Why Products Go Broke
Read on my website / Read time: 8 minutes
Jay, the Product VP, had a great year.
He had helped his startup company exceed its revenue goals. Margins were solid. Customer reviews were glowing. The founders were delighted. And, for the first time in a while, he felt like there was real breathing room for him and his team.
Flush with optimism and a bit of mojo, Jay decided it was time to level up. So, he did what a lot of product leaders do after success: he started spending.
First came the expanded roadmap: slick new features, shiny new UI, fancy new integrations, and an up-scaled tech stack.
Then came the new tools, new systems, new processes, new research.
Finally, came the increased headcount: new PMs, new designers, new engineers.
When he was done, he had doubled the budget overnight.
Was any of it bad? Not necessarily.
The problem was that none of it generated revenue. Nor did any of it make the business more resilient.
So, when the company missed its first quarter sales target the following year and lost a few key deals to competitors, Jay suddenly found himself being squeezed. The new hires he had planned were frozen. Finance paused approval for the new tools he wanted. He faced pressure to redirect the roadmap toward features that would win deals now — the things he had originally wanted to do could be pursued "maybe later."
What happened?
Jay hadn't spent recklessly.
He had spent without strategy.
Some products fail because of poor market fit. But many fail because they go broke.
This doesn't happen on purpose. They go broke because its stewards confuse momentum with margin and spending with being strategic.
Jay's experience frames the difference between intentional investment and expensive distraction. And often, products and product teams are fraught with these types of decisions.
Individual contributor product managers are just as guilty of this.
Every recommendation we make, whether it's a new feature, a tool, or a headcount increase, represents a spending decision. Even when we're not directly controlling the purse strings, our choices ripple through the organization's finances.
It's easy to fall into lazy thinking:
- "We're an $X million/billion company. Surely we can afford this."
- "Everyone else has this. Why not us?"
- "Our roadmap is huge. We can't get it all done. We need more people, now."
This is a trap. Because when we fail to think strategically, we risk being seen as wasting capital, which erodes trust, and slows down real progress. Not just for our products, but for our careers.
So, today, I'm going to give you a crash course in the types of business spends for a product. Then, I'll share an alternative approach that I discovered.
5 Types of Product Spending
A product is a capital investment. As its stewards, it's our job to manage this investment to provide the greatest ROI possible. So it's important we understand the different types of spending for a product. They fall into 5 categories:
- Essential Spend: This is baseline operating expenses for a product — the things that "keep the lights on". In other words, the costs necessary to maintain existing product operations, like hosting, security, customer support tools, bug fixes, compliance work, etc.
- Reactive Spend: Unplanned spend triggered by urgency, surprise, and/or emotion. Sometimes this spend is necessary, but even when so, it's rarely optimized.
- Unintentional Spend: The forgotten stuff. Old tools, auto-renewed contracts, and duplicate services. Slowly draining the margin while no one's watching. This can happen as products and teams scale.
- Discretionary Spend: This is where product leaders have more choice. Things like new tools, consultants, conferences, team off-sites, experiments, or feature investments that aren't essential but could create value. Typically, the smaller the company, the less the discretionary spend.
- Strategic Spend: Thoughtful, ROI-oriented, and tied to our long-term objectives. Investment intended to drive growth, like creating a durable competitive advantage, launching a product line, a major platform investment or game-changing tech, building data moats, or entering new markets. Typically funded from strategic cash allocated in the operating budget, and not from leftover operating surplus.
The first 3 are unavoidable. Discretionary Spend is a luxury, one often afforded once the product has scaled and has sufficient and profitable market penetration. It's also the easiest one to spend — including when we don't actually have it.
Growth and long-term product success is fueled by only one type of spend: Strategic Spend.
So, let's talk about it.
Strategic Spend isn't defined by the size of the purchase, the number of resources, or the length of a project. Strategic spend defined by the intent behind it. Let's break this down:
- Intentional: the spend is part of a deliberative plan or decision, not a hunch.
- ROI-Oriented: there is an expected benefit for the spend, typically quantified, if not directly, then at least directionally.
- Strategically Aligned: the spend is tied to our business objectives or core initiatives (which can include a relationship with a key client or partner).
- Certainty: the more certain we are in the expected benefit, the greater the chances of realizing the ROI.
This isn't about quantifying everything in terms of a dollar return. ROI can be a hard or soft return. For example, while not every feature directly delivers revenue, it is possible to assess the economic value of a new feature.
Even cultural type returns are ok as long as they're intentional and tied to our strategy. So, that random "team bonding" trip to a vineyard that we like to chalk up to "cultural ROI" isn't really strategic. It's discretionary. That 2-day in-person strategy workshop, however, may be strategic if it's intentional and tied to our strategy and business goals.
The 3 Types of Strategic Spend
I had a CFO who was a kind mentor to me. He taught me to think of strategic spend in three categories:
- Growth-generating
- Risk-reducing
- Efficiency-boosting
Growth Generating
Spend that's designed to drive growth — revenue and margin. We're betting that every dollar in will produce more dollars out.
Here are some examples:
- Spending that positions our product as the category-defining solution.
- Spending that creates barriers to entry or raises the cost or difficulty for competitors to challenge our product — e.g., proprietary data, technology infrastructure, ecosystems.
- Spending that creates sustainable cost advantages, allowing our product to operate more efficiently at scale that truly reduce operational cost per unit over time.
- Product investments that reduce sales cycles or accelerate time-to-delivery.
- Tooling to optimize pricing for market segmentation, scaling revenue with usage, increase ARPU, or maximize margins.
- Product onboarding improvements.
- Investments in self-serve tools to reduce customer team adoption friction or enable account expansion (e.g., team invites, roles and permissions).
- In-app up-sell and cross-sell triggers.
- Churn reduction features.
- Same product, new market.
- New product, same market.
- Product localization to make it usable in new geographies.
- Accessibility improvements.
- Strategic partnerships.
- Customer co-development opportunities.
The key with these are to ensure we're measuring the ROI by choosing metrics that align with our goals and what we're implementing, so we can do a post-mortem and see how good or bad our assumptions were and course-correct as needed.
Risk Reducing
Spend that's meant to protect the downside or prevent a bigger problem down the line. These investments may not drive immediate growth, but significantly reduce the possibility, cost, or impact of future problems. These risks may be financial, technical, legal, operational, reputational, or strategic.
Some examples:
- Contractual SLA support or guarantees.
- Paying down tech debt.
- Infrastructure resiliency and disaster recovery.
- Upgrading cybersecurity, especially after signing larger clients or government clients.
- Building redundancy into critical systems or key-person dependencies.
- Data privacy compliance.
- Accessibility compliance.
- Meeting industry compliance regulations.
- Account recovery and identify verification.
- Abuse prevention and incident response.
- Platform or API versioning.
- Governance procedures.
- Diversifying suppliers and vendors to prevent operational choke points.
- Adding liability insurance as we scale our offerings.
These are not sexy, but are necessary to build a resilient product and business.
The strange thing is they're either easy to ignore, because they don't lead to more revenue, or over-emphasize too early in a product's growth journey.
For example, a $10M growth startup in healthcare can easily invest its entire R&D budget in making its product super resilient. But it will come at the cost of growth, and the startup will quickly face extinction. Balancing growth-generating vs risk-reducing investment is a constant tension for product leaders.
Efficiency Boosting
Spend that increases output without a proportional increase in input. These investments help you do more with the same or do the same with less.
Examples:
- Building dashboards to reduce time spent digging through data.
- Internal tooling, CI/CD pipeline improvements, and automating workflows to cut down dev time, reduce cycle time, improve deployment reliability, and reduce manual burden.
- Implementing a system to improve team throughput.
- Implementing feature flags to enable safe rollouts and experimentation without separate deployments.
- Outsourcing development for cost-efficiency while improving or maintaining production quality.
The key to efficiency-boosting spend is increasing leverage. We want to deliver more value, more output, or faster progress without a linear increase in time, effort, or cost.
Thus, this type of spend is strategic if it can provide a measurable ROI, measured in time savings (which can be economically quantified), throughput, or margin improvements.
So, given the 3 types of Strategic Spend, how do we evaluate this spend as a Product team?
Evaluating Strategic Spend
We don't need to start by creating some complicated spreadsheet. We start by asking some basic questions:
- What are we trying to achieve?
- What type of spend is this? (Revenue, Risk, Efficiency?)
- What's the ROI?
- How fast can we achieve that ROI?
- Is this the best way to get that return?
In Product Management, we're often comparing strategic investments against each other. When doing so, in addition to comparing the expected return, we need to consider two other factors:
- Certainty: How confident are we in achieving the expected return? This can include feasibility or level of effort.
- Strategic Alignment: How well does this fit our business goals?
A key consideration as part of Strategic Alignment is the stage of our product or business. For example:
Pre-revenue product:
The goal is to get to revenue — to get to Customer 1. Revenue-generating investments, including risk-reducing ones that enable revenue generation (e.g., HIPAA compliance in healthcare), will be priority 1.
Pre-product/market fit:
The goal is to get market traction — to validate that we've built the right product that our target customers will buy in droves. Here again, growth-generating investments will be prioritized. Many startups even sacrifice profitability in the short-term.
Post-product/market fit growth:
Product/market fit has been achieved, so the focus is on accelerating growth. Major investments will be made in sales and marketing, so product and R&D investments tend to continue to be more focused on revenue growth while keeping risk within reason.
Scale:
The product is growing. Customers are buying and re-buying, usage is growing. Here's where efficiency boosting and risk reducing investments typically get more focus as the company chases profitable scalability.
If you like math and frameworks, here's a simple one you can use to evaluate different strategic opportunities:
ROI Score = Expected Return x Certainty x Strategic Alignment
Rate each opportunity on a scale 1-5 across each dimension to get its final score. It doesn't have to be perfect. It's just a more thoughtful approach than guessing.
Whether you use this framework or not, the key is to start with the questions above and you have a simple process to help you make these decisions.
Some additional optional questions to ask:
- What happens if we don't do this now / delay this 90 days?
- What would it take to get this done faster?
- What happens if we redirect this money elsewhere?
Again, we need to keep in mind that this isn't about budgeting every dollar. It's about intentionality applying this approach to our biggest, most important investments.
Action Steps
Our spend tells the story of our strategy.
The problem with Jay's story is that his spending didn't tell that story. It told a story of naive optimism caused by momentum, of reacting to success with complexity, instead of strategic necessity.
Some ideas aren't bad. They may just be bad right now.
Product Management isn't just about avoiding dumb decisions. Our job as product leaders is to turn precious capital into clarity for growth.
So, the next time you're thinking, "Why can't we afford this?", instead ask, "What return will this create?"
Spend with purpose. Invest with clarity.
And never let success put you in a worse position.
