Hurdle Rate
What is a Hurdle Rate in Product Management?
A hurdle rate in product management is the minimum rate of return or profitability that a company requires before investing in a new product or project. It serves as a benchmark for evaluating potential investments and helps product managers make informed decisions about resource allocation.
Synonyms: Minimum acceptable rate of return, Required rate of return, Threshold rate, Cutoff rate
Why Hurdle Rate is Important in Product Management
The hurdle rate plays a crucial role in product management decision-making. It helps companies:
- Prioritize investments: By setting a minimum acceptable return, companies can focus on projects that are most likely to generate significant value.
- Manage risk: The hurdle rate accounts for the risk associated with new products or projects, ensuring that potential returns justify the investment.
- Allocate resources efficiently: It prevents companies from pursuing projects that may not contribute meaningfully to their bottom line.
How to Use Hurdle Rate in Product Management
Product managers can leverage the hurdle rate in several ways:
- Project evaluation: Compare the expected return on investment (ROI) of a new product or feature against the hurdle rate to determine if it's worth pursuing.
- Portfolio management: Use the hurdle rate to balance high-risk, high-reward projects with more stable, lower-return initiatives.
- Resource allocation: Prioritize projects that exceed the hurdle rate when deciding how to distribute limited resources across multiple initiatives.
Examples of Hurdle Rate in Product Management
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A software company sets a hurdle rate of 15% for new product development. A product manager proposes a new feature with an expected ROI of 20%, which exceeds the hurdle rate and is likely to be approved.
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An e-commerce platform uses a hurdle rate of 25% for major platform upgrades. A proposed redesign project with an estimated ROI of 22% may be rejected or require further optimization to meet the threshold.
Frequently Asked Questions about Hurdle Rate
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How is the hurdle rate determined?: The hurdle rate is typically set by company leadership based on factors such as the cost of capital, industry standards, and the company's risk tolerance.
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Can the hurdle rate change over time?: Yes, companies may adjust their hurdle rate based on market conditions, changes in strategy, or shifts in risk appetite.
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What happens if a project doesn't meet the hurdle rate?: Projects that don't meet the hurdle rate may be rejected, redesigned to improve potential returns, or approved with special justification if they align with strategic goals.
