Product Backlog Items (PBIs) are ordered into a sequence in the Product Backlog in such a way that the Product Owner is able to maximize value or more specifically, the return on investment (ROI) of the team.
The very first PBI in the Product Backlog should be the one with the highest expected value considering the effort to build the PBI. There are many ways to calculate this expected value including Return on Investment (ROI), Net Income After Taxes (NIAT), Net Present Value (NPV), etc. The Scrum Team members should be free to ask why one PBI is prioritized higher than another, and the Product Owner should be able to give a reasonable answer. Since the entire Scrum Team is accountable for its work, it is in the best interest of all members of the team to use expected value, so that both the Scrum team and the customer will be committed to the work that is currently being worked on and the upcoming work in the future Sprints. If we don’t order the PBIs by expected value, then the Product Owner is likely to prioritize them based on dates, feelings, urgency, or other less valuable methods. We maximize value, specifically business value, in order to be competitive and have business viability. These other prioritization methods will diminish the trust of the team in the Product Owner and may lead to morale problems.
There are three approaches to determining the expected value and ordering PBIs: qualitative, relative, and analytical. Qualitative approaches rely upon the Product Owner. The Product Owner applies business experience, skill, market research, good sense, and understanding of the technology to determining the order of the PBIs. Relative approaches rely upon various Agile estimation techniques such as Planning Poker or the Bucket System. The Product Owner works with stakeholders such as customers, users, the sales and marketing staff, and the Scrum Team itself to determine both a measure of Business Value and a measure of Effort for each PBI. The ratio of Business Value to Effort is a simplified estimate of Return on Investment for the PBIs. For example, if one PBI has a Business Value of 8 and an Effort of 2, and a second PBI has a Business Value of 4 and an Effort of 2, then by their respective ratios (8:2 and 4:2), the first PBI should be ordered first, before the second PBI. Analytical approaches to ordering the PBIs rely upon complex financial analysis. A Product Owner using this third approach should have a high degree of skill using spreadsheet software and at least basic familiarity with accounting, finance, options analysis and risk analysis. This third approach is rarely used but can be incredibly powerful for creating shared understanding of the business case for each PBI if done in a collaborative manner.
Additionally, the Product Owner must test the results of this ordering by having customers and users provide feedback in the Sprint Review meeting. This feedback is essential to ensure that the Product Owner is not simply performing a long run of speculative guesses only to discover late in the product development that all that speculation is completely wrong. The feedback from customers and users in the Sprint Review is the absolute minimum level of validation of the effectiveness of the ordering. The Product Owner also may be able to test the ordering even more effectively by actually releasing product increments to the marketplace.
The Product Owner is responsible for maximizing the value of the product and the work of the Development Team…. [by] Ordering the items in the Product Backlog to best achieve goals and missions [and] Optimizing the value of the work the Development Team performs; …. The Product Backlog is dynamic; it constantly changes to identify what the product needs to be appropriate, competitive, and useful.