In this article we consider what questions a leader or investor should be asking a tech business to understand whether that business is truly product-led, and if it has positioned itself to reap the benefits of this approach. (For a recap on the concept of product-led growth, read my short guide here.)
An effective product-led team will:
● Understand the risks of building a product and embrace and use these risks
● Prioritise for success
● Measure progress well and often
Tech and product can seem impenetrable to those not immersed in the day-to-day workings of a business. But by asking the right questions you can gain the insights you need. You can understand where a business has got to in its product-led journey.
As I go through the questions, I’ll highlight the Red Flags that you should look out for. They’ll help you to spot if a team is ‘walking the walk’ of product-led growth or just ‘talking the talk’.
Question 1 – Are you risky?
Some tech organisations – and the people within them – feel their job is to avoid risk. But we can use risk to help us achieve things we couldn’t achieve otherwise. I like to think about risk in terms of a ‘contained blast radius’ – what’s the worst that could happen? If we can answer that question then it will tell us whether we can afford to accept the risk associated with a decision or course of action, even if it doesn’t turn out as we hope.
When thinking about developing a product, these are the key risks the team should be thinking about:
Value – If the product doesn’t give value, nobody is going to buy it. The team needs to think hard about what value the customer is going to get. Will they view it as something they ‘need to have’ or is it just a ‘nice to have’? For a customer, value must be intrinsically linked to something they care about NOW, not something that might be important to them in the future.
Usability – Can we make the product usable and friction free? This risk grows where the team doesn’t talk to customers, use prototypes or focus groups to hone usability.
Feasibility – Is it technically feasible to build the product in a particular way? It is vital to work closely with technical teams to try and pre-empt future problems.
Business viability – Are we the right business to do this? Are there other competitors in the space who can simply do this better than us?
I would ask a team to explain to me each of the key headings of risk, and how they deal with and mitigate each one.
Red Flags
It’s a red flag to me if a team can’t describe the exact way the customer will derive value. I want to hear that the team understands their customer and the problem the product will solve for them.
It’s a common scenario that teams misuse the concept of ‘minimum viable product’ or MVP. The purpose of using a MVP is not to cut corners or meet roll-out targets that would otherwise be missed. It’s a tool to get feedback as quickly as possible and uncover the value that you are – or should be – giving to customers.
Sometimes, companies say their product is a ‘toolkit’ – something that serves many different purposes, and there are many different ways a customer can use it. When I hear that, I hear that the product doesn’t have a sharp focus. When you’ve nailed the product, it won’t be a ‘toolkit’ – it will a hammer, or a screwdriver, or whatever tool the customer needs, at the time, to solve their problem.
Question 2 – are you prioritising for success?
To break this question down, I would ask a team:
How do you prioritise? A key part of being product led is responding to what the customer wants. But sometimes you can have one ‘loud voice’ customer who can skew priorities unless an objective prioritisation process is followed. I advise teams to build up a quantitative analysis with a RICE score (Reach, Impact, Confidence, Effort[1]). Reach considers how many people will this feature affect within a given time period. Impact is more of a qualitative question – what impact will it have for customers? Confidence asks how confident are we about the Reach and Impact scores? Effort is a high-level estimate of the number of Person-Months that it might take to develop the idea. It isn’t a commitment to deliver on a given date, it is just an indication of the level of investment the organisation will have to make to deliver value to the customer.
Where do you start with an idea? For this, we need to go back to first principles – what problem are you are trying to solve, and why? It involves clearly defining the problem, defining the solution, and defining what success looks like (for more on success metrics, see below).
Red Flags
Alarm bells ring if I hear a team saying things that essentially mean, ‘We know better than our customers. They’ll understand in the future why X, Y or Z is important.’
Even worse, a team might be thinking, ‘Our customers aren’t smart enough. They’ll get it at some point.’ In my experience, most customers understand very well what their problems are. Even if they don’t, why would they pay out for a product whose value is not clear or relevant to them NOW?
Question 3 – How do you measure success? (Or ‘Are we there yet?’)
I want to see teams taking a rigorous and scientific approach here, for example:
Release measurements – when new capabilities are released, you can use the AARRR approach (aka ‘Pirate metrics’!) to measure:
Acquisition – how many people are discovering our new feature?
Activation – are they taking the actions we want them to - are they signing up for the new feature and using it?
Retention – do they want to keep the feature?
Referrals – do they like it enough to tell others about it?
Revenue – are they willing to pay for it?
Product measurement – Is my overall product hitting the mark? Various metrics can be used including:
Net promotor score – This is calculated by asking the customer, using a 1-10 scale, how likely it is that they would recommend your product to a friend or colleague. A positive score only occurs where a company has more ‘promotors’ (who score 9 or 10) than ‘passives’ (who score 7 or 8) or ‘detractors’ (who score 0 – 6).
Churn / Customer lifetime – Churn is the rate at which customers stop doing business with a company. Customer lifetime is 1 divided by the churn rate. E.g. if your yearly churn is 10%, then this means the average customer lifetime is 10 years.
Net revenue retention – This shows the percentage of recurring revenue that is coming from existing/repeat customers over a set period (i.e. disregarding revenue from churn), and is useful to predict potential for expansion.
Time to value – This is the amount of time it will take for a customer to get the value they were expecting from your product. The shorter this is, the higher the likelihood of retaining that customers / avoiding churn.
CoCA – Cost of Customer Acquisition, i.e. the amount of money the business spends in order to get a customer to purchase its product (all sales and marketing spend, including salaries, bonuses, overheads etc).
LTV – Long term value or lifetime value. How much will we generate from the customer before they churn?
Red flags
Not measuring success at all, or not in any meaningful or quantifiable way.
Measuring too many things - the ‘NASA control room’ approach! There are dozens of metrics that could be used to analyse the data you receive. But the problem is you can end up with too much going on and the important takeaways get lost in all the noise.
Mixing product metrics with sales and marketing metrics. A good product ultimately delivers revenue, but the product itself needs to have its own metrics. It’s hard to ask an engineering team to increase revenue by 20%. But you can ask them to build something that solves a customer problem in a really effective way – and the revenue will follow.
Lack of clarity. It’s a red flag when a team is unclear about the cost of customer acquisition, or doesn’t understand LTV, and has no plan to quantify or understand these.
Conclusion
Where a team does have meaningful answers to these questions – or a clear plan as to how they will be answered – then this reassures me that the business has the mindset and approach I’m looking for. For me, this is when it gets truly exciting to be involved with a business – when the path ahead is truly product-led and bursting with potential.
If you want to chat more about product-led growth, and the transformative power of using this approach in business, please contact me by emailing Matt Little at Blue Ocean Insight.