How to orient yourself to become a revenue centric PM
As a product manager, do you follow the company’s financial metrics?
In both my previous jobs, I used to diligently follow the company numbers. Each quarter, our CEO or CFO would present the performance and health of the company. I used to note down these numbers and compare them to previous quarters or years.
In addition to your responsibility of adding value to your customer, you are also responsible for growth of your product. Growth can come from New Revenue, Retention or Saving Cost. For more on this, you can read my related article.
By closely following the metrics, you will get a sense of how the company is moving, and how your product is moving. After all, it is your product that helps move the revenue.
If you are a young company with a small product team, they you have more leverage in growing revenue. When you truly understand these financial metrics, you will know which number is a priority to move and adjust your product strategy or roadmap accordingly.
If you are a PM in a large team, then the company numbers are at a high level and you may not get the signal on what you can do to improve in your part of the product. Nevertheless, it is still a good idea to follow the high level numbers and the movement from previous quarters. This will give you a sense of priority for your own product area. Say, number of new customers is not growing fast or slowing down, then perhaps you can determine how your product can really help with new customer acquisition.
Based on how today’s numbers are moving (or not), you can influence downstream numbers, say 6 months and beyond, by implementing the appropriate product strategy.
How do you that?
Start with these 5 metrics.
- New Customers
- ARR/MRR Growth
- Upsell ARR
- Retention (Gross/Net)
- Conversions
How do you interpret these metrics, and more importantly how do you react as a product manager?
Note down the reported metric, and compare to previous quarter as well as any targets.
Lets deep dive.
1. New Customer
This metrics tells how many net new customers were added in the previous quarter. This is commonly called new logos. It can be number of customers as well as new ARR added.
An increasing number shows that customers are interested in leveraging your product. What you want to watch is growth rate. Let’s say you are adding 10% new customers in one quarter, 15% the next, 20% the following and so on, then you have a very good growth trajectory and that you are on to market leadership. Your product is working and customers are responding to your value proposition.
If the growth is flat, then something is not working out. Maybe the demand gen is not generating enough leads. Or perhaps the sales team is not able to close the deals. This could be due to execution issues or messaging issues. From a product point of view, you might want to confirm if you are not attracting new customers because of product limitations. Let’s say your product caters to a specific niche but there is a limit to the growth in that niche. Now you may want to consider expanding out of the niche which could mean product changes.
A decreasing number is a cause for concern for sales, marketing and product. It could mean sales and marketing is not working out. It could also mean the product is not meeting the needs and somehow customers are not placing your product in their consideration list. A quick check on the win/loss analysis can ascertain the cause of decreasing growth.
By the way, product can rarely influence short term sales. In B2B, it can be 6 months or over when product decisions can translate into sales.
2. ARR (Annual Recurring Revenue) Growth
- new sales
- upsell from existing customer
- cross sell to existing customer
- retention
You want the ARR to keep growing.
Compare this growth to the previous metric New Customers. If ARR from new sales is growing slower than new customers, that means average customer value has gone down. e.g. new customers increased by 20% but ARR growth from new sales grew only 10%.
You can work with product marketing and sales to determine what is is slowing down ARR. Reasons could include :
- Not attracting the right customers
- Deep discounting
- Customer not buying the higher tier products or package
- Customers not buying related products
- Customer canceling subscription
- Customers lowering usage
3. Upsell/ Cross Sell ARR
This metric is included in #2 ARR, but usually reported separately.
This metric includes new ARR added but from existing customers. This can happen when customers upsell i.e. buy more usage, add users, convert to higher paid plan. ARR can also grow due to cross sell i.e existing customers buying related products or add ons.
You want to increase the life time value of your customers. One way to do that is to sell them more products. e.g. you are a CRM company and your customer is using Sales CRM, then you can sell them marketing automation or customer service CRM as the next product. Or you can sell the add ons to your product.
The cost of acquiring new customers is high. So, selling to existing customers lowers the cost of acquisition significantly. It also signals that customers place trust in your company and willing to expand usage of your product portfolio.
If Upsell/Cross Sell ARR is growing nicely, then Net Retention Rate will increase. You want NRR to be in the 110-140% range.
If the metric is slowing or dropping, that would mean that customers do not find value in the product. You can now investigate which product or add on is causing retention to drop.
Note: We are only interested in ARR i.e. recurring revenue that comes from subscription service. We are not interested in one off sales such as professional services or training fee. In fact if professional services is growing as a % of total revenue, you might question if your company is turning into a services business. In the early stages of a startup, it’s common. Not a bad thing per se as it gives early cash, but something not desirable for the long haul.
4. Retention Gross/Net
Retention is the holy grail of SAAS businesses. You want to closely monitor retention. This tells how you satisfied your customers are with the product. When customers do not receive value from your product, then they cancel or reduce usage.
For definition :
Gross retention —> number of customers retained and want to keep using your product e.g. Let’s say we start Jan with 100 customers of $ 100K ARR We lost 15 during the year, say $ 15K ARR ARR in Dec = $100K – $ 15K = $ 85K
—> gross retention = 85% or churn = 15%
Net Retention —> number of customers retained and buying more by adding seats, adding new product offers e.g. Let’s say we start Jan with 100 customers of $ 100K ARR We lost 15 during the year, say $ 15K ARR
Existing customers added new seats worth say $ 25K ARR in Dec = $100K – $ 15K + $ 25K = $ 110K
—> net retention = 110%
A high gross retention means customers are happy and want to keep using your product. A lower gross retention means customers are not finding the product useful. This is where product management need to step in and analysis the root causes.
GRR can drop when a customer cancels or they drop usage. Both need separate action. If the number of customers is same, but GRR is low, then they are staying on as customers but not using the product as much as earlier. Customer Success teams will be working with this customers. As PMs, you will need to investigate what their usage has dropped. Perhaps you may want to open new use cases.
If customers are canceling, then you need to look at the value proposition and see what’s not working.
A high net retention means customers are happy and want to keep not just using but expanding your product in their organization. This is a good sign that your product and messaging both are working.
Retention also helps profitability as it is cheaper to retain an existing customer vs acquiring a new customer
5. Conversions
Conversion from marketing leads to actual sale. A growing conversion rate means that your marketing and value proposition is working
A lower conversion could happen due to many factors. Key ones are –
- heavy competition
- lower demand
- value not clear
- not targeting the right channel
- price
As a product manager, your job is to ensure the right value propositions are articulated well in all marketing activities. Conversion can also be impacted if competitors are stealing your business. In which case, you need to figure out how to handle the competition.
In product led growth, conversions from free to paid plans needs to be monitored.
In sales led growth, conversion of leads to opportunities to closed sales needs to be monitored. Product marketing and sales will be your collaborators here. Many times this is because of sales execution issues. But product or the value proposition could be a reason too.
Conclusion
There are a few other metrics that you may want to track especially in startup stages – like profit or EBITDA (Earnings before interest, taxes, depreciation and amortization) or cash flow.
But start with the top 5 metrics. This will allow you to be a more purposeful product manager and work on building those features or products that will move these needles.
There is an added benefit. You will orient your product thinking to be growth oriented. Once you work on optimizing for these metrics, then management will also notice and consider you as a key player working on companys growth.
You might then argue, what about customers and giving them value.
That’s not even a question. Your job is to add value to customer. However, it cannot be at any cost. You are also responsible for growing revenue. When you apply the growth lens, you will be forced to work on things that add customer value which in turn brings in repeatable revenue that retains.
