Gainsight CPO on Product Management (Part 2)

It’s easy to look at the “old way” of doing business in the enterprise software world and say, “why would you change that?” In other words, why would you move away from a cost-effective model with high margins? Unfortunately, vendors can’t have it that easy. Ultimately, product management teams have moved toward subscription as a service (SaaS) models in order to adjust to customer demands.

To quote Geoffrey Moore: “Product is no longer king. Supply is not the scarce ingredient in the economic equation anymore. Now it is demand. And that means that the customer is king.”

Unlike traditional enterprise agreements, SaaS models shift every risk to the vendor as opposed to the customer. Instead of perpetual licenses that pay vendors with upfront capital, SaaS agreements provide services on an annual or monthly basis. As a result, the gross margins are okay and it’s critical to retain as many customers as you can. Furthermore, with less capital being received upfront, SaaS companies need to keep their sales pipeline filled with many prospects.

Product management teams in this space need to be very sales-focused. In other words, you have to focus on making your SaaS product as sales-friendly as possible. For example, you need to develop solutions that reduce churn or attrition with your customer base. With gross margin being much lower in SaaS models, it’s critical to retain customers. One way to do this is to constantly upsell. Simply put, it’s much easier and cost-effective to add new features to a customer’s account than it is to source new customers.

To stay on top of these factors, I like to use two equations with a ratio that combines the two. The first is “cost to acquire a customer” or CAC. Here is how to calculate CAC – which tells you how much you need to spend in order to bring on a new account:

Sum of Sales & Marketing Expenses  /  Number of New Customers

The second is “lifetime value” or LTV. Here is how to calculate LTV – which will provide a summary of the payback that your customers will provide:

Avg. Customer Revenue x Gross Margin  /  Churn Rate

Finally, the CAC-to-LTV ratio gives product management teams a simple view of their business viability. This model provides a clear overview of how much money you can expect to earn over time after making an investment to acquire a customer. In the end, SaaS models are here to stay and enterprise services can be effective in leveraging the model to reach more customers. That said, it is critical to stay on top of your bottom line.

Click here for Part 1

Click here for Part 3

About the speaker
Karl Rumelhart Gainsight, Chief Product Officer and Executive Vice President of Engineering Member

Karl Rumelhart is the Chief Product Officer at Gainsight. Karl is responsible for the product roadmap for Gainsight’s customer success platform. Karl has held senior product and marketing roles at VMware, leading product management for VirtualCenter and driving the acquisition of SpringSource. Karl has also run product teams at Jive and predictive analytics at Infer. Prior to his software career, Karl was an academic mathematician, lecturing at Stanford University after receiving a Ph.D. from Harvard University.

Provide your rating for this post
If you liked this post, please use the buttons to the left to share it with a friend or post it on social media. Thank you!

Leave a Reply

Read more

Product Management: The 4 Stages of Building

According to Christina Lucey of Credit Karma, there are four stages of building a product. Learn more in our latest blog.

Product Management: “Squeaky Wheel Syndrome”

Product management teams must combat the "squeaky wheel syndrome" - learning how to say "no" to maintain strategic focus.

Product Management: Simple UX for Complex Platforms

While product interfaces may appear very simple, PM teams must invest in UX optimization to create intuitive solutions for complex tasks.

Product Management: Trust The Process

Product management can lead culture changes through collaborative processes that increase transparency to make better business decisions.

Product Management: Mode Shift Friction

Shiren Vijiasingam is a product leader who is dedicated to creating solutions that connect with users on a human level. Friction is often viewed as a negative, but it can also create opportunities for new solutions to emerge. As Shiren explains, there are creative ways to turn customer pain points into innovative enhancements that bring joy to more customers.

Product Management: Customer Success Teams

Customer success teams help PMs identify areas for improvement through direct customer feedback, while reducing churn to drive more revenue.

Sign-in / Register for Free

Don’t be left behind in your career. Join a growing community of over 500K Product professionals committed to building great products. Register for FREE today and get access to :

  • All eBooks
  • All Infographics
  • Product Award resources
  • Search for other members

Coming soon for members only: personalized content, engagement, and networking.