Product success

How do you know if your product is going to be successful?

How do you know if your product IS successful?

When I ask product managers this question, I get answers like these:

“We regularly ask our customers for feedback on our product.”

“We have a customer satisfaction metric that we measure.”

“We look at usage — customers who are logging in and using the system.”

“We measure conversions from free/trial to paid users.”

Those are very valuable data points. Good things to measure and track.

But none of those things tell you if your product is actually going to be successful.

Because they don’t answer the most fundamental question about the success of your product:

Is your product PROFITABLE? 

Said differently:

Can you make more profit from your customers than it costs to acquire them?

And that’s what unit economics is about.

Unit economics makes it possible to project whether your product will be profitable.

Because, quite simply, you could have great customer satisfaction, high usage, lots of positive feedback…

But if your product isn’t profitable, you won’t have a business.

So as a product manager, in order to truly measure the success of your product, you need to understand the underlying unit economics of your product.

What are unit economics?

Unit economics are the direct revenues and costs associated with a particular business model expressed on a per unit basis.

What’s the basic unit for your product?

For a SaaS product, it’s usually users, customers or accounts. And the unit economics are:

  • Lifetime Value (LTV): The average revenue a customer will bring in during the entire duration of using your product. Sometimes also called Customer Lifetime Value (CLTV or CLV).
  • Customer Acquisition Cost (CAC): How much it costs to acquire a customer. Sometimes also called Cost per Acquisition (CPA).

LTV and CAC are critical drivers of a SaaS product’s growth and success.

To the extent that LTV exceeds CAC, your product will be successful and you will have a business.

So LTV is a measure of your product’s sustainability: will it make a profit and continue making a profit.

In other words:

LTV is a prediction of all the value a business will derive from its entire future relationship with a customer expressed as net profit.

As a very simplistic example, let’s say on average your customers stay with your product for 24 months and pay $50/month. Then your average LTV is 24 * $50/month = $1,200.

If customer lifetime increases to 28 months, LTV at the same monthly recurring revenue is 28 * $50/month = $1,400. Nice.

If average monthly recurring revenue increases to $75/month, LTV at the same customer lifetime is 24 * $75/month = $1,800. Even better.

But in any of those cases, if it costs $1,000 to acquire a customer, your product’s longevity may be at risk.

(Note: This overly simplistic example doesn’t consider churn, which is a critical factor in the sustainability of your product’s profitability. We’ll get to that in another post.)

So ideally, LTV is way more than CAC.

This balance is INCREDIBLY important for a SaaS product, and good product management involves being mindful of the competing forces that affect this balance.

So how can you, as a product manager, affect this balance?

Let’s first talk about how to calculate LTV. There are several formulas, each of which is just a different approach to do the same calculation:

LTV = ARPU * Gross Margin * (1 / Monthly Churn)

LTV = ARPU * Average Customer Lifetime – Cost to Serve


  • ARPU = Average recurring revenue per user (or customer or account) = Total Net MRR ÷ number of customers
  • Gross Margin = (Revenue − COGS) / Revenue
  • Customer Lifetime = average number of months we expect a customer to use the product (i.e., before they churn)
  • Cost to Serve is basically COGS (i.e., cost of goods sold), and typically can include hosting and monitoring costs, infrastructure costs, licenses and royalties for 3rd party embedded apps, credit card fees, commissions to affiliates and partners, support, etc.

Driving up LTV can have a significant impact on your product’s success.

Let’s say Customer A is on a $100 monthly plan. We expect them to churn after 1 year.

LTV = $1,200.

Customer B is also on a $100 monthly plan and expected to churn after a year, but upgrades to a $150 monthly plan in month 4 and then again to a $200 plan in month 8.

LTV = $100 * 3 + $150 * 4 + $200 * 5 = $1,900 — a significant difference!

BTW, customer B upgrading is called expansion revenue, and it’s pretty sweet!

And understanding the LTV formulas makes it really easy to pinpoint which areas need improvement. (Because math.)

As a product manager, you may have little control or influence over CAC (because you don’t control sales or marketing).

But there ARE a number of ways you can impact LTV:

  • Increase average revenue per user (ARPU).
  • Increase customer lifetime — i.e, get customers to “stick” with your product longer.
  • Drive expansion revenue from existing customers.

You have a number of levers to impact these numbers.

The obvious one is to identify new features, experiences, and improvements to your product that will help increase these numbers.

You can look at offering different feature mixes in various pricing packages, or build “upgrade incentives” into the product itself, etc.

You can also segment your customers by LTV and double down on the more profitable ones or the faster growing segments by targeting them with specific features, pricing options, or other valuable services.

Let’s look at a couple of examples that bring these concepts together.

Let’s say you manage a project management SaaS product that caters to two customer segments:

Customer Segment MRR Customer Lifetime LTV
Smaller teams $50/month 24 months $1,200
Larger, enterprise teams $500/month 36 months $18,000

To keep things a bit simple, we’ll assume churn and the cost to serve each segment is the same.

Now, on the surface, looks like enterprise customers are the more valuable ones. They pay more and stay longer.

But on further analysis, you find the cost to acquire an enterprise customer is $6,000, while the cost to acquire a small team is just $240.

CAC for enterprise customers is a third of their LTV, whereas CAC for smaller customers is just 1/5th of their LTV.

This means it costs 25 times more to acquire an enterprise customer but they’re only 15 times more profitable.

So turns out smaller customers are actually the more profitable segment!

LTV for enterprise customers would need to increase to at least $30,000 to be just as profitable as smaller customers (assuming no change to CAC or churn).

It would seem to make sense to direct your product strategy toward pursuing features and experiences for smaller teams that could minimally protect their lifetime value and ideally increase it and/or their MRR.

Alternatively, you may believe it’s better to focus on increasing LTV for enterprise customers. You could define a product strategy that targets increasing LTV to at least $30,000 by increasing either their customer lifetime to 60 months (maybe they’ll sign 5-year contracts?) or your price to $833/month (will they pay that much?). You can then craft a product roadmap that identifies features and services that will justify the longer contract commitment or higher price point.

Let’s take another example.

Again, you manage a SaaS project management product. Customer lifetime is 24 months, and LTV is $1,200 on an MRR of $50/month.

Because you’re a smart, intrepid product manager, you do some digging and discover the following:

% of customers Lifetime LTV
20% 30 months $1,500
30% 24 months $1,200
50% 18 months $900

Wow — half your customers are actually churning in just a year and a half! Your product’s profitability is actually being propped up by just 20% of your customers.

So maybe you should double down on the 20% segment, encouraging sales and marketing to focus their efforts on acquiring more of the same kinds of customers, and define a product roadmap that delivers features and capabilities that could help acquire more of them.

Alternatively, or in addition, you could try to identify any gaps in your product portfolio that are causing customers in the 50% segment to churn so quickly, and get the relevant solutions prioritized on your product roadmap.

Remember that our primary job as product managers is to drive sustainable business growth.

I’ve talked about how MRR and ACV bookings are key metrics for a product manager to measure the demand and growth of their SaaS product.

LTV helps you measure the sustainability of your product.

In other words, the key question of will it be successful?

So if all you’re doing is gathering qualitative feedback or measuring usage, customer satisfaction, or things like that, you’re NOT getting the true measure of whether your product is successful.

Those ARE important to measure. But they are NOT the ultimate measure of your product’s success, which is simply:

Is your product PROFITABLE? 

Unit economics help you understand this.

By analyzing the unit economics of your product, you can highlight opportunities, expose gaps, and identify optimal strategies for maximizing the profitability (= success) of your product.

BTW, I’ve created this helpful 2-page SaaS Metrics Quick Reference Guide for Product Managers that you can download totally for free. Print it out, post it on the wall of your cube or office so that way you have it conveniently available as a reference at all times.

Get the SaaS Metrics Quick Reference Guide for Product Managers >>

Your #1 KPI as a product manager

What’s the #1 metric you need to track as a product manager?

What’s the #1 KPI you should sign up for as a product manager?

It’s not on-time delivery, the number of bugs or features per release, innovation success, speed-to-market, sprint velocity, uptime, or even customer satisfaction.

Those are interesting to track, but none of them are #1.

It’s important to remember that our primary job as product managers is to drive sustainable business growth.

To do this, it’s not just important for us to deliver customer value, but monetizable customer value — products, features, capabilities, services that customers will pay for and continue to pay for.

Product management as a function is about sustainably managing and growing the customer value monetization process.

Meaning the process by which we create and deliver monetizable customer value.

And so as product managers we need to deliver monetizable customer value in a way that drives sustainable business growth.

On-time delivery, features or bug per release, sprint velocity, uptime, etc. — none of these metrics help us measure how successful we are in doing this.

So if our job is to drive business growth through the delivery of monetizable customer value, then the #1 KPI a product manager needs to track is sustainable growth.

That means product management and product managers should sign up for the business metrics that best measure customer demand and market growth for our products.

For a SaaS product, that boils down to two key metrics:

  1. Monthly/Annual Recurring Revenue (MRR/ARR) or its cousin Annual Contract Value (ACV) Bookings
  2. Customer Lifetime Value (LTV or CLTV)

The first is a measure of the demand and growth of your product.

The second is a measure of its sustainability.

I introduced these in an earlier post. In this post, let’s take a deeper look at MRR and Bookings. I’ll discuss LTV in another post.

Let’s start with MRR.

Monthly Recurring Revenue (MRR)

Monthly recurring revenue is the total amount of predictable revenue a company expects on a monthly basis.

Annual recurring revenue or ARR is simply MRR multipled by 12.

MRR is typical for a monthly subscription business, and many SaaS companies follow this model: MailChimp, Hubspot, Basecamp, Jira, ConvertKit, to name just a few.

MRR is the purest measure of revenue and a key indicator of growth for a SaaS product. The month-over-month percentages give a good status check of whether momentum for your product is building or waning over time.

When MRR is relatively consistent and predictable, it’s a crucial financial metric to use in financial forecasting and planning. For example, to use as part of your ROI analysis when putting together the business case for a product idea.

How To Properly Calculate MRR

At first, calculating MRR may seem as simple as multiplying the total number of customers by the average amount they’re paying per month.

But if that’s all you do, you’ll be making a BIG mistake.

Not calculating your MRR/ARR correctly can cause you to misjudge the true health and trajectory of your product.

The calculation is as follows:

MRR at the beginning of the month
MRR gained from new customers during that month
Additional MRR gained from existing customers who upgraded that month

MRR lost from customers who downgraded that month

MRR lost from customers who churned that month

ARR = MRR * 12

Things to include in your MRR calculation:

  • All recurring revenue, including monthly subscription fees and any additional recurring charges for extra users, seats, etc. (based on your pricing model).
  • Upgrades — i.e., customers who upgrade to a higher paying plan.
  • Downgrades — i.e., customers who downgrade to a lower paying plan.
  • All lost recurring revenue — i.e., customers you’ve lost, including any additional recurring fees they were paying for extra users, seats, etc. (based on your pricing model).
  • Discounts — for example, if your customer is on a $100/month plan, but pays a discounted rate of $75/month, that customer’s MRR contribution is $75, not $100.

Things NOT to include in your MRR calculation:

  • One-time charges — like setup fees, implementation charges, one-time upgrade fees, etc. They’re not recurring. You don’t expect to receive them on a regular basis.
  • Non-recurring add-ons — again, not recurring.
  • Subtracting transaction fees and delinquent charges. This may be tempting in order to be more conservative and “accurate”. But while well intentioned, it will result in misleading results. Transaction fees are an expense, not a loss in revenue. A delinquent charge technically means you didn’t collect the subscription from the customer. Both should be separated out and represent optimization opportunities.
  • Recurring costs, COGS and other expenses — MRR is a revenue growth metric, not a profitability metric, so don’t include costs.
  • Trialers — these are folks who have signed up to trial your product. They haven’t paid you yet, have they? So they don’t count toward MRR. Once they pay you, they count.
  • Bookings — This a common mistake. We’ll discuss bookings in a bit.

It’s important to understand that MRR is a metric that allows you to measure momentum and growth, and so should be kept as pure as possible. That means non-recurring fees and expenses should be kept out of it.

Product Teams Need to Focus on Net MRR/ARR Growth

Sales and marketing teams will typically be incentivized to focus on new MRR/ARR — meaning adding new customers every month (or year).

Customer Success teams will typically be incentivized to defend against MRR churn by focusing on retention and/or expansion MRR/ARR (i.e., getting existing customers to pay more).

Product teams need to be incentivized to develop features and experiences that drive both new MRR and defend against MRR churn — i.e., net MRR growth.

Product teams need to focus on net MRR growth – from SaaS Metrics for Product Managers

This is where we get to the heart of the matter.

By focusing solely on new MRR, it could lead the product team to believe MRR is growing at 30%. But that would be misleading!

The more accurate growth rate is 15%. So the product team needs to focus on downgrades and churn as well.

What’s the point of building new features if new customers aren’t subscribing or existing subscribers don’t keep paying every month?

How do you know if those features are attracting new customers or keeping the existing ones happy?

And BTW, by “happy” I mean “continuing to pay you money for your product”!

Bottom line: For a subscription based SaaS product, your #1 KPI as a product manager should be net MRR growth.

Next, let’s talk about Bookings and ACV Bookings.

Bookings and Annual Contract Value

Simply put, a booking happens when a customer agrees to spend money with you.

In B2B enterprise SaaS businesses, it’s typical for a customer to sign a contract. The booking exists when the customer signs the contract.

So bookings are the total dollar value of all new signed contracts — it’s the sum of all revenue promised to your business through any contracts signed.

It’s typically expressed as an annualized number even if the agreement period is longer than a year. Hence, Annual Contract Value or ACV.

A contract doesn’t have to exist, though, to have a booking. In a month-to-month subscription model, a booking exists when the subscriber signs up for a month of your SaaS offering — the subscriber has committed to that month of service without having signed anything.

In this case, bookings are typically an annualized recognition of expected recurring revenue, i.e., MRR/ARR. (And so ACV is pretty much the same as ARR.)

Why ACV Bookings is a Critical Metric

ACV bookings are a measure of the market demand for your product.

In other words, bookings tell you how the market is responding and committing to your product. As such it’s an important metric for measuring the growth and success of your product.

In other words, how do you know the features and user experience you’re delivering are actually resonating with customers? That’s what ACV bookings tell you. Because if those features and experience don’t resonate with customers, they won’t commit to spending money on your product.

Bookings also allows you to understand your expected revenue and cash flow. For example:

  • Let’s say in a given month 20 customers sign 1-year agreements committing to pay $20K each.
  • This means you know you can expect $400,000 in revenue over the course of the next 12 months.
  • You add some cool new features to the product, and the following month 30 customers sign $20K one-year agreements
  • This means you can expect $600,000 in additional revenue over 12 months from these customers.
  • So ACV bookings went up 50%, expected revenue went up 50%, which means the business is growing!
  • This is a great indication of the value your product (and your efforts) are delivering to the business.

In addition, for a SaaS product requiring customer contracts, tracking ACV bookings allows you to track growth without having to worry about when the customer actually pays (i.e., the precise payment terms, which can vary contact-to-contract). Let your accounting department worry about that.

The things to include and exclude in calculating bookings are the same as those for MRR.

Difference Between Bookings, MRR, and Billings (or Cash)

It’s important to understand the difference between these metrics so you don’t get tripped up with how your finance department looks at revenue.

Let’s take the following example:

In the table above:

  • Customer A signed up for the $50/month Basic plan and decided to pay monthly.
  • Customers B and C signed up for the $100/month Premium plan and decided to pay annually.
  • Customers D and F signed up for the $100/month Premium plan and decided to pay monthly.
  • Customer E signed up for the $50/month Basic plan and decided to pay annually.

Here are what the metrics look like:

Can you see the difference? Customers A and B were acquired in January. Their accounts represent ACVs of $600 and $1,200 respectively. So that’s a bookings of $1,800 in January. Customers C and D were acquired in February. So

Customers A and B were acquired in January. Their accounts represent ACVs of $600 and $1,200 respectively. So that’s a bookings of $1,800 in January.Customers C and D were acquired in February. So

Customers C and D were acquired in February. So that’s a total ACV bookings of $2,400 in February.

In February, there was no churn and two customers were acquired. So MRR went up to $350.

Unlike Bookings or MRR, Billings is when you actually collect money from your customers. Customer A paid $50 for January, but customer B paid $1,200 for the entire year. That’s a cash inflow of $1,250.In February, customer A paid $50, because that customer is making monthly payments. Customer B

In February, customer A paid $50, because that customer is making monthly payments. Customer B paid nothing because that customer already paid for the entire year in January. Customer C signed up and paid $1,200 for the entire year. Customer D signed up, but only paid for that month. So Billings for February $1,350.

Product Teams Need to Focus on ACV Bookings

The nice thing about ACV Bookings is it aligns the interests of both sales and product teams. Because bookings is a measure of market demand and acceptance, it’s a relevant business metric to use to motivate the product team to continuously develop amazing features and user experiences to increase committed contracts.

Bottom line: While applicable for any SaaS product, particularly for contract-based SaaS products, your #1 KPI as a product manager should be ACV Bookings growth.

Key Takeaway

Remember: Your primary job as a product manager is to drive business growth through the delivery of monetizable customer value.

So the #1 KPI a product manager needs to track is sustainable growth.

For a SaaS product, that boils down to two key metrics:

  1. Monthly/Annual Recurring Revenue (MRR/ARR) or its cousin Annual Contract Value (ACV) Bookings
  2. Customer Lifetime Value (LTV or CLTV)

So for a subscription based SaaS product, your #1 KPI as a product manager should be net MRR growth.

And for a contract-based SaaS products, your #1 KPI as a product manager should be ACV Bookings growth.

BTW, I’ve created this helpful 2-page SaaS Metrics Quick Reference Guide for Product Managers that you can download totally for free. Print it out, post it on the wall of your cube or office so that way you’ll have it conveniently available as a reference at all times.

Get the SaaS Metrics Quick Reference Guide for Product Managers >>

SaaS product management

It’s amazing how often product managers forget a simple, yet fundamental truth:

Our job as product managers is not just to build features users want…

Not just to prioritize the roadmap…

Not just to spend time talking with customers…

Not just to ensure a successful release…

Those activities are important, of course.

But they don’t represent our primary job.

They don’t speak to the thing that enables us as product managers to deliver value to the organization.

So here’s the thing many product managers forget:

Your primary job as a product manager is to help drive the business.

Our job as product managers is to find ways to drive the growth and profitability of the business.


Now, we’re not sales people. We’re not in marketing. We’re not in customer success or support.So you’re not directly held to meeting a sales quota, or a lead gen goal, or a customer satisfaction score.

So we’re not directly held to meeting a sales quota, or a lead gen goal, or a customer satisfaction score.

So the way we drive business growth is by being strategic in how we decide to add new features and enhance existing ones, build new products and expand existing ones.

This goes beyond just validating feature requests and prioritizing and building them. This is much more fundamental than that.

In order to be strategic about your product, you must understand your product’s business model.

In other words, you need to understand:

  • How your business acquires, retains and expands customers; and
  • The key goals for your product’s business model.

Furthermore, you need to know the right set of metrics to focus on to drive the success of your product — not just metrics for the sake of metrics, but the metrics that are actionable.

Actionable metrics, combined with an understand of your product’s business goals and business model, provide you with the core foundation you can use to make strategic decisions about how to grow your product and measure its performance.

Let’s get specific. Let’s take a SaaS product as an example. Lots of product managers manage SaaS products. And there’s plenty of range here, from SaaS products targeted to individuals and small teams to those targeted to B2B enterprises.

Let’s look the high-level goals of a SaaS product and drill down from there to discuss the kinds of business metrics we all need to be focused on to measure the performance of our SaaS products, and use them to be strategic in how not only we manage and grow our products, but deliver monetizable customer value.

Primary SaaS Business Goals

At the most fundamental level, there are three primary business goals for any SaaS product:

  • Profitability. Duh.
  • Growth. Meaning sustainable revenue growth through the acquisition of new customers, and retention and expansion of existing customers.
  • Cash. This is a top concern for your CEO. Ultimately, cash inflows must be > cash outflows. No cash = no business (regardless of how good other metrics may be). Cash is heavily impacted by months to recover the cost of acquiring a customer.

For the purposes of this post, we’ll focus on the first two: profitability and growth. The good news is that by impacting these two goals, as a product manager you’ll be helping the third one too.

There are three ways to look at profitability and growth:

  • Revenue
  • COGS and Gross Margins
  • Unit economics

Let’s talk about each in turn.

Revenue Growth and Profitability

For a SaaS product, the key revenue metric is Monthly Recurring Revenue (MRR) or Annual Contract Value (ACV).

Monthly Recurring Revenue (MRR)

Many SaaS products are sold requiring no long-term contractual commitment from the customer. The customer signs up for a monthly payment plan and has the convenience of unsubscribing any time.

The recurring amount the customer pays every month is called Monthly Recurring Revenue or MRR is the key revenue metric for this type of SaaS product.

Quite simply, MRR is the revenue you’re earning every month from your customers. It can be calculated by multiplying the total number of paying customers by the average amount they pay you every month, called Average Revenue Per User (or Customer) or ARPU.

  • Total Number of Customers increases with new customers acquired every month and decreases with customers lost during the same month.
  • ARPU increases with customers who upgrade to a higher paying plan and decreases with customers who downgrade to a lower paying plan and customers who churn. It can get a bit complicated when you have customers paying different price points, different customer segments, and your product mix.

The key point to remember when calculating MRR is to focus on net MRR because every month you’re both gaining and losing customers. And hopefully, you’re gaining a lot more customers than you’re losing!

Focus on net MRR! – From SaaS Metrics for Product Managers

Focusing on net MRR will provide a more accurate view of growth. Here’s an example:

If you focus solely on new customers and upgrades, you could be led to believe MRR is growing at 30%. But that would be misleading!

You need to factor in downgrades and churn (i.e., lost customers), resulting in a more accurate 15% growth rate.

Annual Contract Value (ACV) and Bookings

If you manage a B2B enterprise SaaS product, it’s likely your customers are signing long-term contracts for a guaranteed period of time, like 12, 24, 36 or 60 months. (The business, in turn, commits to certain SLAs.)

This means unlike month-to-month SaaS products, the business can usually rely on a certain amount of guaranteed income over two or more years based on the length of the contract.

The annual amount owed by the customer is called the Annual Contract Value or ACV and is the key revenue metric for this type of SaaS product.

A related metric is Total Contract Value or TCV, which is the total value of the customer contract over the life of the contract.

So if a customer signed up for a 3-year contract worth a TCV of $300,000, the ACV would be $100,000.

In particular, you want to track ACV bookings. ACV bookings are the total value of all new signed customer contracts. Simply put, a booking exists when a customer agrees to spend money with you. So bookings are the amount of money customers have committed to spend with the business.

For example, a customer signs a 3-year contract worth a total of $36,000. Whether the customer pays you annually, monthly, quarterly or the entire amount up front, the ACV bookings value is $12,000.

Why are ACV bookings important? Because it allows you to accurately track money customers have committed to spending on your product (regardless of how they are actually billed and pay for it).

More to the point, ACV bookings are a demonstrator of the demand for your product. It tells you how the market is responding and committing to your product — its features, its user experience, it’s capabilities — and as such it’s an important metric for measuring the growth and success of your product.

In other words, how do you know the features you’re building and the user experience you’re delivering are actually resonating with customers from a business perspective? That’s what ACV bookings tell you.

Using MRR or ACV to Drive Growth

So how can you as a product manager impact these critical metrics of MRR and ACV, and thus drive growth?

  1. Identify and deliver features new customers want.
  2. Identify and deliver features that encourage existing customers to upgrade to higher price points.
  3. Up-sell and cross-sell add-ons and product extensions that increase recurring revenue or boost ACV — some customers may be willing to pay extra for value-added features and services.
  4. Look at how you segment customers. It may be worthwhile to look at different ways to segment your customers and package your product’s features into pricing plans that are more specifically targeted to these customer segments, and thus deliver more growth and profitability.
  5. Offer scalable or metered pricing. Does it make sense to offer pricing that scales by a unit metric, like number of users, events, transactions, campaigns, etc.? Some customers may be willing to pay more for your product than others to get more of the same feature or capability.
  6. Reduce churn. This is the #1 growth killer. Are you losing customers because you’re missing critical features? Because they abandon after onboarding? Because valuable features are not easily accessible to the user? Because you’re targeting the wrong set of customers?.

By analyzing the above, you can identify what are the things you can do from a product perspective to drive growth, and then craft your product strategy and roadmap to accomplish those goals.

COGS and Gross Margins

When a customer pays for your product, you generate revenue. Gross margin is the revenue left over after the costs associated directly with the delivery of the product or service are paid for.

The costs directly associated with the delivery of the product or service are called COGS or cost of goods sold.

Unlike a manufactured product, where COGS include materials and direct labor, COGS for a SaaS product can be a bit tricky to figure out. Generally, they include items that contribute directly to the delivery of the service. (Remember: SaaS = “software as a service”).

COGS for a SaaS product typically including things like:

  • Infrastructure, hosting, monitoring costs
  • Licenses and fees for 3rd party embedded apps, integrations or other back-end services
  • Payment processing fees
  • Commissions and royalties to affiliates and partners

There could be others. (Check with your Finance department.)

Gross margin is the cost of goods sold subtracted from revenue. It’s typically represented as a percentage of revenue.

Gross margin is critical because it’s used by your executive team and the company’s Board and investors to determine how much the company has left to cover operating expenses and reinvest in the business after delivering the service to the customer.

Gross margin is also an indicator of customer lifetime value, which in turn is a prediction of all the value a business will derive from its entire future relationship with a customer. (More on LTV in a bit…)

Gross margin is why a $10M SaaS company can be more valuable than a $100M brick and mortar company.

As a product manager, you can look at ways to reduce COGS by finding more cost-effective vendors, reducing fees or finding more efficient ways to deliver your product.

Unit Economics

Unit economics look at the most basic elements of a product’s business model and provides insight into whether the business will be profitable.

And profitability is a pretty important measure of success.

Unit economics express revenues and costs on a per unit basis. For a SaaS business, that unit is typically the user or a customer account.

One of the most fundamental unit economics is LTV or customer lifetime value (or CLV or CLTV).

LTV is a great measure of how “sticky” your customers are — whether they’ll keep paying you and for how long. LTV is also a key data point in determining company profitability.

For a product manager, LTV allows you to calculate the profitability of a single customer or segment of customers. You can then use this analysis to identify your most profitable customers and double-down your product related efforts for those customers or perhaps identify upsell/cross-sell opportunities.

Key Takeaways

Remember: Your job as a product manager is to drive business growth through the delivery of monetizable customer value.

To do this, you need to:

  • Learn the business of your product and the key levers of growth.
  • Understand the underlying economics of your product’s growth.
  • Focus on the right set of actionable metrics.
  • Marry these with your VOC insights to build robust business cases for your product ideas.
  • Craft product strategy and your product roadmap such that they show how you will drive growth via these business metrics.

This is how you can actually QUANTIFY the value you as a product manager bring to your company!

To help you, I’ve created this helpful 2-page SaaS Metrics Quick Reference Guide for Product Managers that you can download totally for free. Print it out, post it on the wall of your cube or office so that way you have it conveniently available as a reference at all times.

Get the SaaS Metrics Quick Reference Guide for Product Managers >>

P.S. If you’re not managing a SaaS product, so these metrics may not apply, of course. You just need to identify they key business metrics for your product that will help you shape your product strategy and drive its business performance.

What a product manager really does

One of the biggest lies in product management is agile.

That may sound like heresy, but hear me out…

I actually love agile. It’s a great approach to reducing the risk of developing and shipping software. It’s a better software development methodology.

But on its own it doesn’t solve the problem of providing a capital efficient method for discovering, validating, delivering, and growing a marketable product.

Which is EXACTLY what product management is all about.

Many product managers are like this:

I love this cartoon because it describes where so many product managers are stuck. And it resonates with me personally, because it describes where I was as a product manager many years ago when I was still trying to figure out what the heck was this product management thing I was apparently doing!

So many product managers are struggling to make a meaningful impact. They’re hustling, they’re busy in the trenches writing stories, managing backlogs and releases, worrying about SCRUMs and sprints and story points…

Of course, these are important activities. But they’re not the things that REALLY create impact producing business results.

In other words, if you ONLY focus on those tactical activities all the time, you won’t be doing the things that truly create and deliver customer value.

Over the years, I’ve worked on a number of different types of software and digital products and services, and have also been fortunate to have worked with and mentored 100s of product innovators.

And so I’ve learned a few things. And what I’ve learned is actually surprisingly pretty simple.

Because the most impactful product managers all follow a similar pattern for how they align product strategy with company goals and deliver business value time and again.

In order to understand this — to understand the true value product managers bring — we need to understand what is product management.

What is product management?

There have been many attempts to define what is product management and what a product manager does.

Most are all pretty good. But they tend to be convoluted (at least to me), and not easily explained.

Over time, I’ve come around to a simpler, but far more powerful, definition of what is product management, and what it means to be a strategic product manager.

And to understand what product management is about, we need to talk about what is product innovation.

Innovation is, of course, what fuels a company’s growth long-term. So in a for-profit company, any innovation must create growth for that company.

Growth comes from creating value for customers. Customers who find value in what the company has to offer, pay for that value. (Or generate value for the company in such a way that a 3rd party will offer to pay for it.)

So, in other words, quite simply, product innovation is about creating monetizable customer value.

Now, that’s not just a bunch of MBA-speak. Those three words are very important: “monetizable customer value”.

Or said differently: creating customer value that can be monetized, i.e., that results in creating value for the business.

In his book, Scaling Lean, Ash Maurya talks about two conditions that must be met for in order for any product to succeed represented as follows:

Credit: Ash Maurya

The first is called the Value Equation. This means you must create more value for customers than you capture back, because if your customers don’t perceive to be getting back more value than they pay for your product or service, they won’t keep coming back, and you won’t have a business.

Credit: Ash Maurya

Said a different way: creating customer value seems obvious enough. But it’s not enough to just create customer value — you need to create enough value that customers are willing to pay for some or all of it. Or the customers themselves represent a valuable commodity that someone else is willing to pay for the value they represent.

And in a profit-making enterprise, this is typically in the form of revenue.

Now, the first equation is important, but not enough. The second condition to satisfy is the Monetization Equation.

Credit: Ash Maurya

Quite simply this means your ability to deliver that value must cost less than your ability to capture it.

Or, to put it even more straightforwardly, revenue — cost = profit!

(I guess you could also call this the profit equation.)

So product innovation is not just about the next shiny new object or sexy new app for the sake of it. True product innovation — one that creates value for your customers AND for your business — is one that creates so much value for your customers that you can monetize it in some fashion, preferably with customers paying you at a price point that exceeds your ability to deliver that value.

THIS is what we mean by creating monetizable customer value

Every product needs to satisfy these two equations, which means product innovation is about solving both these two equations.

And in fact, savvy product leaders and teams will want to institute some sort of methodology or process around this — a repeatable and sustainable innovation process to constantly uncover new opportunities to create customer value that can fuel business growth for the company. In other words, an ongoing customer value monetization process that’s constantly looking at maximizing both the value equation and the monetization equation.

So if we think about the tactical activities a product manager does, like writing stories/requirements, managing backlogs and releases, user testing, etc…

Or if we think about the more strategic things product managers may do, like communicate the product strategy and roadmap, monitoring KPIs, pricing, go-to-market, etc…

Those are all means to an end — that end being creating customer value that can be monetized.

This leads us to a nice, concise definition of what product management is about:

Product Management is about sustainably managing and growing the customer value monetization process

What this means is that the BEST product management teams and the BEST product managers are continuously working on maximizing BOTH these equations — the value equation and the monetization equation.

At the highest level, these are the TWO THINGS that you, as a product manager, need to be focused on to drive innovation and deliver business results.

The two things product managers need to focus on

As such, the best product managers think and act beyond tactical activities like backlog grooming, sprints, requirements and stories, releases, user testing, etc.

Again, these activities are important, but in and of themselves they don’t drive innovation and don’t deliver business results.

The best product managers think strategically:

  1. They think about monetizable market opportunities.
  2. They think about tying their activities to business results that matter — acquiring new customers, increasing LTV or ARPU, speeding time to market, etc.
  3. They think about the “whole product” — not just the core software app itself, but also how to market, sell, deliver and support that product to customers

This 1-page Product Canvas succinctly captures all the key elements of a product strategy. And this is what the best product managers, and the best product management teams, for that matter, are constantly thinking about.

This is what’s meant by the “whole product” — that is, the overall product strategy, not just the bits and bytes that make up the core product itself.

The best product managers are thinking strategically about every aspect of the product strategy. And even when they’re managing an existing product:

  • They’re continuously re-visiting the value proposition, making sure the product is delivering on its promise to customers…
  • They’re making sure the product is delivering ROI and constantly measuring success…
  • And when they’re considering new features to enhance the existing product, they’re looking at the same critical elements — who’s it for, what problem is it solving, what’s its value proposition and competitive differentiation, and how will it deliver ROI.

The best, most strategic, most impactful product managers are able to be strategic while executing tactically, proactively define their roles and the value they bring to their companies rather than wait for it to be defined for them, and align product strategy with company goals to deliver business value time and again.

They do this by focusing relentlessly on creating customer value that can continuously deliver benefits to the business.

You either ROI or die

Let’s face it:

Accounting is boring as isht.

Assets. Liabilities. Cost basis. Accrual. GAAP. Cost principle. Double entry system…

This is boring

Finance is not much funner… In fact, it can downright make your head spin…

Liquidity. Risk tolerance. Asset allocation. Dollar cost averaging. Capital asset pricing…

What the heck is he talking about?Eh?

As a product manager, why in the world would you need to know how to do financial analysis?

Actually, there are some excellent reasons why. And you ignore them at the risk of your “brilliant” product idea dying a painful death.

First, the exercise of financial analysis forces you to think long and hard about the viability of your product idea.

It can help surface major issues early on or support your hunch that what you’re wanting to work on actually has some potential.

Second, if you’ve got an idea for a new product or new major feature, you’ll need to articulate to your stakeholders the market opportunity and ROI for it.

They’ll want to understand your assumptions about the market opportunity, and what will be the key revenue or ROI drivers.

Third, these financial analyses, once done, can serve as a strategic roadmap for execution. They allow you to track benchmarks, and you’ll be able to quickly assess where you are vs. where you thought you’d be.

So many product managers are unable to do this effectively. And, as a result, their product ideas die. Don’t let this be your fate.

The good news is you don’t need to torture a spreadsheet for days and weeks with crazy unfounded assumptions to produce some silly made up 3-year projection.

It comes down to 3 core financial analyses that need to be understood:

  • Market sizing
  • Net Present Value (NPV)
  • Internal Rate of Return (IRR)

I talked about market sizing — it’s importance and how to do it — in a previous post. So let’s talk about the other two.

Remember: When you go ask to have your product idea funded, it means you’re trying to convince people that YOUR idea is the best place for the company to spend its money vs. something else.

So it’s almost certain your finance department is going to be in charge of running the numbers on your product idea. This means it’s important to understand how the finance department is going to evaluate the financial merits of your product idea.

NPV and IRR aren’t really that complicated once you learn them.

So here’s a quick primer to help you start using them TODAY:

Net Present Value (NPV)

To understand NPV, we first need to talk about weighted cost of capital.

Since you’re eventually going to have to work with your finance department on the numbers, you need to understand your company’s cost of capital so you can ensure that you’re going to get the best deal possible.

A simple way to think about cost of capital is that it’s the cost of the money used to pay for funding a business endeavor, which is exactly what your product idea is, of course.

The money may come from debt, like a bank loan. In this case, the cost of capital is the interest rate the bank charges you for the loan, called the cost of debt.

Alternatively, the money may come from equity, like from investors. In this case, the cost of capital is the return these investors expect, called the cost of equity.

Most companies have a mix of debt and equity on their balance sheets.

So the weighted cost of capital is typically a weighted average of the cost of their debt and the cost of their equity.

Let’s go through a simple example:

  • Let’s say your company’s cost of debt is 3.5% and cost of equity is 10%
      • In other words, the company is paying 3.5% interest on its loans and its investors are expecting a 10% return
  • Let’s also say your company’s capital structure is 70% equity and 30% debt (i.e., the percentage of debt relative to the percentage of equity the company uses to finance its operations)
  • So your company’s weighted average cost of capital = (70% * 10%) + (30% * 3.5%) = 8%

How is this related to Net Present Value?

The weighted cost of capital is used to calculate the NPV of a business investment.

And the higher the cost of capital, the lower the expected profitability of your product.

So you definitely want to know what your company’s cost of capital is and what assumptions are going into calculating it.

Net Present Value (NPV) is a way of assessing the profitability of an investment by factoring in the present value of any future cash flows your product projects to generate over a given period of time, like 3 or 5 years.

Let’s explain via another simple example:

  • Let’s say you deposit your money in a savings account at your bank, and you earn 10% interest on your money.
  • So $1,000 today would earn you $100 in a year — in other words, your $1,000 today will become $1,100 next year.
  • This means $1100 next year is the same as $1,000 now.
  • So the present value of $1100 next year = $1,000 at the discounted rate of 10%.

Note that the interest rate you’re earning in your savings account is also called the discounted rate when calculating the present value of your future earnings.

So to calculate NPV, your finance department will:

      1. Calculate the present value of future cash flows your product is expected to generate over a specific time horizon (i.e., revenue over 3 or 5 years)…
      2. Subtract from it the present value of the initial investment needed for your product and any future expenditures projected to be incurred over the same time horizon

NPV = present value of future cash inflows – present value of future cash outflows

NPV is pretty easy to calculate in Excel. In fact, it has a formula for it.

Internal Rate of Return (IRR)

Now that you know what NPV is, this one is easier to explain…

The IRR is the interest rate at which the net present value of all the cash flows from an investment equal zero.

So the idea is that the higher an investment’s IRR the more desirable it is to undertake that investment relative to other projects (assuming all other factors are equal).

BTW, this is also pretty easy to calculate in Excel — it has a formula for IRR too.

So let’s say you calculate the IRR of your product idea is 92%. Is this good or bad?

That depends on the IRRs of the other projects competing for the same dollars!

Additional thoughts on NPV and Cost of Capital

The cost of capital should vary depending on the type of product initiative you’re pursuing.

If it’s truly a new product innovation, a higher number could be justified, since the project is going to be riskier, but may be worth it.

For a line extension, a relatively lower rate could work, since it’s relatively less risky.

Either way, do your homework, and then sit down with your finance counterparts and understand what values they’re using and why.

You don’t need to be a finance genius, but you do want to be able to negotiate with them intelligently. You may or may not win the day, but you will gain their respect, and at least everyone will be aligned on how to value your product idea properly and in relation to other projects the company is investing in.

Bottom line: yeah, finance may be boring, but it doesn’t need to be confusing, and it’s super important. Rockstar product managers understand that it’s well worth their time to learn, and get decent enough at it to be able to justify and defend their product ideas.

When I built products the stupid way

In 2007, ProductRepair (name changed), a market leader in its industry, was facing some serious threats:

A rapidly maturing business.

New “digitally native” entrants with greatly enhanced data collection abilities.

A 100% call center based customer service model, with an escalating cost per interaction.

Service partners with increasingly divergent strategies.

Legacy IT infrastructure that made it difficult to compete.

To tackle this, the company’s product management team proposed an innovative and bold “interactive customer web portal” (remember: this was 2007), thus transforming the company’s traditional “brick & mortar” type business model into a “21st century digital model”.

The vision was pretty cool actually. The strategy was to provide:

  • “An integrated closed-loop customer experience.”
  • “Comprehensive product setup and support.”
  • “Enhanced full-service customer support.”
  • “Interactive multi-channel communication.”
  • “Cross-sell and up-sell platform.”

(Yes, those were the actual words used in the presentation to the CXOs.)

The benefits were the usual stuff: increased value-add, improved customer satisfaction and retention, call reduction, after-sale revenue opportunities, “big data” insights, etc.

The new digital business was to have five core capabilities:

  1. A product “locker” for the the user to keep track of their purchases
  2. Self-troubleshooting
  3. Live chat and email support (again: 2007, so pretty new stuff back then)
  4. Request service on their malfunctioning product, with real-time claim adjudication, and service status and resolution
  5. Up-sell/cross-sell platform

As an ambitious young product manager, I was put in charge of building and launching this bold new digital capability.

Our (my) approach was classic:

A month spent writing a PRD and an RFP to source a development partner.

$10,000 spent on “consumer research”.

$320k in 6 months spent to get to “First Release”.

Another $10,000 spent to produce a flashy “demo” that we could showcase at the Consumer Electronics Show.

Over $1 million spent in a year to add features, fix bugs, and re-design the system.


E.P.I.C. Fail.

Delivery was late. Customers hated it. Sales was unhappy. Execs were angry.

It wasn’t just that we took a waterfall development approach vs. agile…

It’s that we made a terrible business decision: we decided to deliver our entire product vision in our first release.

This “build it all” approach added a tremendous amount of needless risk to our delivery and strategy.

If you’re reading this shaking your head, laughing at me, I know, I know…

In the new world of agile/lean, we’re all much savvier to the benefits of an incremental and iterative approach to product development.

Credit: Jeff Patton

Needless to say, I learned my lesson (the hard way, I might add)…

And yet, turns out, product managers still struggle with this.

See, it’s not a choice between waterfall vs. agile. It’s not a project management problem.

It’s not even a software development methodology problem.

It’s a business innovation problem.

That’s why when I recently saw this question posted by Ganesh on a PM community, my past flashed before my eyes, and I knew I had to help him out.

Here’s his question:

I need some advice around building a service incrementally around user needs.

We’re building an online service that has the following needs (in priority): Cereal, Beef, Vegetable, Fruit. (Shardul’s note: Names of actual needs not listed here to protect any confidentiality concerns.)

As Cereal is the number 1 need, my idea was to design and build this need out and test it with users while further researching what users wanted around Beef. Once we have more information around Beef, we can then incorporate that into the Cereal prototype, thus building it out like building blocks. And repeating this cycle till all needs are met and the service is built out incrementally.

The opposite is that we research ALL the needs in one sprint, and find out what people want. Then build the whole page, which has all the needs together. I can see how this would be positive in terms of seeing the entire picture, and keeping the content in context of each other. But my concern here is that we miss out the details.

Any advice would be appreciated.

Maybe you’ve been faced with a similar dilemma…?

Here’s the answer I gave to Ganesh, verbatim (though, with the food groups):

In case you can’t read the text in the image…

Ganesh, since I don’t know the complexity of your service (I don’t want to assume just because you’ve listed four functions that “seem” straightforward that there isn’t complexity), allow me to share an approach we took on a previous job I did as a thought provoker.

My inclination is always to get product to customers as fast as possible without compromising on quality and ensuring every release attempts to deliver real user (and business) value.

With that philosophy in mind…

I’d consider asking a Designer to sketch out the “whole picture”, like a clickable mockup or prototype (no “plumbing” behind it) and see if I can get some qualitative user feedback on it. I’d take this option if I believed that this could be accomplished relatively quickly.

Once done, I’d actually consider going ahead and building and delivering the Cereal functionality first because you stated it’s the #1 need, and I can get users to actually use the thing and start getting real feedback on it allowing me to focus on usability improvements (because they will be needed.)

I can then prioritize these needs along with the remaining functions on my roadmap/backlog for delivery. For example, my next release could strictly be usability improvements for Cereal, or these + an increment of the Beef need (assuming there’s value in delivering it in increments), or Cereal usability improvements + Beef in its entirety. (I’m assuming here Beef is second most important after Cereal.)

By having my designer sketch the “whole picture” upfront and sought user feedback on it, I’ve hopefully reduced the risk of wholesale design changes downstream. (Though, it’s still possible.) Even if there are changes that need to be made to the Cereal feature as you get user feedback and look to add the other features, a competent designer should be able to manage the process (since they’ve already done the “whole picture”) in concert with you, and determine the best approach to releasing them to the user.

This allows me to accomplish all three of my needs: design for the whole picture, get product to users as quickly as possible, and start acting on user feedback.

I would opt not to have the designer sketch the “whole picture” if it was going to take a long time (like a month).

The crux of my answer is a strong proclivity for getting product to customers as fast as possible without compromising on quality, and ensuring every release attempts to deliver real user (and business) value.

It’s a philosophy that has guided every product I’ve worked on since that debacle back in 2007. #ProdMgmtHardLessons

The one skill your boss wants you to have

When I announced my product management course, Idea To Revenue Masterclass, I asked the folks who manage product teams — Directors, VPs, SVPs of Product — what they’re looking for in their product managers.

The responses I got were eye openers.

Here are some of the replies I got, with certain parts bolded by me that I think are super important:

“A well balanced product manager knows how to take a concept from ideation to delivery. I find some are strong in one but not the other.”

“Our product managers need to learn to drive product innovation by deeply understanding the ecosystem in which our customers operate, address the most pressing customer needs, and ensure we deliver business and customer value and drive company revenue.”

“Currently, our PM team is not leading. They mostly focus on fixes to the current products. They need to be more strategically driven, and be able to size the market opportunity for new ideas. As a result, to be honest, our executive team is not comfortable empowering our product managers to make decisions, and so priorities keep changing constantly.



In other words, they want product managers who can be strategic product leaders that can drive innovation and deliver business results… not just be backlog grooming sprint release operators.

Having worked with 100s of product innovators and numerous software and digital products and services, I’ve learned that the best product managers think and act beyond tactical activities like backlog grooming, sprints, requirements, stories, releases, user testing, etc.

These activities are important, but in and of them they don’t drive innovation and don’t deliver business results that matter.

The best product managers think and act strategically — that is to say:

  • They think about and pursue monetizable market opportunities.
  • They think about and actively work at tying their activities to business results that matter — acquiring new customers, increasing LTV or ARPU, speeding time to market, etc.
  • They think about the “whole product” — not just the core software app itself, but also how to market, sell, deliver and support that product to customers — and execute accordingly.
The Whole Product

Product Canvas – downloadable here

It’s this strategic perspective that then drives their tactical day-to-day activities.

In this post, I’m going to talk about one of the ways — one of the most important ways, actually — that the best product managers impact business value:

Validating the market opportunity for a product idea.

The best product managers know that to pursue any product idea it must be a problem worth solving. In an earlier post, I talked about how there are 3 criteria any product idea must satisfy in order for it to be worth pursuing:

  • It must solve an urgent problem for a customer.
  • The problem must be pervasive — that is, enough customers must feel that pain or have that need.
  • Customers must be willing to pay to have the problem solved. Or, more specifically, they must be willing to buy your solution to their problem.

This is what it means to have a monetizable market opportunity. And being able to identify these opportunities (and then execute on them) is exactly what the product team leaders above are looking for in their product managers.

Unfortunately, it’s a big area where many product managers fall short.

Why is it important to analyze the market potential for a product idea?

Because quite simply, if enough people aren’t experiencing the problem and are willing to pay for your solution, then the market potential for your product idea isn’t big enough, and it’s not worth pursuing it. Period.

viable_product_ideaSo you need to find out before investing considering capital and resources in developing the product or capability whether there may be a market for it.

Also it:

  • Establishes whether the business opportunity for your idea is reasonable.
  • Informs how you look at, analyze, understand, and segment the market.
  • Demonstrates an understanding of your customers’ pain points and the value of your solution.
  • In turn, informs how to enter the market — your go-to-market strategy, pricing model, etc.
  • Provides optics for the growth of your product — a sounding board to measure your financial model and your progress against it.

This isn’t just for brand new product ideas alone. It applies to new feature ideas for existing products and other product expansion ideas as well.

Any new feature or capability must deliver both customer value and business value. There has to be some clear ROI for adding a new feature to a product. Perhaps the new feature will help up-sell existing users to a higher pricing plan. Or maybe help accelerate new customer acquisitions in your target market segment. Or reduce churn and increase lifetime value. Or maybe it will help improve customer satisfaction leading to increased retention.

Your company has a choice of whether to focus its resources on developing feature A or feature B. In fact, it has a choice of whether to have its resources focused on your new feature idea or something else entirely.

So it’s important to vet whether there’s enough of a market demand for that feature before investing engineering cycles building it.

There are several common mistakes product managers make in estimating market potential. Let’s talk about these and then go through specific examples of how you can calculate the market potential for your product idea.

Common mistakes in estimating market size

Your market is NOT “everyone” or “anyone”, as in “everyone who drives a car”, or “every business that needs a CRM”, or “anyone who uses social networks”, etc.

Heck, the market for this blog isn’t “everyone who reads blogs”!

In fact, it’s not even “every product manager” out there. If you’re a product manager for a hardware product, it’s nice to think there may be nuggets in these posts that could help you, but I’ll tell you straight up I don’t specifically target you. So if you find zero value in these posts, that’s cool with me.

Even for a new feature for an existing product, your market potential may not be “all our existing customers”. For example, not all customers using your messaging service may be interested in archiving old messages.

You need to drill down and get specific about the true size of your market. Otherwise, your executives and Board will question the validity of your product idea — and, frankly, your credibility.

To make this super tangible, let’s talk through how you can size the market for a new product and a new feature.

Assessing the market size for a new product

The most common way folks do this is what’s called the “top-down approach”. This approach uses a broad market size figure and whittles it down to the target market.

It typically goes something like this:

  • Let’s say your product is an analytics algorithm that can decide the sentiment of a Twitter stream.
  • You find that IDC (or Gartner, whatever) says the market for big data technology services is $6.2 billion. You estimate that the portion that’s for sentiment analytics software is 20% = $1.24 billion.
  • With your existing sales and marketing channel, you believe you could realistically reach 25% of this market = $310 million.
  • But there are 10 other competitors in that same reach. So assuming you can capture 15% of the market, your target market share = $46.5 million.

Now, if you read that and are feeling uncomfortable, yeah, you should.

‘Cos it sounds squishy, right?

That’s why I’m not a big fan of the top-down approach:

  • The broad market size figure used as the starting point in the top-down analysis often includes different market segments, so it’s easy to forget to take some of these out of the estimate.
  • You’re extrapolating without direct customer validation. So top-down can come off as a bit optimistic (and even fuzzy).
  • When extrapolating, you’re typically using a percentage off a very large number, like 1% of a billion dollar market, but it doesn’t take into consideration which 1% or how you’ll get this 1% with your specific product.
  • Plus, how do you know if a 1% market share is the right success criteria for you?

As such, the top-down method can give you a false sense of comfort.

(Plus, smart execs will see right through it and tear it apart.)

Instead, a “bottom-up” approach is better. This approach builds up the total addressable market by using the main variables of the revenue model — typically total number of potential customers multiplied by what they typically spend or are willing to spend.

It requires more effort, because you’re evaluating where your product can be sold, the sales of comparable products, and the slice of current sales that you can carve out.

(BTW, this is where your customer persona and primary market research really comes in useful. You can use them to identify how many customers are in your target market, and extrapolate from there.)

Let’s go through an example:

Your product is an app that helps people play basketball more regularly by helping them find the right place, time and people.

You’ve discovered that people pay to book time at basketball venues, and your idea is to charge these venues a fee for referring basketball players who use your app.

You interview 10 basketball venues, and discover they typically get 100 bookings per month, each booking consists of 10 players, and each player typically pays $50 to play.

So the total value of monthly bookings at any given venue = $50 * 10 * 100 = $50,000 or $600k per year. And if there are 2,000 venues in your target market, that’s a total market of $1.2 billion.

You find that 70% of venues (1,400) have already signed deals with your competitors, leaving you with 600 unsigned venues. You believe you could steal 10% (140) of already signed venues — so if you signed up all 740 (i.e., 600+140) of these venues, that’s a serviceable market of $600k * 740 = $0.44 billion or 37% of the total market. (It may reasonably take several years to do that, of course.)

You feel confident all 10 of those venues you had interviewed could be initial customers. You extrapolate that there are about 200 venues just like those, i.e., they fit your customer persona. You could target them in the first year, giving you a target market of $120M (27% of your serviceable market and 10% of the total addressable market).

While there are undoubtedly some assumptions inherent in this analysis (and many dependencies to achieving those targets), this type of analysis is much more useful.

For one, it gives you more grounded assumptions to use to extrapolate to the broader market. It’s less likely to include non-addressable revenue since your basis is to start from your primary market research. Finally, it forces you to consider how you’ll be able to attract and acquire customers — for example, you’d love to sell internationally, but if that’s unrealistic for several years, you can’t really factor that in. On the other hand, you can focus your go-to-market efforts specifically on targeting that initial $120M in the first year.

You can also play with the variables to get a sense of best-case and worst-case scenarios. For example, what if you could steal 20% of already signed venues? Or only 5%? What if there are only 100 venues like the 10 customers you interviewed? What if it takes longer to acquire any of those 600 unsigned venues?

Assessing the market size for a new feature

Now, for a new feature or capability for an existing product, how you analyze the market size depends on your goals for the new feature — things like accelerate new customer acquisition, up-sell existing customers, penetrate an adjacent market segment, etc.

For the sake of simplicity and illustration, let’s assume the goal is new customer adds — e.g., this feature is the key missing ingredient that has prevented new customers from purchasing your product till now.

Let’s say your product is targeting a $50 million market and currently generates $5 million in revenues. It’s been successful with early adopters, but now you want to expand within your target market to “early majority” type customers (in the technology adoption curve).

You’ve identified a new feature that your product would need to have to attract this group of customers, and your problem hypothesis testing validated the pain point it solves. From this work, you’ve built a customer persona to target for the new feature, and through further market research and analysis, have identified that 25% of your product’s current target market fit that persona (i.e., they have the same problem).

Your total market opportunity is 25% of your product’s target market * your product’s price (assuming no change).

You believe it could be possible to capture 10% of those customers in the first year. So your target share of market is 25% of your product’s target market * your product’s price * 10%.

Again you could play with the variables for best-case/worst-case scenarios. For example, what if you captured only 5% in the first year? Or 20%? What if it only 15% of your product’s current target market fit the persona?

Once you have your market size, what next?

Play around with the assumptions and variables in your analysis. For example, try different pricing levels, or vary the percentage or number of customers.

This analysis shouldn’t take you very long — you’re merely trying to estimate the opportunity to get a quick sense as to whether there’s a market opportunity for your product idea. If you’re spending hours or days torturing a spreadsheet, you’re spending too long on it.

Of course, you don’t know definitively whether customers will actually validate your product idea, let alone buy it. But you want to do this exercise at this stage because you’re essentially trying to answer if there are enough customers in the market with the problem you’ve identified, and how much revenue you could potentially target if they’re willing to buy?

In other words, is it big enough? If the market opportunity is too small, if there aren’t enough monetizable customers, it’s not worth going after, and you’ll be faced with a pivot. (And a pivot isn’t a bad thing.)

* * *

The best product managers understand that to really drive innovation and deliver value to their businesses they need to be thinking and acting strategically.

As part of that, they understand they need to be testing and validating whether a product idea is worth pursuing before investing major capital, budget or resources on it.

A critical part of that validation exercise is assessing the market potential for a product idea. Doing so exposes important assumptions inherent in the initial product strategy hypothesis. It helps product managers justify the product idea to themselves and to their internal stakeholders, and serves as a reality check for the product idea.

This kind of analysis it NOT about arbitrarily picking a large number out of thin air and then working some Excel magic to rationalize the number. As I’ve shown, there’s a grounded way to approach it.

And, as a result, should the market opportunity for the product idea have potential, it allows for a more actionable way to pursue it.

As Ash Maurya has correctly said:

“While we all need a ballpark destination to justify the journey, it’s not the destination itself but the starting assumptions and milestones along the way that inform whether we are on the right path or need a course-correction.”

To your product success!

The Top Strategies For Doing Customer Interviews That Get You Real Insights

We all know a core responsibility of a product manager is to constantly and consistently bring the customer perspective into the business.

That means customer interviewing is a critical skill for every product manager.

I must admit, earlier in my career I totally sucked at it.

I had no plan. I often just winged it. I asked the wrong questions. I was a poor listener. I talked more and listened less. I tended to get too excited about my product idea and go into pitch mode instead of focusing on the customer’s problems. And I was very guilty of confirmation bias.

Fortunately, with lots of practice, over time I got better. As I did, I accumulated a list of the best strategies that I use even today to conduct an interview that helps me extract real customer insights.

Get the Entire List of 25 Customer Interview Strategies >>

So in this video I share 5 of the best customer interview strategies:

Use these 5 powerful tips to supercharge your customer interviews to extract every ounce of goodness from them:

  1. Set an objective. Know what you want to get out of the interview — that is, what is it you want to learn and come away with?
  2. Have a script. Having a script will help guide your interview with the customer, be better prepared and purposeful in your interviewing, and make sure you achieve the objective you’ve set out.
  3. Ask “Why?” — a lot. This is by far the most important question in your arsenal. It allows you to go deep, get inside the mind of your customer, understand their motivations, get to the true nature of the problem they’re trying to solve, and how they actually value their solutions.
  4. Ask for examples. Asking for an example forces your customer to get specific rather than speak in generalities, giving you tangible evidence of a customer’s problem, and allowing you to momentarily “live in their world”.
  5. Focus on listening. Cannot stress this enough! The biggest thing you can do is to TALK LESS AND LISTEN MORE. Your purpose is to get THEIR perspective — not promote your point of view, explain yourself, defend your idea or debate. The only times you should look to speak is when you need to clarify something or need to ask a follow-up question.

Get the Entire List of 25 Customer Interview Strategies >>

Follow these strategies and you’ll become a pro at conducting truly insightful customer interviews.

Watch the video above, download the full list of customer interview strategies, and please share in the comments below what strategies you’ve developed to conduct truly insightful customer interviews.

How Do You Become A Good Product Manager?

This is the BIG question, isn’t it?

We all want to be the best at what we do.

And product managers are no different. We want to be good. Great. Awesome.

And we want to be recognized for it!

We want to launch products people love. We want customers to love it. Our company’s to grow from it. Our teams to feel pride in it. Competitors to fear it. And our executives to love us for it.

So how does one become a good product manager?

Unfortunately, there’s no one size fits all answer to this. There’s no silver bullet or 3-step process that guarantees you will become a good product manager. (Let alone a great one!)

But it’s one of the most frequently asked questions. It gets asked at ProductCamps. It’s asked on Quora in different ways. And it’s one I’ve been asked countless times by folks I’ve mentored, by peers, even CEOs and senior executives.

Lots of knowledgeable and seasoned product management practitioners have weighed in on this. Some really good perspectives from some really smart, successful product managers.

So today I weigh in with my perspective. While there’s no single universal answer, I do believe there are some key principles or strategies you can adopt to become a really effective product manager.

And that’s what I share in today’s video.

Through product management gigs in startups and Fortune 100 companies, I’ve come to identify seven principles that help me as a product manager in any situation:

  1. Get to know your customer.
  2. Get to know your product.
  3. Learn the business.
  4. Learn the market/industry.
  5. Learn how to execute.
  6. Find mentors.
  7. Invest in yourself. That is, look to constantly upgrade your skill set.

The last two are really the key to unlocking your full potential as a product manager.

Are any of these new to you? These are sort of “no brainers” to me now, but looking back, if I’m honest with myself, I probably focused a bit too much on #2!

It can take time to master these, but I’ve come to realize they’re paramount to successfully execute as a product manager.

You can read my original answer on Quora, as well as some great answers to another similar question on Quora.

Watch the video and then please leave me a comment below on what do you think it takes to be a good product manager?

Here’s to all of us becoming great product managers!

The most important thing you need for your product to succeed

Have you ever felt like there is no clear direction for your product?

That you keep getting jerked around building features to satisfy the latest customer opportunity?

That your product can do a lot of things, but it’s hard to articulate exactly what it does in just a few short sentences?

Maybe your product is trying too hard to be all things to all people?

Or maybe folks are constantly asking you why…

Why are we building these features?

Why are we selling to those customers?

Why is the customer wanting our product to do something else?

The reason for this often boils down to a simple truth:

The product lacks a coherent vision.

Having a product vision is quite possibly the most important thing you need for your product to succeed.

Yes, strategy is important.

Yes, execution is important.

But it all starts with having a vision for your product.

Without a product vision, how will you know where you’re going and why?

So every product starts with a vision to make it real. It’s foundational to the success of any product. It’s your north star. Without a coherent product vision, even a seemingly “great” product idea will fail in the market!

I decided to put my thoughts on this into a video.

So here it is. In it, I talk about:

  • What is a product vision.
  • Why it’s important.
  • How you can craft one for your product.

I cover this in depth in this video:

Creating a product vision doesn’t have to be hard. You don’t need to write some fancy vision statement, nor do you need torture yourself by trying to come up with the perfect elevator pitch.

You can actually start simply and immediately by defining four things:

  1. Who is your customer?
  2. What problem are you solving for them?
  3. What is your solution to that problem?
  4. What is your value proposition — i.e. that ultimate benefit you’re trying to deliver to your customer.

This is something you can do today. Right now. It can take less than 20 minutes. Even 5.

It doesn’t have to be perfect. It just needs to be done.

I talk about it in the video.

Over time, as you learn from the marketplace, as you learn from customers, you’ll refine the vision. That’s a good thing.

Watch the video, and when you’re done, please leave me a comment on what challenges you’ve had to face because your product lacked a proper product vision.

Then be sure to grab this quick fill-in-the-blank worksheet below to help you create the product vision for your next great product idea!

Grab Your Copy Of The Fill-In-The-Blank Product Vision Worksheet >>