Tracking Leads is a Waste of Time
One of the most common ways to measure the performance of a product marketing manager is by the number of leads she generates. The approach comes from the old sales phrase “It’s a numbers game!”. “Get me more leads and I’ll close more deals!”.
Not likely. What’s needed is a way to check on the health of the product, to monitor its vitals. To know that it’s healthy.
What good is it to learn the patient was sick after he dies?
Product marketing managers (and their bosses) are often confused about what is important and what isn’t important to track. This post helps to unpack that dilemma into a starting set of metrics which show the health of a product. Think of it like the data your doctor needs to diagnose your health.
The list of metrics started with 10 and grew to 15. Then I stepped back and thought about a basic, starter set of metrics to track. A set that is easy to understand, easy to measure, and relate to each other in a way that helps you get a clear picture of the health of a product. Some of you will be in a business where other metrics are equally as important as this list. Please add to the list, experiment, and adjust.
Oh, and you will notice that “Number of Leads Generated” isn’t on my list.
First Understand the Contribution
Contribution is the impact a product is expected to have on the business. In other words, how the product helps the business achieve its goals. Without understanding the definition of “healthy”, any metrics you track are useless. By measuring Contribution you can demonstrate how the product is driving revenue, reducing cost, improving retention rates, reducing churn, etc. It shows a measure of health.
In order to measure Contribution you have to start with the definition of Contribution. Common ways to measure Contribution are:
- Retention (Churn)
Revenue means how much is bought by the market segments served. Start with understanding the revenue goal. Then ensure you have the ability to track revenue to the product(s) in question. This can get fuzzy in companies that sell complex solutions and where the buyer doesn’t see an itemized breakdown of prices. In this case work with your Finance team on how they allocate revenue to each item in the solution.
Adoption means how many customers are using the product, and specific features in the product. Adoption helps you understand if they are really using the product regularly and have they made it part of their regular routine. It doesn’t help to build products/features that customers use once and then put on a shelf. That leads to lower Retention Rates and higher Churn.
Retention means how many of your customers stick around and continue to use the product. For on-prem products this means renewing paid maintenance. For subscription models that means renewing the license.
Adoption correlates to Retention. Retention correlates to Revenue. The bigger point is that you cannot focus on Revenue alone, and ignore Adoption and Retention. Poor adoption can lead to lower Retention which impacts Revenue.
Churn is the opposite of Retention. It tells you how many customers have you lost (more on this later).
The goal is to minimally achieve the expected Contribution. Ideally you want to exceed the expected Contribution.
So what are the metrics we can track to know you’re tracking in the right direction?
Average Deal Size
The Average Deal Size is the average revenue you receive on the average purchase of your product. Also known as the Average Selling Price (ASP). For established products the data is known. For new products, start with a set of assumptions then track the date to confirm or adjust your assumptions.
Determine if you have different Average Deal Sizes across different market segments. You are looking for outliers. It’s possible your company is serving a subset of market segments that have a higher Average Deal Size. Why? What can we learn from those market segments that may increase Average Deal Size in other market segments?
The Average Deal Size helps with understanding sales channel capacity. It can identify an unrealistic revenue targets (sales channel is too small), and you can identify trends in Average Deal Size. An increasing Average Deal Size results in better sales throughput. A decreasing Average Deal Size means a drop in sales throughput.
Average Length of a Sale
The Average Length of a Sale is the time from initial contact by a qualified buyer to when the sale completed. Over time you want to strive to reduce the length of time of a sale.
An increasing Average Length of Sale means your sales team has to work harder to achieve revenue targets. A decreasing Average Length of Sale means your sales team is able to sell more and with fewer resources.
Average Length of a Sale is another metric used to help understand sales channel capacity.
The goal is to reduce the Average Length of a Sale. Is the Average Length of a Sale consistent across market segments? Is it trending longer or short? Are there market segments that have a much shorter (or longer) Average Length of a Sale? Why?
The Close Ratio is the percentage of sales transactions that purchase your product vs. those that don’t. The Close Ratio is an indicator of marketing performance gaps as well as sales performance gaps.
A low Close Ratio could be due to:
- A poor product/market fit
- Improper targeting of potential buyers
- Ineffective sales enablement
A perfect Close Ratio would be 100%. An easy way to calculate close ratio is take the number of opportunities from the last 12 months that resulted in a sale and divide it by the total number of opportunities.
For example, if you had 3,000 purchases and can identify 12,000 interested buyers you have a close ratio of 25%:
3,000 / 12,000 = .25
The goal is to increase the Close Ratio because small improvements to the Close Ratio increase the throughput of the sales team. It lowers cost and uses fewer resources. Is the Close Ratio consistent across market segments or do you see variations? Are there market segments with higher Close Ratios? Why?
Retention Rate (Also Churn Rate)
The Retention Rate tells you how many customers continue to remain customers at their time of renewal. An ideal retention rate is 100%. While that may not be a realistic goal, you want to get as close to that as possible. Here’s why. The effort to get a new customer is far greater than the cost of keeping one.
As the Retention Rate goes down (and therefore the Churn Rate goes up) it takes more selling effort to not only get new customers, but to replace the lost customers.
Let’s say you have 1,000 customers and a Retention Rate of 85%. That means at the end of a year you will have 850 customers. If you are trying to grow at a 30% growth rate. You will need to acquire not 300 new customers but 450 (150 lost + 300 new). Even small improvements in the Retention Rate yield big returns.
The goal is to increase the Retention Rate (decrease the Churn Rate). Look at the Retention Rate over the last few years. Has it changed for the better or for the worse? Does the Retention Rate vary across market segments? Why?
A purchase is the first big measure of success. Getting customers to use the product and make it part of their daily life is adoption. Are they actually using the product or important new features of the product?
The Adoption Rate measures the percentage of your customers who are using a product or a set of features. A low Adoption Rate could signal a problem. Customers may use it initially but don’t see the long-term value of using it. It’s an early warning sign of future Retention Rate problems.
Conversely, as the Adoption Rate increases there is a higher probably of renewal and a higher Retention Rate.
The goal is to increase the Adoption Rate. If Adoption Rates are less than expected, investigate the issue. Were features built for a handful of big customers who demanded them, but the rest of the customer base doesn’t need them? Is it a new product that gets initial attention then customers lose interest? Why?
Customer Lifetime Value (LTV)
Customer Lifetime Value is the total profit a customer delivers during the time they are your customer. From initial purchase to leaving, how much profit do you receive from a customer on average? This insight helps guide important investment decisions around how much you would be willing to spend to attract a new customer (or how much you are willing to spend to keep one).
Some customers are more profitable than others. When you start to analyze LTV it will become obvious. In some cases you will find customers that are costing your organization more money than they deliver in profit.
The goal is to increase Customer Lifetime Value. It means we make more profit off of each customer. Tracking LTV provides insight into more profitable and less profitable market segments. With the data it guides the organization into making informed decisions about which market segments to go after and which ones to avoid. Not all revenue is good revenue.
Customer Acquisition Cost (CAC)
Customer Acquisition Cost (CAC) is the total cost to acquire a single customer. It costs time, money, and resources to get a customer to say ‘yes’. How much does that cost your organization?
If you break this down by market segment you will see that acquisition costs can vary dramatically. In some cases this may be expected, like entering into a new market segment where your organization has little visibility. In other cases it might be an early stage company that is investing heavily now in order to get fast growth.
The goal is the reduce Customer Acquisition Cost over time. You spend less money, use fewer resources, at a greater efficiency. Collect and analyze your Customer Acquisition Cost. Break it down by market segment. Is there an outlier market segment where you are spending much higher than other market segments? Why?
This is a basic set of metrics. I expect for your business you will include metrics that are more specific.
As a product marketer, what metrics do you track today? What are the barriers you see if implementing tracking of these 7 important product marketing metrics? What would you add?
Let me know in comments section. Also add any questions in the comments section too. I am happy to answer them.
Photo by patricia serna on Unsplash