In this talk, we're going to dive into how you can connect your product decisions to revenue. We'll also explore the role of product in the growth of your business.
Jonathan Kim:
Thank you so much for joining this talk. We are here today to talk about how to connect your product decisions to revenue.
Jonathan Kim:
Now, if you're a product manager or you are on a product team, you're probably saying, hold up, I'm in product, I'm not in sales. My job is to build a product that customers love not to generate revenue. But hear me out for a moment, every business, even if you're a nonprofit has a additional motive that they have to keep in mind and that's the sustainability of the company. Modern product teams have thus defined the roles as building the right thing, but very few have actually quantify what it means to be right. Some companies run on Bitcoin ICOs, but most of us run on customer revenue. And for a product person to contribute to the broader business, it is critical to understand the financial impact of the decision that we're making day to day.
Jonathan Kim:
So the good news is that this is much easier than it seems. And these things are really easy to learn and the impact is probably already there in your product led business, waiting for you to just measure it and quantify it. At the very least, these skills will help you have more educated conversations with your executive team and go to market peers. Though it may seem scary ultimately products should be as accountable for business growth as any other function in the organization. That doesn't mean that it's the most important thing to optimize for, but there's no doubt that product and revenue are more connected than ever today. Regardless of how you feel about revenue there's no question that these skills are going to help you make better decisions as a product manager or growth person. It's already a PM's job to understand the customer and being able to align that to the needs of the business is going to be even more impactful.
Jonathan Kim:
So why should you listen to me? I'm Jonathan Kim and one of the founders here at Appcues. Until stepping down to lead product full-time I was the CEO at Appcues for the first five years and led the company from zero to over 1200 customers. Then my background is in SAS software. Many of these lessons are things that PMs in any business can take away. So we have a lot to cover through this talk, and I'm going to attempt to cover six topics that will help you connect your product decisions to revenue. So let's go.
Jonathan Kim:
First, we had a quick dive into some useful terms, there's plenty that will be specific to your business and that you should already be aware of but these are some of the high-level ones that don't always get the same public attention. Every business runs a little bit differently and you won't be fluent right away, but these terms will help you at least start thinking in the right way. So here are those six terms, I can address them one by one.
Jonathan Kim:
The first one is bookings, this is money that customers commit to paying. Second one is called billings, money that you actually receive. CAC, C-A-C, which stands for cost of customer acquisition. This is the amount of money that you spend to get a single new customer. COGS or Cost of goods sold, this is essentially product costs. What it takes you to manufacture your product. Opex, which stands for operating expenses. These are the dollars that are spent to run the business. And lastly margin, which is how much you make or lose for every customer that you have.
Jonathan Kim:
So let's figure out exactly how revenue is usually calculated within a product company. It's usually done in one of two ways, either you do it based on past performance, that's the preferred method of most finance teams. And the second way is that you take the quotas of your sales team and you add that all up to come up with your projections. Notice that in neither of those two cases is product mentioned in that equation. There's no mention of features being shipped or bugs being resolved, but that doesn't mean that product revenue doesn't show up in the forecast. Here's the screenshot of the revenue budget for Appcues. You'll notice here the product is littered all over the place, you see different product lines show up here under the bookings. You see different customer segments, enterprise features. You see what happens when we have unhappy customers or current bugs in the product that results in churn by segment. And you also see server costs and support costs that are all contributed and solved byproduct.
Jonathan Kim:
Now, the dream here is to be able to layer in a self-service revenue with all of these other things that you're doing, whether it's ABM or it's inside sales or field sales or partner sales and connecting those return to the decisions that you're making and the improvements you're making in your product. Now PM's already spend a good amount of the time doing this type of analysis, competitive research, pricing studies, customer interviews, all of these things help tell the story of why something is worth doing, but without the business context, it's impossible to confidently know when to do it. Which means that it's still could be the wrong thing to pursue right now. And we can settle for proxies, things like lifetime value, but we aim for these things to be as close to the measurable dollar impact as possible.
Jonathan Kim:
And I can give an example. So I recently had to evaluate a third party vendor to power our integrations platform, and most companies end up building this themselves, but I wanted to avoid doing that and found someone that offers that as a service. When we put cost aside for a moment and just look at the returns. We found that this would help us go to market with a vast catalog of rich integrations that our competitors did not have and we can do that in a matter of weeks. By our math, we needed about 3% of our existing customers to buy it in order to break even on that investment. So can we get more than 3% of our customers to upgrade or buy this integration, became the question that we had as a leadership team.
Jonathan Kim:
Cool. So now we understand that how to speak the language of revenue. Let's start talking about how to start sizing the investments that we're going after. Here's some common ways that we can look at different investments and different returns that we can expect from those investments. For product led companies, those are turns that impact acquisition and retention are among the most critical. To illustrate this a bit, I'll give an example we discussed recently here at Appcues, which is the cost of a single support ticket. This highlights, why it is so important for us to fix especially technical issues. Much like many other companies Appcues has a tiered support model. This allows us to catch them really simple issues with the first line of defense, with very little effort, but it is also very taxing when we have really complex ones.
Jonathan Kim:
So when someone writes into support and after use customer or prospect trying the product for the first time, if that is a technical bug, it first goes to the frontline support person who may then escalate it to a technical support person if they've realized that it's a technical issue. If that technical person can't solve it, it gets escalated to an engineering manager who then escalated to an engineer or assigns it to an engineer, once they've identified that it's a real issue. A couple of days later, perhaps that bug is resolved. And then some, if not all, of the people earlier in the chain are now notified of that change then gets relayed to the customer. In that example, there are four or five different people that are involved in this process, which equates to hundreds of dollars of man hours spent on resolving this in addition to the impact that it's had on the customer. And so that's why for us, it is really critical to understand how many of these issues are coming up and how we can start tackling and resolving them.
Jonathan Kim:
So now we've talked about how important the revenue and product is, we know to speak the language, we know how to size investments. Let's talk about how to maximize the impact once we start making these investments. Now, I think we're all in agreement here because you were part of this summit, that product led businesses are awesome. And one of the really amazing parts of them is self-serve revenue. But there is one thing that we don't often talk about when it comes to self-serve revenue and that's that self-serve revenue has a really narrow range of flexibility when it comes to price. So somebody that is used to paying $45 a month, it's going to be really hard to get that person to start paying tens of thousands of dollars a month. The range as it turns out for how you can flexibly price. A product is really small.
Jonathan Kim:
Now, if we compare that to a sales driven model, especially when it is layered on top of a product led model or a self-served model, the range of flexibility and pricing is really great there, Because now you can have a conversation with people about the value that they're getting out of your product and price that appropriately. That means that one customer could come in and pay a thousand dollars a month for exactly the same product that another person is paying 10,000 or $20,000 a month for. This can only be done with sales, but using the two things together, a really great product and a really great foundation, and then pairing that with sales helps you really get that price elasticity up.
Jonathan Kim:
The point of this is that sales is an amazing partner to a really great product team. Every sales person wants to sell a product that is easy to use, the customers really love because it makes their job easy and together both teams can really win. So now that we've got everybody on board, now we understand really what it means to connect these product decisions to revenue. Let's talk about how to make this part of your culture going forward. This can't be something that just lives within the product team or one single person, it needs to be something that's championed throughout the entire company so that you can all be speaking the exact same language of revenue. What this doesn't mean is that you go around and act like a salesperson and forget about the customer impact, that's absolutely not the way to go do it. At the end of the day, you should be viewing your product as the biggest lever of growth and sharing the financial decisions but it doesn't mean that it's the only thing that we're optimizing for as product leaders.
Jonathan Kim:
The three things that we can do to make this part of the culture, as I mentioned, the first is to share in the financial decisions. Product should have a seat at the table when it comes to setting the forecast and setting the budgets, because all of these things do trickle into what happens. The last thing we want to do is to be setting these projections independently and then be on the hook to have to deliver some really major feature that was never on the roadmap to begin with.
Jonathan Kim:
The second is to put the product to work. So if you are a product led company, start thinking about how your product can be driving growth through acquisition, maybe self-serve revenue, improving retention, reducing support costs. All of these things show up in the budget and really can change the curve of the company. So if you're thinking about ways that you can be adding value there.
Jonathan Kim:
And the last one is finding ways to pursue the win-win. When this is good for customers, when they are able to get value out of your product and really succeed with it, that's what's going to be better for the business. That's really what it means to be product led and that's really what it means to really win with customers. Creating that culture, where everybody is looking for that win-win for the company and for the customer is what's really going to make this a sticky part of the culture.
Jonathan Kim:
Thank you so much for joining my talk. If you'd like to get in contact or reach out to me about anything, you can find me on Twitter, I'm hijonathan. We are really excited about helping product led companies really connect their decisions to revenue a lot better, and you should look to see that and part of the Appcues product over time. So feel free to sign up right at appcues.com.
