Discover more from B2B Product Blog’s Substack
Business KPIs vs. Product Outcomes
Bridging the gap between financial metrics and product initiatives
I have recently observed some discussions about business outcomes vs. product outcomes. I believe this is driven by the current economic environment where Product Managers and Leaders are no longer measured by just how quickly they grow their teams or deliver free trials — but rather have to prove they contribute to business results, such as revenue or profitability.
While a Product Manager shouldn’t take the role of their CFO, it definitely helps to understand how product initiatives relate to business results. In the following, I will explain my mental model and illustrate this with a fictitious company which, I guess, will resonate with most of us immediately:
In today’s IT, project management and product development often are related to drowning in tickets, tickets, tickets with no end in sight. It feels clunky and cumbersome. Our mission at Zira is to make project management fast and enjoyable. We are mobile-first and adopt modern concepts that resonate with Generation Z users.
Even though I just made this up, you know who I am talking about, right?!😉
OK, back to our topic. No matter what the exact business model is or what notion of a flywheel our company is adopting, in its most basic version, there are 2 elements:
Delivering value for the user by means of the product
Capturing value from customers for the business
Both need to be in balance. If either of them falls short, there is no sustained business model:
If there is no customer value, it will be difficult to acquire paying customers; and even if that’s achieved by a certain level of over-selling, they will soon churn — which will impact the ability to capture value.
If a company fails to capture value in a sufficient manner, it will not be able to operate or pay salaries and other expenses — ultimately leading to a business failure (unless you are an NGO relying on donations or similar).
So, both aspects are closely related yet different. For experienced Product Managers and Product Leaders it is essential to understand both and how they play together.
KPI Trees for Capturing Value
The capturing side is typically measured by business KPIs, such as profit, revenue, retention, or churn. Depending on the growth stage of the company, the specific top-most KPI may differ: sometimes it’s revenue (to focus on growth), sometimes it’s margin (to focus on profitability), etc. But once that top-level KPI has been defined, it can be decomposed into the contributing factors and, thus, a KPI tree can be defined as sketched here:
In a nutshell, for this simplified example, the growth is measured in ARR (i.e. ignoring one-time fees and such) which in turn is determined by the number of net new customers, the number of seats sold to these customers, and the price per seat. The number of net new customers, in turn, is the number of newly acquired customers minus churned customers, and so on. While not shown in the diagram, there is strict math behind it which every CFO should be able to explain. And, yes, in reality, these KPI trees will be much more complex, including things like taxes, interest, and depreciation. For illustration purposes, I kept it simple.
The problem with these KPI trees is: Typically none of the metrics shown can be directly influenced by the product team. For example, net new customers could come via the Sales team, partners, or conversions after a PLG-like free trial. In any case, it will be highly dependent on other teams rather than directly measurable inside the product.
Hence, we need another tool for the product side of the house:
North Star Metrics for Delivering Value
A great candidate for that other tool is the North Star Metric which can then be decomposed into specific product goals:
So, we adopt the North Star Framework and think about a single metric that indicates the success of users when using your product. Maybe they will buy more (when you are in e-commerce), will book more hotels (when you are in the hospitality business), will spend more time with your product (e.g., when you are a streaming service or gaming company), become faster or more efficient in completing their jobs-to-be-done (e.g., when you offer products for logistics), or reduce their environmental footprint (e.g., when you are in ESG). The essential idea here is that we find a metric that
truly indicates customers derive value from using our product,
can be measured directly inside the product, and
is time-bound so when we measure, we will see changes in that metric.
In our simple example illustrated above, we want our customers to enjoy our products and we believe a great indicator for that is the total number of tickets being created or worked on every month. If that number goes up, it shows that customer adoption increases which, in turn, indicates they love using our product to get their jobs done.
Once we agreed on that North Star Metric, we can think about ways by means of which it can be influenced. For Zira, we, of course, need to focus on top-notch usability because this is part of our core value proposition. But there might be adjacent themes, such as making sure that IT compliance needs don’t get in our way when selling to enterprise customers. Thus, we can define strategic intents which then help to structure product work:
Note how each of these strategic intent will have its own metrics that, in the end, contribute to the single North Star Metric. For usability, we measure ease of use — either by directly observing users or indirectly via Customer Effort Scores or similar tools. For the IT compliance, we could look at successful RFPs but since we want to measure inside the product directly, we better track how often these specific features are used. The goal is to find a metric that
contributes to the North Star Metric
is specific to the respective strategic workstream
is a leading metric rather than some lagging indicator.
With that, it’s time to operationalize the product strategy by adding product initiatives:
Note that this isn’t a roadmap yet, it’s not a plan, it doesn’t tell what gets done when and in which order. Instead, it is a collection of hypotheses about how the specific strategic intent might be served. I don’t want to go into the discussion of Now / Next / Later roadmaps here; nor do I want to be dogmatic about the style of these initiatives. Instead, I believe:
Some initiatives will be more like big bets, with lots of unknowns, intense discovery needed by the entire product team; and maybe engineering even has to build something completely new: How might we provide a lightning-fast user experience even in environments when the internet is sparse?
In some other cases, it will be more like a simple task list: Integrate with a specific identity management service to provide SSO. (With “simple” I mean: hardly any unknowns — it might still be complicated to build.)
OK, now we have the business side of the house with KPI Trees. And we have a great collection of product initiatives serving the North Star Metric. Now it’s time to connect both.
Combining KPIs and the North Star Metric
While both structures, as explained, are different and serve different needs, they are related to one another. Or to be more precise: they should be related to one another and have a certain overlap. In other words:
We have to be able to explain how our product initiatives contribute to certain business metrics.
By doing so:
We aim for a significant overlap even when we don’t have to achieve a 100% alignment. There are business metrics that we can barely influence (for example when pricing is owned by Sales). And there are product initiatives that do not directly influence business metrics (just think of tech debt).
We start with qualitative statements and only later aim to quantify the impact.
Let’s look at some examples for our Zira startup:
As indicated by color-coding, we believe that with great UX, fast response times across all devices, and additional guidance we can reduce churn. Sounds pretty plausible, right? In e-commerce, there is even data on how every few milliseconds of page load impacts revenue. But for Zira, we don’t want to make quantitative guesses.
Likewise, we believe that the initiatives in the Enterprise Theme as well as easy administration of workflows will be important to help Sales win deals with enterprise customers. Again, pretty much obvious. And by talking to our Sales team, we will learn about priorities for the initiatives sketched here.
As a third example, we believe that fast and easy-to-use UX as well as feature-rich trials will help to convert users into paying customers. This will strengthen the Product-Led Growth layer of our Zira product as a complementary approach to standard enterprise Sales.
Above, I have sketched how some core business metrics might look like, how product initiatives should be derived based on a product strategy that serves a North Star Metric, and — most importantly — how these two views at our business can be connected to each other.
I am convinced that we, as Product Managers, are much better positioned and will have higher chances of success if we manage to bridge both positions. At least for a significant part of our product initiatives, we need to be able to explain why we pursue them and how we believe they will impact the business. With that, our next planning session with stakeholders will become sooooo much easier.