As a vice president of product management, there’s a problem I’ve seen many times before. Product managers avoid tying their north star metric—a metric that connects product value to solving the customer problem—to revenue. They end up throwing up their hands and saying, “There is no good metric!”
It’s true that it is really, really hard to clearly connect a product team’s work to a top-level outcome such as revenue because product changes are usually one or more steps removed from revenue outcomes. It’s also sometimes hard to prove what has caused an increase or decrease in revenue.
When I say product teams need to connect their work to revenue, people get stressed. They think that connecting to revenue means revenue has to become their goal, and that they have to generate dollars.
It’s difficult to get a product team to rally around metrics that are too high up. Teams become demoralized because of their inability to impact those metrics on a short time horizon. Revenue is a function of the demand pipeline and sales execution, so product teams have little control over it. Understandably, product teams have a desire to disconnect from revenue and just focus on increasing user value.
But product teams do have to show how their work connects to revenue to make sure they’re aligned with what the rest of the company is doing. The best way to do that is to ladder up from metrics that measure a team’s day-to-day output to top-level key performance indicators (KPIs). Those top-level KPIs, in turn, map onto the different dimensions of revenue: generation, retention, and sustainability.
- PMs and product teams are naturally resistant to connecting their work to revenue.
- It’s hard to rally a team around really high-level metrics they can’t fully control. It’s much easier to focus only on delivering value to users.
- But PMs do need to connect to revenue to make sure their work is meaningful in terms of helping the business.
- It’s especially important in B2B because the product team is closer to the deal cycle than in B2C orgs.
- Revenue can be broken down into three dimensions: generation, preservation, and health/sustainability.
- Those three dimensions map onto top-level B2B org KPIs: growth, retention, and margins.
- PMs can ladder down from those top-level KPIs to product metrics, thus showing how their work connects to revenue.
Why B2B product teams need to connect their work to revenue with a monetization strategy
Organizations have limited investment budgets. If B2B PMs don’t connect their work to revenue, they might be spending their time on work that is disconnected from the rest of the org and doesn’t deliver a return on investment for the company.
If a product team is disconnected from revenue, their work is disconnected from the business strategy. The efforts of the product team may or may not have a positive impact on the health of the business. But without connecting to revenue, you have no way of knowing.
Connecting to revenue is more important for product teams in B2B organizations than those in B2C because they are much closer to the deal cycle. In direct-to-consumer businesses, you tend to have ad- and subscription-based business models. PMs in B2C are a step removed from concerns about how users are paying for the product, which means they can really focus on the value of the product.
Whether you work with small to medium-sized businesses or with larger organizations, B2B products mean it’s highly likely product teams will get pulled into deals. There are wins that product helps drive, and there are churns that products help prevent. Inherently, that means revenue is a bigger part of the day-to-day conversation in B2B product management.
How to connect product work to revenue
PMs can connect product work to revenue by laddering. Break revenue down into three different dimensions that map onto top-level KPIs. Those top-level KPIs ladder down to mid-level KPIs, which ladder down to metrics that measure the day-to-day output of your product team.
1. Map revenue onto top-level KPIs
Revenue is the ultimate metric we’re trying to impact. To get from revenue down to product metrics like app installs, we have to start by connecting revenue to top-level KPIs.
At the highest level, you can measure the health of any B2B business by three KPIs: growth, retention, and profit margins. They track your ability to win new revenue, preserve that revenue by preventing churn, and ensure your revenue is healthy and sustainable. Each of these KPIs has a revenue component.
We can break revenue down into three dimensions (revenue generation, revenue preservation, and revenue sustainability/health) that map onto the KPIs like this:
- Revenue generation = growth
- Revenue preservation = retention
- Revenue sustainability = margins
2. Divide top-level KPIs into mid-level KPIs
So now we have to get from the three top-level KPIs down to product metrics. We do that by dividing those three top-level KPIs into six mid-level KPIs.
Each top-level metric can be split into two mid-level metrics that feed into it.
User growth and revenue growth contribute to overall growth. Product impacts revenue growth by helping to land and close deals, generating net new recurring revenue. Product teams can also contribute to user growth by activating user bases that can eventually be monetized.
Similarly, overall retention is made up of customer retention and revenue retention. Product can help prevent churn (thus improving retention) by building product features and capabilities that preserve revenue. They can encourage stickiness, make sure customers get value, and increase the level of product sophistication that customers use.
Product pricing and service costs both affect the margins metric. Product teams can develop advanced features that allow you to unlock premium pricing. They can also help reduce service costs by writing more efficient products.
Though these mid-level metrics are useful for team managers, they’re still too high for a product team to rally around. If you’re a PM, you have to go one step further and connect those metrics to the work your team does every day.
3. Connect mid-level KPIs to day-to-day metrics
Connect mid-level KPIs to product’s day-to-day metrics by grouping those metrics by the type of impact they have. For instance, daily, weekly, or monthly active users and app installs contribute to user growth.
Similarly, things like time-to-value and customer satisfaction feed into customer retention. If customers are reaching an “aha” moment quickly and are satisfied with the product, that indicates they’re unlikely to churn.
Group low-level metrics by how they impact mid-level metrics.
Now we can see how these metrics ladder all the way up to revenue:
- App installs → user growth → growth → revenue generation → revenue
- Time-to-value → customer retention → retention → revenue preservation → revenue
Laddering isn’t just useful for product teams; it can also happen across departments. For example, the marketing team can map customer acquisition costs (CAC) onto service costs, which feeds into margins and revenue health.
No matter what your product team’s north star is, you can use this framework to connect the dots from the bottom all the way to the top. The only way this technique won’t work is if your organization is disjointed and your product value has no correlation to business value.
Create a data hierarchy map to show the relationship between metrics in your organization.
Measure product impact with the right metrics
To ladder up from your product metrics, you need to make sure you’re tracking the right metrics in the first place. Learn which metrics to track with The Amplitude Guide to Product Metrics.