How to Perform a Cost-Benefit Analysis for Features
Do you feel overwhelmed whenever you try to determine whether a new feature is worth the added cost? You’re not alone! Making the right decision is critical for any business, but it can be challenging to know where to start.
Without a clear understanding of each feature’s potential benefits and costs, you may find yourself in a constant cycle of trial and error, making decisions based on guesswork rather than solid data.
Don’t worry, there’s a solution! Performing a cost-benefit analysis is the key to making informed decisions about your product.
Thanks to an efficient cost-benefit analysis, you can determine whether a new feature is worth adding. The analysis considers the costs of developing and implementing the feature and the potential benefits it could bring.
But it can be tricky to know where to start. That is why we have come up with a step-by-step instruction guide to make the whole process easier for you. Ready to take control of your business’s growth?
What Is Cost Benefit Analysis?
The history of cost-benefit analysis dates back to the early 1900s. The first CBA on bridge construction is thought to have been conducted in the 1840s by French engineer and economist Jules Dupuit. That paper attracted minimal attention and didn’t surface again until the 1950s.
However, beginning in 1950, US economist Otto Eckstein developed modern CBA methodologies for assessing water resources and flood control issues, presented in annual Green Book reports. After that, the CBA method became used for an increasing number of public projects.
But what exactly is a cost-benefit analysis?
As Harvard Business School states, the process of comparing the projected or estimated costs and benefits (or opportunities) associated with a project decision to determine whether it makes sense from a business perspective is cost-benefit analysis.
Suppose you are in charge of a booming e-commerce company, and your current customer service employees are failing to keep up with increasing requests. A cost-benefit analysis could assess the benefits of using a chatbot system to respond to standard requests from customers.
As part of this analysis, prospective benefits like the following will get evaluated:
- Improved response time and customer satisfaction
- Calculating the number of chatbots required
- Calculating the expenses of installing the technology and determining whether the anticipated efficiency and customer satisfaction advantages justify the expenditure.
Benefits of Cost-Benefit Analysis
Let us look at the most essential advantages of a cost-benefit analysis:
Prioritizes Taking Actions Based on Data
Through cost-benefit analysis, an organization can rationally assess a decision or potential project without preconceptions. As a result, it provides an impartial and fact-based assessment of your options, which can assist your company in becoming more rational and data-driven.
It may additionally provide project managers with fact-based information to back up innovative project concepts and successfully communicate them to company management.
Unearths Hidden Expenses
A cost-benefit analysis compels you to list all possible expenses and advantages related to a project, which can reveal less evident elements such as indirect or intangible costs. Companies can find out about any hidden costs or expenses they were unaware of earlier by analyzing the total cost of a project.
These costs can involve missed opportunities, like potential profit loss when picking one project over another, and less tangible costs, such as a temporary drop in customer satisfaction when resources get redirected to a specific project.
Nevertheless, conducting a cost-benefit analysis can uncover unexpected advantages, like a boost in employee satisfaction that could enhance overall productivity and work quality.
Simplifies Decision-Making
Navigating business decisions can be pretty complex, but a cost-benefit analysis simplifies things by putting costs against benefits. Even though certain decisions still need careful thought using this method, it generally makes decision-making smoother for companies.
This strategy brings clarity by showing how expenses relate to project outcomes. If you anticipate a project to have more costs than benefits, it’s clear that the investment might not be the best use of time and resources.
Conversely, if the benefits surpass the costs, it’s easier to understand the positive, long-term impact on the company.
How to Perform a Cost-Benefit Analysis for Features
- Lay the Groundwork for Your Evaluation
- Zero In on Your Costs and Benefits
- Determine Monetary Value
- Break Down and Match Up Costs and Benefits
- Formulate Decisions with Insight
Step 1: Lay the Groundwork for Your Evaluation
The first step involves establishing clarity around your goals, metrics, and scope before diving into the specifics of costs and benefits.
When evaluating a new product feature, it’s essential to start by identifying what problem you’re trying to solve or the opportunity you want to capture. In this case, let’s say our goal is to improve customer retention by enhancing the onboarding experience for new users.
From there, we need to decide how we will measure success. For this feature, we could track things like reduced dropout rates after the first week, higher levels of engagement beyond basic account setup, or increased revenue over time from customers who were more invested in our platform earlier on. Aligning our metrics to the goal will help ensure the analysis stays focused.
It’s also crucial to define what will and won’t get included in the analysis. For example, we may limit our consideration to only the development costs of the feature itself and direct impacts on client retention without factoring in secondary effects down the line. Setting clear boundaries upfront prevents scope creep.
With the goal, metrics, and scope established, we’ve laid the groundwork to systematically evaluate how the potential costs of building this new feature may measure against the benefits of addressing our retention challenge. This framework will guide productive discussion and objectively assess whether the feature merits further investment.
Step 2: Zero In on Your Costs and Benefits
To properly evaluate the costs and benefits of a potential business decision or project, thoroughly research and document both sides of the equation is essential. Spending time upfront to compile detailed lists will pay off when it comes time to analyze all the factors.
Start by focusing on direct expenses – these line items are directly tied to implementation, such as materials, labor, software licenses, equipment purchases, etc. Don’t forget indirect overhead costs, like office space, utilities, and subscriptions.
Beyond financial outlays, consider intangible impacts, too. It could include effects on employee morale, customer satisfaction levels, or brand perception. You may also face opportunity costs by choosing one path over alternatives.
It’s also wise to envision potential risks and the costs of dealing with surprises. What if the launch gets delayed? Expenses to remedy unforeseen technical issues? Contingency funds for regulatory compliance updates?
To gather a complete picture, engage stakeholders across departments. Leverage their specialized knowledge of development needs, support requirements, and risk mitigation strategies.
Organize information by category – direct, indirect, intangible, and risk-related. Estimate dollar values where possible, but note qualitative factors for a multidimensional evaluation. Looking back on similar past initiatives can provide a helpful benchmark.
With all pertinent costs and benefits identified and itemized, you’ll have built a solid foundation for the quantitative and qualitative analyses ahead. This upfront workaround due diligence sets the stage for an informed go/no-go decision.
Step 3: Determine Monetary Value
Now, it’s time to put numbers for each item on the cost and benefit lists. You need to evaluate a potential new integration feature.
Direct costs may include engineering labor to build the functionality and sales training materials on new capabilities. Indirect costs like IT system updates and office space can also be estimated.
Revenue gains from new customer acquisitions or expansions with existing clients would represent quantifiable benefits. Market research projections and historical sales data can inform these figures.
Intangibles require creative evaluation. For example, estimating support ticket reductions from an improved UI by analyzing historical change drivers. Or attributing a dollar value per monthly active user increase to gauge user experience enhancements.
Some KPIs like NPS score or client renewal rates may stand in for intangible costs/benefits related to satisfaction rather than attaching a fee. Consistently measuring the same metrics allows “apple-to-apple” comparisons.
The team analyzes past related projects housed in their project management system to boost accuracy.
How did estimated vs. actual engineering hours or new user conversions compare? What unforeseen factors impacted other initiatives? Leveraging real numbers from similar prior work helps capture full cost/benefit scenarios.
With a combination of conservative estimates and data-backed predictions populating the analysis, stakeholders now have an enriched framework to weigh costs against strategic advantages in a quantifiable, like-for-like manner.
Step 4: Break Down and Match Up Costs and Benefits
Now, it’s time to crunch the numbers and see what they reveal. Start by tallying the total costs listed and the total benefits estimated. Subtract costs from benefits to get your net impact – if benefits outweigh costs, there’s potential value here.
Beyond the bottom line, revisit your strategic goals for this project. Does the analysis suggest you’ll achieve what’s important – increasing customer retention or accelerating product adoption? If not, it may not be worth pursuing, even with a positive net value.
Similarly, if costs are higher, consider where you could potentially reduce expenses without compromising results. Maybe certain features or capabilities aren’t essential after all. Finding savings could tip the balance.
For intangible factors measured via KPIs rather than dollars, compare each to your current baseline. A projected 5% decrease in customer churn is meaningful, for instance, even if it is not directly financial.
What if some assumptions were too conservative or optimistic? A sensitivity analysis varying those variables would show how risks might impact your decision if circumstances change.
Overall, a cost-benefit breakdown illuminates what matters most – sustainably achieving your objectives. Given revenue and resource limitations, choosing options with clear upside that advance your strategic goals makes the most business sense. Just be sure to consider all factors, both tangible and intangible.
An excellent roadmap tool is crucial in discerning priorities and focusing on what truly matters, particularly when addressing items that require immediate attention.
Chisel steps into this role seamlessly with its Treeview tool, allowing you to prioritize features based on your analysis effortlessly. Furthermore, Chisel promotes seamless collaboration by providing a platform for team members to express their opinions.
Sign up for Chisel’s Free Forever Version here.
Step 5: Formulate Decisions with Insight
After thoroughly evaluating costs and benefits, it’s up to decision-makers to synthesize learnings and plan the next steps. The culmination of a thorough cost-benefit analysis is using the insights gained to make informed decisions about your product roadmap and features.
At this stage, you’ll want to summarize the key findings from your CBA work. It involves outlining the features that provided the strongest positive ROI and any features where costs significantly outweighed benefits.
Present this information to your product and engineering teams to help guide prioritization and planning.
Highlight features poised to drive real value for customers and the business. Call out areas where additional refinement or alternative approaches may be needed to improve a feature’s cost-benefit profile. The goal is to align stakeholders on opportunities to optimize value through your forthcoming development initiatives.
For instance, if you are an HR management platform, findings from a CBA could show that enhancing the applicant tracking system provides a high ROI by improving the hiring process and hiring manager experience.
However, a proposed overhaul of the benefits administration module may have costs that outstrip potential benefits. It informs delaying that overhaul in favor of readying the ATS enhancements and then reassessing the benefits module. The analysis yields actionable recommendations grounded in real data rather than assumptions.
All in all, the final step of a cost-benefit analysis(CBA) is using the analytical findings to make strategic decisions aligned with value. It optimizes your roadmap and focuses on features offering the strongest returns for your business and customer needs. With practice, CBAs become a powerful ally in evidence-driven product leadership.
A prioritized roadmap is crucial for tracking progress and making necessary adjustments during development, ensuring that the product is delivered on time and within budget. Chisel facilitates this with its Kanban Board, specifically designed to manage tasks, visualize workflow, and enhance collaboration.
With Chisel’s Kanban Board, teams can efficiently organize, monitor, and adapt their work, contributing to a streamlined development process and successful project outcomes.
Sign up for Chisel’s Free Forever Version here.
Key Takeaways
As we revisit the challenge, the need for a systematic approach to evaluating features is evident. Our journey through this article has equipped you with the most essential steps needed to navigate the complexities of a cost-benefit analysis.
Staying on top of cost-benefit tracking and analysis is vital as your product and needs evolve. We recommend checking out Chisel, which can help streamline and automate the CBA process. Chisel’s feature enables robust cost and benefit modeling, tracking ROI metrics over time, and collaborative decision-making.
Chisel’s robust analytics and reporting features take the guesswork out of prioritization. Seeing the full financial picture can ensure your roadmap and development keep delivering the highest returns.