A value metric is the way you measure value exchange in your product.
“If you’re selling a pair of shoes, then your value metric is ‘per pair of shoes’ and as customers buy more pairs your business expands.” - ProfitWell
Ultimately, value metrics are the linchpin to successful execution of a product-led go-to-market strategy. Why? Because you're aligning your revenue model directly with your customer acquisition model.
Your value metrics play a vital role in how you price your product, set up your product metrics, and build your team. But, what the heck does it look like?
- For a video platform like Wistia, a value metric could be the number of videos uploaded.
- For a communication application like Slack, a value metric could be the number of messages sent.
- For a payment processing platform like PayPal, a value metric could be the amount of revenue generated.
According to Patrick Campbell, CEO of ProfitWell, there are two types of value metrics: functional and outcome based. Functional value metrics are “per user” or “per 100 videos.” Pricing scales around a function of usage. Outcome-based value metrics charge based on an outcome, like how many views a video received or how much money you made your customer.
Now, many SaaS businesses rely on feature differentiation as a way of justifying higher price points. But this comes at the cost of higher churn. As Campbell notes, value metrics outperform feature differentiation with up to 75% less churn. Outcome-based value metrics take this a step further with an additional 40% reduction in churn.
This trend continues further when looking at expansion revenue. Both types of value metrics still outperform feature differentiated pricing models with at least 30% more expansion revenue, but outcome-based value metrics push those gains to nearly 50%.
We all don’t have the luxury of pricing based on outcome though, because sometimes it’s hard to perfectly measure how much money someone gained from using your product or how much that time you saved them is worth. Yet, we can still take a lesson from this data in making sure we get as close to that customer and as close to value as technically possible.
Before we dive into how to find your value metric, let's step back and identify what makes a good value metric.
What Makes a Good Value Metric?
According to Campbell, a great value metric must pass three tests.
1. It’s easy for the customer to understand.
When someone visits your pricing page, will they immediately understand what they’re paying for and where they fit in your packaging? If not, you need to pick a new value metric.
If you’re in an established market, it makes sense to view how your competitors charge. A common value metric might be used by most competitors. For instance, if you’re in the email marketing space, most solutions charge by the number of contacts you have, so it makes sense to use contacts as your value metric.
However, if you’re in an emerging space like artificial intelligence, you’ll want to opt for a more data-driven approach to discover your value metric, something we’ll cover later.
In addition to making it easy for your customers to understand your value metric, make sure that your value metric aligns with the value that customers receive by using the product.
2. It’s aligned with the value that the customer receives in the product.
Consider the low-level components of your high-level outcome. If that sounds confusing, let me reframe it. Let’s say you have a live-chat solution. If you want to acquire more customers, you need to monitor how many messages customers have on their website with your live-chat solution. By monitoring the number of conversations, you’re able to see, at a high level, how much value they’re getting. Typically, most SaaS companies use Product-Qualified Leads (PQLs) to measure this internally.
Or, if you run a churn-prevention solution, you need to monitor how many customers set up automated emails that prevent churn due to credit card failures. Depending on how many emails are sent to recover churned customers, you can easily see your impact on saved revenue.
In both examples, we’re simply looking for what it takes to achieve a specific outcome. When it comes to your product, what core components lead someone to experience a meaningful outcome?
- Is it the number of contacts used by your CRM?
- Is it the number of live-chat conversations started?
You tell me!
Lastly, make sure that your value metric grows with your customer.
3. Grows with your customer’s usage of that value.
If customers get incredible value from your product, charge them more—your product is worth it. On the flip side, if customers aren’t getting the full value from your product, charge them less.
Slack does a great job emphasizing this on their pricing page by creating a fair billing policy. Given that Slack’s value metric is the number of users you add to the messaging platform, it makes sense to charge per user.
However, if you’re an enterprise with a large number of users, one of your biggest objections is not knowing how many people are actually going to use the platform. To combat this, Slack created the fair billing policy—you get charged only for active users.
Although it’s easy to suggest what makes a good value metric, it’s even easier to choose the wrong one.
The Mistake that So Many Make: User-Based Pricing
One of the most common traps is charging per user. For many businesses, charging per user is like tying a rope to an anchor that’s already tied to your feet, then tossing the anchor overboard. You’re going to get dragged down until you figure out how to cut the rope and pick a new value metric.
As ProfitWell’s Patrick Campbell explains, “The reason per user pricing kills your growth and sets you up for long term failure is because it’s rarely where the value is ascribed to your product.”
If you get charged by the user, are you going to share that product throughout your entire team? Or are you going to limit the usage to a select few? If you have a messaging application like Slack, it’s perfectly fine to charge by the user—the product has network effects and gets more valuable with more people.
But Slack is the exception, not the rule. So why is user pricing still the most common way people price solutions, according to the Pacific Crest Survey? Part of the reason is that companies just don’t know better. Most companies don’t have anyone to evaluate objectively if per-user pricing makes sense. Why?
“It’s counterintuitive,” Campbell notes, “but because pricing touches on every single part of your business, it’s often ignored. That’s because it’s at the intersection of marketing, sales, and product—so nobody in the organization owns it.”
If you think about it, this happens all the time in volleyball. Whenever the ball goes directly between four players, everyone assumes someone else will get the ball, so nobody actually gets it. Don’t you hate when that happens?
Openview created a checklist to help identify whether user-based pricing makes sense for your business. If you can check “True” for each of these conditions, per-user pricing is a great fit. If not, well, at least you know that it’s not the right fit. Better now than never, right?
Per-User Pricing Scratch Pad
Now that we’ve covered what makes a good and bad value metric, it’s time to define yours. This is the fun part!
How to find your value metric
Finding your value metrics helps you monitor if users are achieving meaningful outcomes in your product. They also play a critical role in reshaping your pricing strategy.
Choosing your value metric doesn’t need to be complicated—you don’t even need to get it right the very first time. If you’re a small company, you can afford to test several hypotheses (as long as you take a data-driven approach).
I’ll go through two different strategies that—depending on your company size—can help define your value metric. For best results, I’d recommend using both approaches in unison.
Step 1: Subjective Analysis
By now, you should have at least a couple of hypotheses about your value metric:
- Is it messages sent?
- Number of users?
- Total revenue generated?
Pull out a piece of paper and jot down everything you think could be a value metric. Once you have the list, run it through the value metric scratch pad.
Value Metric Scratch Pad
How did your value metrics stack up? Did you find a value metric that works? If not, stop reading this and continue to brainstorm new value metrics until you have one that passes these three conditions. I can wait.
Everything from this point on focuses on how to help your users experience this value metric in your product as quickly and often as possible. It can be tempting to call it quits once you’ve found a value metric that you think will work, but, given the importance of the metric, I encourage you to vet your metric with a data-driven approach.
Step 2: Data-Driven Approach
Every SaaS business has many types of users. You’ll have users who churn quickly, users who barely use your product, power users, and users with an extremely high lifetime value.
When analyzing usage patterns, it’s easy to focus on measuring your product data without segmenting your users. By doing so, it’s easy to optimize for everyone while creating a worse experience for your best users.
For instance, if we look at the product data for your best customers, we could streamline the onboarding experience for your perfect-fit customers while simultaneously filtering out bad-fit customers. We might decrease our signup-to-activation metric but increase our free-to-paid conversion rate.
To get meaningful insights out of your product data, look for patterns among your best and worst customers. For instance, ask yourself these questions when analyzing your data:
- What do my best customers do regularly in the product?
- What do my best customers not do in the product?
- What features did my best users try first during onboarding?
- What similarities among my best users—demographics, team structure, ability—led to success?
For churned customers, ask:
- What were some of the main differences between their user journey and that of your best customer?
- Specifically, what activities were different? What outcomes did your churned users achieve and not achieve?
- Were these churned customers in your target market?
- Why did the majority of these customers churn?
When trying to answer these questions, go through your product data to validate everything. And I really do mean everything. After you’ve come up with several viable value metrics, stress test their potential.
How to Stress Test Your Value Metrics
Using Campbell’s value metric scratch pad is one of the easiest ways to validate if you have the right value metric.
Value Metric Scratch Pad
However, there’s a downside: A simple scratchpad is based on your insights, not your customers’. To take it a step further, use a relative preference analysis. This is a simple statistical method to measure value in your product. You force people to make a decision between what they most and least want.
Here’s an example of what it could look like from ProfitWell:
In terms of [company] pricing, which of the following when it comes to pricing is most preferred? Least preferred?
Once you’ve asked enough people, you can identify the ideal value metric and have confidence that you've chosen the right value metric.
Are you currently using value metrics yet? I'm curious. Leave a comment below.