How to develop a revenue-driven product roadmap in a downturn
Deep dive on how to adapt your product roadmap to the current economic realities.
At the beginning of the year, I wrote about the layoffs happening in tech - a burst to the bubble created by the pandemic. The layoff pressure is not slowing down anytime soon. In the first 4 months of 2023, over 173,000 people have been laid off globally- a figure higher than the total number of people laid off in 2022, according to the data from layoffs.fyi. More mass layoffs are still coming from Meta.
Also, VC funding continues to plunge. In the first quarter of 2023, VC global funding was down 61% YoY when compared to the first quarter of 2022. With this cash freeze, startups are shifting their focus from growth to profitability and sustainability.
Before this, the consensus was that a startup is all about growth. This idea was popularized by Paul Graham in his article, startup= growth and Reid Hoffman’s book on Blitzscaling. High growth is very important for startups who want to raise VC funds. While growth and profitability are not mutually exclusive, early-stage startups are often advised to prioritize growth before charting a path towards profitability.
Unfortunately, in a downturn like the one we find ourselves in, startups cannot afford to run out of cash. For companies to survive, they need to grow revenue and maintain profitability. Revenue is the best form of non-dilutive financing. This means more intentionality about resource allocation and growing margins. Executives are putting more pressure on employees to deliver on their KPIs. Revenue per employee is suddenly becoming an important metric that businesses are paying attention to.
There is a general mindset shift towards business thinking and monetization as I noted in my article on the rise of micro subscriptions. For instance, Twitter has begun removing the verified checkmark from accounts, with the hope that these account owners will pay for a Twitter Blue subscription. Reddit and Twitter will also be charging for access to APIs that were previously free. Mark Zuckerberg in his note to Meta's employees mentioned that increasing business performance in the face of new economic realities is one of the two major goals for 2023 - a year Meta has called the Year of Efficiency.
In all of these, product teams play an important role here because it is the engine that drives this strategic shift. As a product manager, you need to become more business-outcome-oriented in your thinking when crafting your OKRs and roadmaps to adapt to the current economic realities.
I coined the term, "revenue-driven product roadmap" to describe a product roadmap that is laser-focused on contributing to the company's bottom line. In this article, I will be sharing my thoughts on how you can develop a revenue-driven product roadmap in a downturn. Let's start first by
Re-examining your product market fit
A downturn is a moment to pause and deeply reflect on the realities of your product-market fit especially, the market side of your product-market fit. What triggers your customer to want to buy your product immediately? And is this trigger repeatable? It is easy to assume that a startup that has raised $million in funding has achieved product-market fit. Unfortunately, raising millions of dollars does not equal product-market fit. You may need to go back to the drawing board.
Assessing your market-fit depends on how you're able to do the discovery job well. As a product manager, one of your biggest responsibilities is discovery. But discovery can be done wrong.
You might be talking to the wrong people;
You might be talking to people at the wrong time, leading to recency bias.
You might be using the wrong discovery method;
You might be asking the wrong questions (for instance, leading and biased questions)
You might be doing the wrong analysis.
You might fall prey to confirmation bias.
Wrong market discovery will lead to wrong product decisions, and wrong decisions lead to failed products. Discovery is not asking what kind of features the users want or how much someone is willing to pay for a certain product. You can’t rely on what your user is saying. [Caveat; In a B2B setting, feature requests might be a blocker to closing a deal. But you should still weigh such feature requests thoroughly].
Often-time, users don’t know what they want. And even if they do, users typically think in a linear model, which can only offer incremental solutions to an existing product and not radical improvements. Also, users think in the light of maximizing value from your product. They will hardly tell you features to build that will get them to spend more.
You need to assess market fit, by understanding the prevailing market conditions and use it to gauge what people are likely to truly do in a real-life condition - with emphasis on "real-life".
How will your customers act, when they have competing priorities, are surrounded by multiple options, have a limited budget and do not have enough time? Is your product a must-have or nice-to-have? If it is a nice-to-have product, how can you introduce some elements of essentiality into it?
You need to also probe your pricing. Is your current pricing strategy an accurate reflection of your cost structure? You have probably raised some funds and can subsidize your fees and prices to your customers. What happens when you increase your prices? Will your product still be a top priority for customers? If not, you probably don’t have a market fit yet.
What if you are under-pricing? Are there products or features you can monetize in your product suite that you are currently giving for free? Dig deeper, don’t assume and make sure you experiment.
Next, understand your unit economics
Unit economics is a fanciful word for break-even analysis in more traditional business. If you are familiar with a profit and loss (P&L) statement, you probably know what unit economics means. The difference here is that you are doing the P&L on a single unit of product sold or a single customer sold to.
Understanding your unit cost and unit revenue helps you chart a pathway towards profitability, a key component for long-term sustainability. It will also reveal the key business levers of your company and what you need to prioritize (or optimize) and deprioritize. There are two methods to calculate unit economics: one customer vs. one unit sold, depending on your business model. [Some industry-specific metrics may not be captured in these two methods]
One Customer: This method is suitable for SaaS companies and companies with minimal marginal cost per unit item sold. It is calculated as Customer Lifetime Value/ Customer Acquisition Cost i.e LTV/CAC. You should aim for at least a 3:1 ratio for your LTV/CAC.
You also need to calculate the payback period i.e the amount of time it takes to recoup your customer acquisition cost. Payback period = CAC / (Monthly Revenue x Gross Profit Margin). Let me provide an example of this: If your SaaS or subscription product costs $10/month per customer, and you spent $70 in marketing and sales to acquire one customer, you need to retain that customer for 10 months to recoup the cost of acquisition, assuming your gross margin is 70%.
Companies with VC funding can target to recoup their in >12 months. But in a cash-strapped environment, you need quicker returns on your customer acquisition cost to survive.
One Unit sold: This method is suitable for companies selling physical products. You need to calculate your contribution profit i.e your selling price minus the variable cost of making the products (such as direct labour cost, raw materials, etc). The goal is to identify how your variable costs affect your overall pricing.
For example, if you sell a mobile device for $100 and the variable cost for the device is $65. The contribution margin is 35%. This method is not intended to provide company-wide profitability. However, it is useful to optimize the profitability of an item either by cutting variable costs or increasing the price of the item.
Understanding your unit economics and knowing where every money goes and how it contributes to the bottom line is the foundation of building a sustainable business. Having understood product-market fit and unit economics, the next is to;
Link your product roadmap to revenue
Businesses exist because they want to make money. You might have heard phrases like, “We are not in for the money”. That is not true in most cases. Depending on your company’s structure, revenue pressure can come from multiple directions. But, oftentimes, it is coming from the executive team. They are also getting pressure directly from the company’s financial position or shareholders. So you cannot blame them.
You must link whatever you are doing on your OKRs or product roadmaps back to your revenue drivers in three ways: increasing revenue, reducing costs and retaining revenue. Although it is not always possible to link all tasks directly back to revenue, you may need to press yourself a little bit to do this.
Have a clear company-wide north star metric that can be distilled into 2-3 key business objectives. Your business objectives should be extracted from the decisions you made while re-examining your product-market fit and understanding your unit economics. Every initiative or activity in your roadmap should influence the business objectives one way or the other, and you should be able to size the impact these initiatives will have on your objectives. Doing this pushes you to think about business outcomes set by the executive team.
For example, let’s say you want to build a feature that allows users to save money in multiple currencies on a mobile wallet. From your historical data or user research, you can estimate the volume of deposits (a metric close to revenue) you are losing due to the single currency feature. By extension, that will also tell you what the increase in deposits would be by adding a multi-currency feature.
You need to be thinking ahead on what metrics you would use to measure the success of each activity you plan to do. If you are struggling to measure the impact or see a link to a business outcome, it might be an indicator that you need to rethink whether it is worth building that feature or not. Even if you're able to link the project or task to a business outcome, you can still cancel them out if you estimate it to deliver only a marginal increase in revenue. The indirect and opportunity cost of building a low-impact task can be heavily underestimated.
I understand that some initiatives might be difficult to link to revenue. For instance, in my experience, it can be quite difficult to estimate the business impact of fixing technical debts, which is sometimes necessary for quality and efficient service delivery. One way I can link this is that fixing technical debts can contribute to cost reduction - which is a revenue driver - because it allows your engineers to build features faster, thus saving overhead costs. This way, you can communicate the value of this task in a way that the executive team will understand.
Aside from linking product initiatives to business objectives, you need to also explore opportunities that allow you to do more with less. Are there low-cost and low-engineering options that you can employ to achieve the same business objectives?
When you complete these activities or initiatives, you should be evaluating if they achieved your set business objectives or not. If not, there is something probably wrong with your product discovery or your goal-setting framework. Identify what you have learnt from the outcome and what you need to change. Factor this knowledge into other product initiatives and iterate as quickly as possible.
Finally…
The economic downturn we are in is constraining startups to operate and think like traditional businesses. It is forcing stakeholders to be commercially oriented in their thinking. This is likely to trickle down to employees and may affect how startups conduct the performance evaluation of their employees.
The onus is on you to develop strong business knowledge and understanding of industry levers that can drive your business revenue growth. The funding party is over on a break. You need to be accountable for every human and non-human resource you spend to achieve your objectives.