I’ve always found it a little strange that we refer to software as a “product”—like it’s a car or some other tangible, real-world object—when, in fact, software is more similar to a service. What drives the success of a software business isn’t how many widgets it sells; it’s how many problems it solves and how many tasks it helps users complete. This is where the software’s value lies, and value is what customers care about most.
Unfortunately, while value is the key currency when it comes to the relationship between software and users, most software companies don’t know how to measure value. Instead, they tend to rely on traditional, product-based metrics. While many such metrics are worth tracking, they don’t tell the whole story. They can also be gamed, which can result in misleading data and misguided growth strategies.
The other problem with product-based metrics is that they tend to focus on business-centric objectives rather than user objectives. This may help a company in the short term, but if long-term sustainable growth is what you’re after, focusing on delivering value to the user is the way to go. When you focus on delivering the outcomes the user is seeking, it will inherently result in good things for the company. In fact, this is really the only sensible way to build a business model for a company selling something that is more service than product.
And since it’s hard to improve on something you can’t measure, it’s important to know exactly what value you deliver and which metrics will help you accurately measure whether or not your customers are receiving that value.
Product versus service and the power of value to drive growth
When a SaaS company thinks about their software as a product, that paradigm defines their entire perspective and growth strategy. When you think about software as something you might buy off the shelf at Circuit City, you get trapped in the mindset of having to build a better mousetrap. Instead of focusing on user outcomes, you get wrapped up in thinking about adding more features, putting on a fresh coat of paint with a new UX, changing the packaging or the marketing. These actions are all beside the point.
Thinking about software as a fixed, semi-cohesive property places unnecessary limitations on how you conceive of what you’re actually delivering. When you’re providing digital services, there’s no need to constrain yourself to design around this imaginary “product” dynamic. It’s much more effective to think about what people are actually doing with your software.
People don’t buy software for the sake of owning software. They buy software because they have a job to do and the software helps them do it. Software helps them complete tasks and achieve goals. That’s where the value lies: getting stuff done.
Despite this somewhat obvious fact, many companies continue to build their growth strategies around business-centric tactics designed to manipulate users into upgrading, continuing to engage, or referring other users. While you obviously want users to do these things, focusing only on those outcomes is, ironically, not the most effective way to achieve them. It’s much more productive to focus on delivering value by helping users get to what they need so they can do their work. If you focus on delivering the value that inspires users to engage, upgrade, and refer, those things will take care of themselves.
Surprisingly, if you asked a handful of companies how they define the value their software delivers, there’s a pretty good chance you’d get a lot of generic answers. They could probably tell you all about the features and functionality, but they would likely have a harder time articulating why those features and functionality matter to users.
The trouble is, without a clear and detailed definition of the value you deliver, you will have a really hard time measuring that value. And—as we’ve already acknowledged—if you can’t measure it, you can’t manage or improve it. However, once you know what value means to your users, you can start to identify the metrics that will help you get a handle on whether or not you’re living up to that promise.
Traditional and value-based metrics
Before I talk about specific value-based metrics, I need to say that I’m not advocating abandoning standard growth metrics like revenue and retention. You can’t deliver a sustainable service if your company isn’t sustainable, so it’s healthy to be looking at those critical numbers on a regular basis. You just need to keep things in perspective and understand that those aren’t the causal mechanism driving your business success. Those are secondary metrics.
Also, you need to be careful about how you calculate and use even the executive-level metrics—things like lifetime value (LTV), cost of acquisition (CAC), and so forth. The hard truth is that there is little standardization around how to arrive at a completely reliable number. The number of variables opens you up to not only miscalculation, but also the manipulation of figures to tell a specific story, even if that story doesn’t reflect the whole truth about what’s happening.
Value, on the other hand, is really hard to fake. You’re either delivering it, or you’re not. And if you know which numbers to look at, you’ll know pretty quickly where you stand.
Let’s look at a couple of examples.
Instead of simply looking at how many signups you get in a week, try looking at your actual batting average. In other words, don’t just check the sign-up box, but follow those signups to see how many go on to actually use your software and—beyond that—how many are able to actually complete tasks and achieve goals.
This kind of metric shifts your perspective from focusing on business outcomes (sign ups) to focusing on user outcomes (complete task, achieve goal). It’s almost like you want to think about improving your user’s conversion rate rather than your own. You want to focus on what they want, and then align your service to help them convert on those needs.
To use Appcues as an example, there are steps a user needs to take before they can improve their onboarding with an Appcues to do list. They have to integrate Appcues and select the items for the list and so on. To achieve a better batting average, Appcues needs to look at a user’s progress through each of these steps and make sure the user has everything they need to follow through and experience the software’s value. They need to design the experience around helping the user get through each step as quickly and easily as possible.
MVRPU — minimum viable revenue per user
A lot of companies look at the relationship between CAC and LTV, which is a worthwhile exercise. However, what about the scenario in which a user is converted into a customer, but doesn’t ultimately stick around long enough to pay back the cost of their acquisition?
MVRPU helps you analyze situations where a user churns while they are still, so to speak, “in the red” and haven’t yet generated any actual profit revenue for the company. Similar to batting average, this model challenges you to look beyond the surface metric of signups to assess actual profits tied to signups. It also helps identify when the software has failed to deliver value, and how that translates into bottom-line business costs when a user doesn’t meet the minimum viable revenue.
Putting value first – a win-win for the user and your business
I’m clearly biased after putting in more than half a decade studying onboarding. I encounter people all the time who have been beating the drum about the importance of effective onboarding within their own companies, only to have their suggestions pushed aside to make way for new features or a splashy new interface design. I have worked with so many companies that generate thousands and thousands of signups each week, but only manage to convert 10 percent of them.
What if they could convert 40 percent of those signups? What would that mean in dollars and cents?
All it takes is shifting your focus to delivering value and looking at the metrics that will tell you straight up if you’re succeeding or failing in that effort. The traditional way of looking at one-day, three-day, and thirty-day retention isn’t relevant as part of a value conversation. You can’t assume that you are delivering value just because a customer comes back. They might be coming back because you spammed them with three emails on day two. They might be coming back because it’s taking them too long to complete a task. They might be coming back to cancel their account.
You can see how looking at certain numbers without the full context can give you misleading information about how you’re actually doing.
And if your organization is incentivized to drive metrics that can be gamed, they will miss the opportunity to deliver the value that really matters in the long run. You’re much better off focusing on delivering value to users based on their objectives—not yours—and figuring out how to accurately measure your success rate on that front. If you get that right, everything else will fall into place.