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, Aha.io 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
=
MRR

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 >>