ZT20 #002: Value ExchangeDec 01, 2022
What is it and some anti-patterns to look out for
Founder: “We know our customers value our product because engagement rates are really strong”
Me: “How frequently do you sit down with customers and establish the value being created by their engagement with your product?”
Founder: “We don’t need to, we can see usage in the product...”
Me: “Yes I understand you can see usage and it’s strong, but do you know what value they create for their business from that usage?”
In my discussions with founders over the last few months, one trend I have seen accelerate is the failure to proactively capture value exchange.
I define value exchange as the quantifiable metrics that illustrate the value being created by your product or service for your clients.
Some examples of value exchange are:
- Hard cash: increases in revenues or a decrease in spend
- Time saved: reduced time spent on tasks, therefore increasing productivity, or reducing overhead
- Critical insights: access to data that directly influences the strategic direction of the company on a high frequency
- Regulatory risk: reduced risk of falling foul of regulatory rules in a sector
Some value exchanges are easier than others to measure, in Adtech, for example, you often proactively set the value exchange levels you want in the product itself.
However, the value exchange is not linear or transparent in many B2B SaaS plays, which makes it harder to measure, however, that does not mean you should not measure it, quite the opposite.
Failure to measure value exchange often leads to incorrect assumptions being made, which leads to unexpected churn.
Here are 4 anti-patterns founders use to incorrectly assume value exchange:
1. Product Engagement
- Whilst DAU/WAU and DAU/MAU metrics are important to track accurately to ensure your product is actually being used, you have to go one step further to appreciate what value that usage is creating.
- Yeah fine, people are using the product but is it a nice-to-have or is it core to their business. You need it to be core and you need to be able to quantify how it’s impacting the core of the business - engagement is merely the first step in that process.
2. NPS (net promoter score)
- If you have a strong NPS then great, your customers really like you/your product. But who are these users and how does that NPS translate to value? Often the users are tactical influencers in the business, versus strategic decision makers, and often their responses do not map to quantifiable value that a CFO would agree with.
- Rahul Vohra’s product-market fit exercise would be a better proxy, especially for those building PLG engines, but still, we need to get much more specific to truly appreciate value exchange on a customer-by-customer basis.
- A renewal confirms the customer is happy to pay for another period of time, and again it’s a proxy full of assumptions. The biggest assumption is that the price they are paying is a fair reflection of value, however, if neither side is accurately assessing this, then they are likely setting price as a factor of market forces, which is a slippery slope, especially when a downturn hits or competition increases.
- Upsell is a stronger proxy than renewal, especially if the upsell happens early in a customer lifecycle (i.e. ahead of the natural anniversary), however perhaps it’s a network effect tied more to peer usage and adoption, than value? Again, these phenomenons are often seen in PLG plays and they do not define value exchange, but they may be proxies.
Note: #3 and #4 become much stronger proxies for value if renewal and upsell is strong in a downturn such as the one we are in right now. For example, one of my clients has seen a major customer reduce engineering headcount by ~15%, their target users, and yet they renewed their contract at the same value. This is a net upsell, and in a very tough market. However… it still does not illustrate value, but it does tee up the value exchange discussion very nicely, something we will be prioritising.
To Sum Up
The growth of product-led growth (PLG) plays in SaaS has increased the likelihood that value exchange is not measured proactively. In PLG, value is commonly assumed with usage, and in product renewal and upsell. And whilst this is a good short-term proxy for value, it has major limitations as explained above.
I work with many founders who have built wonderful PLG businesses, with ARR of $5m+ but have not quantified the value exchange, and this presents a major risk.
When founders want to move upmarket and justify 6 or 7-figure ASPs they struggle, because no longer are they making the case to the credit card of an individual end user, now they are making the case for the capital expenditure budget of the CFO, and likely 3 or 4 other stakeholders. At this level, the conversation requires accurate and auditable value exchange to succeed.
Tune in next week to find out when and how I bake value exchange into the standard operating procedures of my startups.
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