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:
- 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.
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!
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?
- Identify and deliver features new customers want.
- Identify and deliver features that encourage existing customers to upgrade to higher price points.
- 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.
- 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.
- 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.
- 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 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.
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.
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.