Risk Prioritization – Important = Business Impact * Uncertainty

Risk Prioritization by Tristan Kromer

What does the word important really mean?The most important thing is know what important means, risk prioritization

It may seem silly, but how we define “important” defines how we spend our days. Teams can get stuck in endless meetings where we debate what’s important without actually doing anything about any of it.

Does important mean…

  • Dealing with customers?
  • Growing?
  • Getting an investment round?

Does it mean…

  • Running the business?
  • Scaling the business model?
  • Learning?

Important as an equation

As part of the 2×2 prioritization process we use (very similar to Dan Toma’s Five Steps to Prioritization that Actually Work), one axis is More Important vs. Less Important. We use this process to prioritize just about everything, but for a startup, we use it to prioritize questions about our business model.

These are questions like:

  • Who is our customer?
  • Will adding a search function increase user engagement?
  • Our office lease is expiring in two months! Where will we work?
  • Will they pay $19.99 for a one month subscription?

To prioritize effectively as a team, we need to agree on what important means. So here’s our definition as an equation:

Important = Business Impact * Uncertainty

Business Impact

business impact is a key component of importanceBusiness impact is fairly straightforward. If the answer to the question might kill our business, then it’s very impactful.

  • Who is our customer?

Critical business impact! If we don’t know who the customer is, we can’t find the right marketing channels to reach them and we can’t sell to them. We can’t talk to them or test things with them.

Without the answer to this question, we have nothing and our business is dead.

  • Will adding a search function increase user engagement?

Less impactful. The users are already using our product, so adding this feature will give us more engagement, but even if the answer to this questions is “No, a search function will not increase user engagement” then we still have something and can survive for at least a bit longer.

  • Our office lease is expiring in two months! Where will we work?

Zero business impact. We’re a small team and can work from coffee shops!

  • Will they pay $19.99 for a one month subscription?

High business impact! If they are not willing to pay, we’ll have to make some big changes to our business model.

Of course, if our business is a bit further along, we could have already run some tests, which brings us to…


The Uncertainty of Schroedinger's CatHow much do we know? What don’t we know?

  • Our office lease is expiring in two months! Where will we work?

Highly uncertain! We have not even begun looking for an office space so the answer to this question is completely unknown.

It’s helpful to think of uncertainty as ranging from 100% uncertain to 0% uncertain which is the same as completely known.

Hint: Nothing is ever completely known.

  • Will they pay $19.99 for a one month subscription?

Perhaps we already ran a test showing the customer is willing to pay $15.99 for a one month subscription. Our costs are known at $5.99 per month per customer, so this question has a pretty high impact on our business model, but is less uncertain.

The customer has already shown a willingness to pay something, and $4 per month isn’t a huge leap. So we might view this as 25% uncertain.

If we know that a close competitor has an inferior product and is already charging $18.99 for a one month subscription then the answer to this question is even less uncertain. Perhaps only 5% uncertain.

  • Who is our customer?

If we have users, but don’t really understand who they are and have never talked to them, the answer to this question is highly uncertain.

We may have some rough demographic data, but demographics don’t tell us about the mindset of the customer! So we’d still rate this a highly uncertain question. Perhaps 90% uncertain.

  • Will adding a search function increase user engagement?

Since we haven’t talked to the customer and don’t understand their motivations, the answer to this question depends on the answer to “Who is our customer?” and also to “What are the goals of our customers?” So we’ll rank this as 99% uncertain.

Hint: The numbers are just examples, this is not an exact science. They’re just a conceptual aid so don’t pretend a false degree of accuracy here.

Together, these two factors define importance in risk prioritization…

Important = Business Impact * Uncertainty

Important is a function of business impact times uncertainty

  • Who is our customer?

Critical business impact * 90% high uncertainty = very very important!

We need to figure out how to answer this question right now. (Probably by going and talking to them.)

  • Our office lease is expiring in two months! Where will we work?

100% highly uncertain, but no business impact at all.

Remember from math class that any big number multiplied by zero is still zero. 100% uncertainty * 0 business impact = not important

  • Will they pay $19.99 for a one month subscription?

High business impact, but only 5% uncertainty. Remember we have some information here already. So this is certainly important, but a big number times a small number is going be somewhere in the middle.

Hint: Again, the percentages for uncertainty are just examples to make the equation clear. It’s not that precise.

  • Will adding a search function increase user engagement?

99% uncertain but less impactful. So all in all, not the most important thing.

Spend your Time Wisely

Spend your time on the important things!Regardless of what method of risk prioritization we use (there are plenty of great methods), we need to agree on how we define importance. Otherwise, we’re bound to spend hours debating when we could be doing something actually important with our time.

Update: We made a Risk Prioritization Template here. It’s a template to analyze risks (including moral hazard) to experiments and brainstorm ways to mitigate them.

Discussion (1 comments)

  1. Roger L. Cauvin says:

    “Business impact” can lead you astray when evaluating the importance of roadmap items and other tactical product decisions. See this post I wrote about prioritizing last year.

    Business impact should determine your product strategy hypotheses and MVP. But once you have those hypotheses, progress towards implementing and testing the product strategy should guide tactical decisions, not a re-evaluation of business impact.

    When we determine a preliminary unique value proposition for a product, we do so on the basis of what we believe will have the most business impact. But when we decide on a feature to include in our product, we should evaluate it in terms of support for the unique value proposition we’ve already chosen for its business impact.

    Uncertainty is, indeed, another key part of the evaluation. We should ask what we will learn about our product strategy by moving forward with an experiment or other product decision.

    In short, business impact should guide strategic product decisions, but not tactical ones, at least not directly.

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