Product Strategy & ARR: What’s the Relationship?
No business outcome matters more for software start-ups and scale-ups than revenue growth. Founder intuition and trial and error are the ingredients for establishing the product-market fit which fuels the first critical stage of growth. Inevitably, a successful company will grow past the point where those engines can drive growth. It becomes increasingly difficult to identify which paths forward will achieve the most sustainable growth in the long-term. Customer bases and product portfolios grow too broad and complex for intuition to navigate, and trial and error at the company level becomes too costly. To continue growing efficiently, leaders need a rigorous, data-driven approach to measuring revenue which can highlight areas of opportunity and inform where to place strategic bets. But what makes for a good data-driven approach?
The right data driven approach to top-line growth breaks down revenue into metrics which are strategically important, actionable, and clear.
- Strategically important – directly relatable to the top-line
- Actionable – tied to tactical initiatives and measured on an ongoing basis
- Clear – easy to understand and communicate throughout an organization
Understanding how the pieces fit together, which metrics matter the most for your business, and what you can do to impact those metrics are the foundations for product strategy. Additionally, your priority metrics will evolve over time with your business; you should be constantly tracking a comprehensive, but not overwhelming, set of revenue metrics (ideally in real-time, when at product operations maturity). Sustained growth requires a complete view which can be explored by customer segment and product to surface actionable insights with clear ties to the big picture.
In SaaS, these revenue metrics are especially unique. Recurring revenue makes upsell, down-sell, cross-sell, new logo acquisition, and retention all critical building blocks for growth. These building blocks lay the foundation for which metrics you will need to focus on. To learn more some of the key revenue metrics you should be continuously tracking, check out our Getting More Out of Your Revenue Measurements article.
So do we translate this to strategy?
Always tie evidence back to your strategic goals. What are your top three goals for top-line growth? Identifying your goals, and tying it back to data, is what will make metrics relevant for strategy. By identifying goals tied to actionable metrics, and assigning KPIs to track them, companies can measure progress towards goals and quickly pivot strategy.
Although getting the right numbers is relatively easy, with revenue metrics it is more about showing your growth story. It is more important to identify the critical metrics that show where your company is going, and to understand how to pivot product strategy based on these metrics. Unfortunately, this is also the hardest part, especially when data challenges the status quo. Oftentimes we see situations like this call into question the integrity of the data, or the process taken to get the numbers, leading exec to forego data for gut and intuition.
It is the responsibility of exec leadership to foster an environment where data is trusted and valued in strategic decision-making. This requires things like allocating necessary FTEs in your organization and establishing processes to govern the insights. It requires your operations team to automate as much of the data science (e.g. scrubbing, matching, pivots) necessary to produce key visualizations, with the end-goal of fully automated, real-time, dashboards. With a company-wide commitment from CPO to engineer to foster an environment that values evidence-based decision-making in product strategy, you’ll have a much easier time identifying paths to growth and truly achieving your company’s ambitions.
Now, let’s run through some scenarios that a typical SaaS company might face:
- Company A is a high-growth SaaS startup with 60% YoY revenue growth, driven by 30% logo growth QoQ. ASP is on par with benchmarks in the industry, with many competitors in their category. Their LTV is low, however, due to a Gross Logo Retention of 60%. What would you do in this scenario?
- Target Retention. Identify why companies are leaving, what is causing low NPS, which segments have the biggest pain points, and then focus R&D on product improvements that customers are demanding for the platform (e.g..., critical bug fixes, tech debt). Optimally, the projected impact of product improvements is strategic in creating value for key customers in your portfolio.
- Company B is a Martech company with 35% YoY growth. Customers love the product, and there are few competitors in their category, so logos tend to be sticky. This leads to Company B’s low churn of .5% with Net Dollar Retention of 145%. When building the revenue bridge, it is found that growth is being driven by upsell / cross-sell opportunities, creating a solid LTV. However, logo growth is 10% YoY. What do you do?
- Target New Bookings. Drive acquisition of logos and dollars – since customers are sticky and retention is high, focus R&D on new acquisition-related product opportunities (e.g.., product innovation) which open new segments (i.e.., increase SAM/TAM), rather than retention-related product improvements (e.g.., tech debt).
- Company C is a Fintech startup with a dropping ASP. They are going into another fundraising round, and their ASP is lower than benchmarks in the industry. Certain segments perform worse than others, but overall ARR growth is still 30% and Net Dollar Retention is 120%. What do you do?
- Dive into Segmentation – ‘cut’ your customer base into different segments (e.g.., size, industry, years as customer) to identify where you are selling, and why you are winning or losing in each segment. Tailor your product offerings and potential innovation to the segments that demand certain features – and implement stronger value-based pricing that maximizes ASP for those segments. Target Sales & Marketing towards segments with higher ASP and win rates, to drive higher value bookings. Additionally, R&D can consider developing self-service enrollment for lower value bookings to lower their customer acquisition costs.
If you want to check out what components typically build an understanding of your top-line, check out our other blog post, Getting More Out of Your Revenue Measurements.