Annual planning: We hate it. But we do it. Why! A Guide for Product Managers
Annual planning: We hate it. But we do it. Why! A Guide for Product Managers
Yes. It is that time of the year. Again. Where most product teams should be measuring what they did well in the year, and what they should focus on in the next year.
Before we begin, here is a thank you to this edition’s sponsor—Amplitude
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I am exhausted. Frustrated.
Yet, I show up to work everyday.
I do everything that is required to keep things going.
I ensure I am creating the impact that is expected of me.
If I were to guess, most PMs and leaders are in the same spot this time of the year. Because we’re all in the middle of Annual Planning—a process that is time consuming, mentally exhausting, but EXTREMELY CRITICAL for a product’s and a PM’s career success!
That is why I do it. That is why most PMs and leaders do it.
Today, I talk about what is annual planning, its importance, and the steps I follow to do it effectively.
What is Annual Planning
Annual planning is a strategic process that sets the direction for your product and organization over the coming year.
It involves identifying the wins and failures from the current year and setting goals focus areas for the upcoming year. It also requires cross functional alignment in all directions (sideways, upwards, downwards.)
The process is usually a little overwhelming and cumbersome, especially when you’re new to it. Yet, it is critical to do.
Why is it important
Effective annual planning is essential for product managers because:
Identifying strengths and opportunities: It helps you understand your wins and fails from the previous year, which becomes a very meaningful input into creating the plan for the next year.
Alignment and collaboration: A clear plan ensures that all teams are working toward the same goals, reducing confusion and enhancing collaboration.
Focus on high-impact initiatives: An annual plan helps prioritize what truly matters. It also ensures resources are allocated to the most impactful projects. And also that resources are not allocated to low-impact or irrelevant projects.
Sets clear targets: An annual plan will always create measurable goals, making it easier to track progress at an org level.
Facilitates communication: Keeps stakeholders informed and engaged, ensuring everyone understands their role in achieving the larger mission.
Drives accountability: Clearly defines deliverables and ownership for those deliverables. It creates clarity that leads to increased accountability across the entire organisation. It also helps teams appreciate how important their work is for the org to be successful in their goals.
If you don’t do annual planning, there is a high chance people stay confused, move in different directions, and are unable to contribute to the larger goals.
Only when you recognise the benefits of doing it, and the pitfalls of ignoring it, will you approach annual planning with confidence and enthusiasm.
And that is the reason, I (and most PMs) still do the process with all our hearts.
What I learned or found interesting this week:
How Netflix makes money and is winning the streaming wars: Netflix recently increased prices and introduced new policies to curb password sharing. Yet its subscriber base and revenue are growing.
Why Microsoft Excel won’t die: The oldest, but the most successful, MS product is still the no. 1 choice for many people and businesses.
Facebook Marketplace powered by artificial intelligence: FB marketplace is now using AI to make the buying/selling experience better!
How to do Annual Planning
Before, I share a list of steps to create effective annual plans, I want to highlight:
The process is very different depending on the organisation size, product maturity, product team size and complexity, and product culture.
The goal is always the same (irrespective of the process you follow): identify wins/fails from current year and decide what to focus on in the next year.
The frequency of creating a plan can also vary. Small-medium companies might do it half yearly. Startups might do it quarterly.
It is important to understand that the process is lesser important than the outcome of the process. So create and follow a process that works for your team, organisation, and desired goals.
With that said, let’s move on to the actual process.
I’ve done annual planning in a few different organisations, and most processes revolve around these 7 steps more or less.
Let’s dive in…
Step #1: Create Focus Areas For The Year
In this step, the leadership team meets and decides the areas they want the company to focus on for the year.
At this stage, the focus areas are intentionally kept broad.
This allows for teams to innovate, ideate, brainstorm, and so on.
For example, the focus areas for a food delivery app could be:
“Become the best food delivery platform in the country.”
“Increase monthly revenue from food delivery by 30%.”
While they are broad, each focus area should have a concrete KPI and goal for each KPI.
This sets the tone of the year. One look at the goals will tell you if the company is planning to be aggressive, defensive, or somewhere in between.
So how do leaders create these tangible goals?
Typically, they analyse historic growth numbers, industry, market, competition, internal data, strengths, etc. to create goals that make sense.
It is critical to create aggressive, but realistic goals.
As leaders, you want ensure that while teams are excited, they are also motivated to work on new ideas in the hope of meeting goals.
If the goals are too aggressive (and hence unattainable) or too conservative, teams will not be motivated. And the chance of achieving the goals will be lower.
Step #2: Align on And Finalise Focus Areas
Step #1, if done well, will result in a long list of ideas.
Then, this is what should happen next:
The executives/leaders discuss in a lot of detail and negotiate which ideas to keep and which to discard. The goal is to get to a list of top X focus areas for the entire organisation.
The leaders, then, share the list with non-executive leaders—such as product heads, engineering heads, business heads, etc. This is their chance to discuss, share feedback, ask questions, and suggest changes.
The final stage in this process is for leaders (executives and non executives) to agree on a final list of focus areas, metrics, goals for each focus area, and clear ownership of which team drives which metric (by how much.)
Step #3: Break-down Focus Areas into Initiatives
At this stage, the primary ownership of the process shifts from leaders to their direct reports i.e. VPs/Directors/GPMs, who then start collaborating with their direct reports i.e. GPMs/SPMs/PMs.
The goal of this stage is to break focus areas into a list of initiatives.
Initiatives, have a little more detail than the focus areas, but not a lot. They detail is just enough for PMs, designers, and engineers to estimate the impact and the cost of building them.
Example: Focus area - “Increase monthly revenue from food delivery by 30%.”
Initiative 1: Introduce a loyalty program to increase the average monthly order frequency by 20% (which will increase the average order value per user)
Initiative 2: Provide real-time order tracking to decrease the total number of user complaints by 10% (which will increase the avg. order frequency per user per week.)
…and so on…
Step #4: Estimate the Impact of Each Initiative
Other than the goals that were created in Step #1, everything till this step is just a theoretical list of ideas.
So now the focus shifts—in this stage, the PMs (in collaboration with their business and analytics counterparts) start estimating the impact of each initiative.
And at this stage, it’s important to ensure that initiatives for each team have the same currency. In larger organisations, this is some times a challenge.
There will always be teams, that own multiple initiatives. Some of those initiatives might measure impact in terms of no. of users, some in $$, some in man-hours saved.
Example: The initiatives in the “Increase monthly revenue from food delivery by 30%.” focus are have multiple currencies. And here I’ll show you (a very simplistic view of) how to convert them into a common currency—dollars (made or saved)
Initiative 1
Introduce a loyalty program to increase the average—monthly order frequency by 20%.
Leads to an increase in monthly orders by 20%.
Every order, on average, has a value of ~$10.
Average order value multiplied by the incremental orders gives us the incremental revenue for this initiative
Initiative 2
Provide real-time order status to decrease the total number of user complaints by 10%
Reduces the total number of complaints by 10%.
Every complaint needs ~10 minutes of a call support agent’s time
Total complaints reduced multiplied by 10 minutes gives us total time saved
Use the total time to calculate the (reduced) number of agents required, and use that to calculate the cost (dollars) saved
However, if initiative #1 and 2 above are owned by different teams, then it might be okay to have different currencies. Currency standardisation is critical only for initiatives within the same team—when the intiaitves are competing for the same pool of engineers, designers, or other teams.
Step #5: Estimate the Cost for Each Initiative
In this step (which can be done in parallel with the previous one), the EMs (engineering managers) create a high-level effort estimation for the initiatives.
Since the initiatives are still broad (with limited details), EMs typically add buffer for vagueness, unknowns, and unplanned events (PTOs, sick leaves, team churn, etc.).
The estimates are also broad, instead of concrete. So the estimates are usually a range like 6-10 weeks, instead of an exact number.
Step #6: Prioritise by ROI
This step is theoretically straightforward—you prioritise all the initiatives based on impact and cost.
However, the real world is never straight forward.
You will have initiatives that are high-cost, medium effort, but have large dependencies on other teams. Or they will have other uncertainties about the market, industry, competition, users.
In such cases, many teams introduce additional variables in their prioritisation approach.
A few that I have used in the past are:
Dependencies: this is a section where you list all the dependency teams. Then, understand from the manager of each dependency team if they will support your initiative in the time frame you need. That information will help you prioritise better. Low support from dependency teams lead to a low confidence level. This gets me to the next dimension…
Confidence level: this is usually a low, medium, high score, which denotes how confident you are in achieving the impact that you estimated in Step #5. This confidence level is based on all the constraints (dependencies, capacity, skill-set,etc.), market conditions, and other unknowns.
Impact realisation: this is usually a time frame (like Q4 2025, or 2026+, etc.) which indicates an idea of when you think ALL of the impact will be realised. If the impact can be realised quickly after building the feature, then you should prirotise it higher (and vice versa.)
Step #7: Finalise and align on initiatives for the year
In this step, product and engineering leaders commit to delivering the select few initiatives.
This final list of committed initiatives is a function of prioritisation and available capacity. For example: the top 5 initiatives might all be high impact, but they need X eng. months of effort. And your total capacity is only 0.7X.
In such cases, you either pick those initiatives that can be done with the available capacity, or you make a business case to increase the capacity (by hiring, reallocating, reshuffling teams, etc.)
The result of this step is a further classification of the initiatives into three buckets:
Will do: Items that you’re confident of delivering within the year given the current/approved capacity.
Might do: Items that you might do if you have more capacity, or if any items in the “will do” category get deprioritized.
Won’t do: Items you won’t do because they are low impact, high cost, or both.
Once you’re done with all of this, you should have finalised and aligned on two crucial things:
List of initiatives you commit to deliver.
Capacity needed in terms of (eng. months, design months, etc.)
That is a wrap!
I hope you enjoyed this and are able to use some of the best practices while you’re doing annual planning for your product.
But before you close this tab, here are a few questions (and their answers) that I get asked when I talk about annual planning!
FAQS
Question #1. What should I do if unexpected challenges arise during the year that affect the original annual plan?
Unexpected market changes or shifting priorities can happen. In these cases, it’s important to remain flexible. Regularly review your progress and reassess the plan as needed, ensuring you’re still aligned with long-term goals.
Question # 2. How can I balance short-term wins with long-term strategic goals?
Annual planning is usually done with the long-term goals in mind. That is how the process starts (with step #1) But it is important that when you go through the step 3-5, you also think about short-term wins. And create a balanced list of initiatives at the end of the process.
Question # 3. What metrics or KPIs should I use to measure success throughout the year?
It’s essential to set clear KPIs (metrics) and goals for each initiative during annual planning. Regular check-ins on these KPIs will help track progress and ensure that your team stays on course to meet the goals outlined in the annual plan.
Question # 4. How do I maintain cross-functional alignment after the plan is set?
Cross-functional alignment doesn’t stop with planning. Continue to hold regular alignment meetings with key stakeholders across different teams to ensure everyone is focused on the same goals and initiatives.
Question # 5. How should I manage dependencies between teams during execution?
Clearly identify all dependencies during the planning process. Keep an open line of communication with the teams involved to ensure that timelines and resources are aligned, and address potential blockers early on.
Question # 6. What if my team is small and we don’t have the capacity for extensive annual planning?
Smaller teams or startups can still benefit from this process. In case you’re a smaller team or company, try shorter frequencies like quarterly or half-yearly.
Question # 7. Are there any tools or frameworks that can help with annual planning?
Yes! Tools like OKRs (Objectives and Key Results), roadmapping software, and project management tools can support the planning process, making it easier to track progress and adjust as needed throughout the year.