Linking Product Metrics With Commercial Metrics
Do commercial metrics, like “monthly recurring revenue” matter to product managers, when product metrics, like “monthly active users” already paint a good picture?
The short answer is yes, as long as the PM role involves communicating with commercially oriented stakeholders like CEOs with an interest in financial growth, pretty much every CEO.
The saying “a product manager is the CEO of the product” stems from the idea that product managers are entrepreneurial and base their teams’ efforts on the assumption of value gain for clients and the company. This also implies that product managers have to have broad knowledge of many fields, just like the CEO of a company, including data, technology, marketing and finance.
In an excellent recent article, the venture capital firm Lead Edge Capital, aptly pointed out how startup CEOs should communicate their company success better in their pitches to them. Lead Edge argues that CEOs should communicate their success like an escalation of metrics. In case the highest metric — profit — isn’t good, report on the next highest metric; adjusted profits. If they’re not good either, then continue the way down the hierarchy.
Every product initiative can be looked at through exactly the same lens, in reversed order. One metric that leads to the next, until the highest level — profitability — is reached. Let me elaborate on this point further, but first, here’s what Lead Edge wrote:
- If companies have good cash profits, they report those
- If companies don’t have good cash profits, they report on adjusted profits
- If companies don’t have good adjusted profits, they report on gross profits
- If companies don’t have good gross profits, they report on revenue
- If companies don’t have good revenue, they report on adjusted revenue indicators (like Gross Merchandise Value — GMV)
- If companies don’t have good GMV, they report on Monthly Active Users
- If companies don’t have good Monthly Active Users, they report on Subscribers
- If companies don’t have good Subscribers, they report on Downloads
- If companies don’t have good Downloads, they report on Pageviews
- If companies don’t have good Pageviews, they report on that they were voted the “Best Place to Work in XYZ City”
Now, the difference between the CEO and “the CEO of a product” or the product manager is that product managers derive their strategy from the overall company vision, typically set by the CEO and other directors. CEOs are therefore more accountable for overall company profitability and product managers are more accountable for metrics further down in Lead Edge’s hierarchy.
Using an example of building a new chat bot feature, here’s how the hierarchy can be reversed to illustrate the initiatives’ impact on profitability:
- When we implement a new chat bot feature to write bespoke email responses
- It speeds up responses to client request emails
- So that 120 seconds per email is saved by account managers on client relationship management
- Which leads to lower operational costs of 10% for account managers’ day to day activities
- And that in turn leads to an NPV of £230,000 in 12 months
- Which has a positive impact on overall revenue by 1%
- And a positive impact on profit by 0.5%
Product managers typically use metrics such as in the example “time saved by account managers”. Other common metrics are “increased market share”, “lower churn rate”, “higher conversion rate” and so on. The point Lead Edge Capital and I are making, however, is that the order in which these metrics are connected to higher level financial metrics matters, because it helps to break down more easily at which point product assumptions were wrong in case of failure.
On a more abstract level, the following works perfectly for product managers when writing a business case as a blueprint for communicating product metrics’ relationship with potential profit:
- When [feature] does [X],
- It has the consequence of [Y],
- So that [product metric] is higher / lower
- Which leads to [lower operational costs / higher sales]
- And that in turn leads to increased [commercial metric]
“What can be measured can be managed”.
What my former employer Michael Bloomberg once famously said has become synonymous with good business acumen. However, unpicking some of the commercial metrics in more detail, it is important to understand each of their advantages and potential risks when translating them back to product success. For example Return on Net Assets can be useful to compare similar products and their effectiveness, but also tricky, because intellectual property in SaaS companies can be hard to calculate as an “asset”.
However you slice it, some metrics are more useful than others, but creating a link between product metrics and commercial metrics will improve the ability to raise funds for product initiatives. I’ll always remember what my late colleague Alex McKie once said about metrics. It’s important to measure the valuable and not just value the measurable.
