equal to its costs. It gives you a clear picture of the number of units to be sold or the total sales to target.
The break-even point will help the company to know when a particular product will start making a profit. If the revenue is below the break-even point, then the company is losing money. If it’s above, then it’s making money from the product or the feature.
Let’s take an example. Mathew owns kids toy manufacturing business. He is planning to introduce a new toy called “Robo Rover”, a remote-controlled robot. He wants to know if it impacts the company’s finances and how many toys he needs to sell to make a profit. So, he decides to calculate the break-even point.
First, he estimates the cost of the product in terms of the fixed and variable cost:
Fixed Costs = $1,000 (cost of material, equipment etc) per month
Variable Costs = 2.50 per toy produced (labor cost, utility, etc.) per month
Formula to calculate Break-Even Point:
BEP = Fixed Costs / (Sales price per unit – Variable costs per unit)
If Mathew decides to sell the new Robo Rover for \$10 per toy, then the number of units he must sell to reach the break-even point is:
BEP = $1000/($10 – $2.50)
BEP = 134 units (rounded up)
This means Mathew needs to sell at least 134 toys per month to reach the break-even point.