What the well-intentioned Product Manager is tracking as KPI’s for new Software Products

I tried to style this article's header on Sir P.G. Wodehouse’s epic character Bertram Wooster's article “What the Well-Dressed man is wearing”, that his Aunt Dahlia had forced him to write - partly because I love reading P.G.W.’s, and partly because I am bad at authoring catchy headers.

A few months back, I had written this blog post, where I had argued that revenues from products should not be tracked as a KPI for the Product Manager, as it leads to Product Manager’s losing focus on their primary objective - customer value, they start chasing short term competitive advantages. However, in that article, I did not give any indication on what should be the right KPI’s for a Product Manager.

In this post, I will try and address that. I will lay out five ratios that, I think, are most relevant for tracking the health of the Product and are influenced by the decisions taken by the Product Manager. There may be others as well but mostly those will be relevant for specific product markets, these are applicable generically.

Evaluation funnel/ Revenue from product – This is a very good measure of how well the product is adding value to the customer. The funnel size, can be computed on the quoted price or average selling price.  Evaluation POC’s are where most of the value assessment happens. This ratio, therefore, is an indicator of how well the product performs in a POC, and the funnel value going into POC can be used as the numerator. I have not included the full opportunity funnel, as other stages of the funnel are not impacted by short term Product decisions. However, the opportunity funnel growth should still be looked at periodically, to validate if the Product and Market selection were on the money.

Average Selling Price/COGS per unit – Does your selling price cover your variable production cost?

COGS (Variable Cost) – Cost of Goods Sold for software is the cost going towards hosting and servicing a software product. For a cloud delivered product, this will include the support expense, license fees of TP software included, the cloud hosting cost of storage and compute, as well as any sales commissions. Ideally this should be greater than 1. If it isn’t you will need to work towards making it so, as the excess over 1 will help cover the fixed costs over time.

Revenue from Product/R&D expense – It’s great to be able to onboard many customers. But at what cost? This ratio gives a fairly good idea of the choices the Product Manager has made to deliver value. R&D expense, one may argue, is an Engineering KPI. However, it is also directly influenced by the choices and prioritization that the Product Manager makes. As the product gains market fit, this ratio should increase exponentially.

Revenue Churn Rate/Total Revenue - It is important to track this ratio, after about a year or so of launching your product.

Revenue Churn Rate = MRR lost due to churn

Ultimately, if the customer is not getting value from your product, they will leave. The ratio may vary between products due to switching cost. However, keeping track of this metric over time for your product is essential.

So, what do you think, Product Managers? Are there any other metrices that you track, that measure Product Manager’s performance better?