Product professionals, whether they work at a startup or an enterprise, tend to ignore a goldmine of readily available quantitative data. What I am referring to is the sales and business development data stored in the company’s CRM and diligently maintained by the sales operations team. Why not take your product roadmap to the next level by embracing a more customer-centric strategy?
In this article, I’ll go over some of the most common sales, marketing, and business development metrics, and explore how they quantify the economic value of a customer. Then I’ll discuss how the product team can use these metrics to better support customer acquisition efforts and prioritize those features that matter most to customers.
ACV refers to “annualized contract value.” This sounds complicated but is nothing more than the average yearly value of an order. For example, if a 3-year subscription license is sold at $3000, the ACV for Year 1 = $3000 / 3 = $1000. An ACV that increases year over year shows a few things. One is that the product is selling. Another is that the go-to-market strategy (including but not limited to distribution, packaging, lead generation, and pipeline generation) is working.
To calculate margin, subtract all variable costs associated with sales, marketing, operations, and administration from revenue. A high margin signifies that the product owner has been successfully controlling the costs that go into building, shipping, and selling the product.
NOTE: A product leader might want to involve the company’s CFO and not just the sales operations team to obtain this number.
Annual Churn Rate
A company’s annual churn rate is equal to 1 divided by observed annual churn. Annual churn is the number of customers the company lost during the previous year divided by the total number of customers in the previous year. A churn rate that decreases year over year demonstrates high levels of customer satisfaction and delight. Also, it shows that the product’s adoption strategy has been a success.
Customer Lifetime Value (LTV)
To calculate customer lifetime value (LTV), simply multiply margin by annual churn rate. This number signifies the total economic value of a customer over their lifespan. A high LTV means that the customer is highly satisfied with the product. A low LTV, however, may suggest that your team should reprioritize the product roadmap.
Customer Acquisition Cost (CAC)
CAC is the sum of all the sales, business development, and marketing costs involved to acquire a customer. A high CAC suggests that the product is not self-sustaining and that its value may not be clearly communicated to the end user. In addition, it may also mean that the go-to-market strategy is falling short.
Now that we have covered the concepts of LTV and CAC, let’s go over how these two metrics can help you build a product strategy around feature prioritization and customer acquisition.
A high ratio of LTV to CAC means that a smaller dollar amount is spent acquiring a customer. At the same time, the total potential profitability of the customer is very high. In this situation, the product team should prioritize features that are particularly appealing to customers, leading to additional revenue and higher levels of customer delight. For example, if the LTV to CAC ratio for Netflix is high, it means that the available video content, recommendations, search and so on, are attractive to customers.
A higher ratio of LTV to CAC also means that you’ll likely find success with promotional plans such as discounts, free upgrades, discounted add ons, and bundle deals. Your product’s go-to-market strategy should include avenues such as upselling and cross-selling. Let’s consider a hypothetical example. If the LTV to CAC ratio for Amazon Prime is high, the company might offer a “bundled” subscription for HBO or free access to movies on Amazon Prime for a specific period of time.
In conclusion, a product leader should be able to convert data from traditionally overlooked sources like sales, marketing, and business development, into meaningful insights, then use those insights to make the product roadmap holistic and data-driven.
Kumar, V., & Rajan, B. (n.d.). Customer Lifetime Value Management: Strategies to Measure and Maximize Customer Profitability. Handbook of Marketing Strategy.
Marketing Analytics, Prof. Przemyslaw Jeziorski, University of California Berkeley.