Product Managers: Q3 is Ending and You’re Going to Miss Your Bonus Again . . .
Three strategies to ensure it won’t happen again
An annual survey from the Pragmatic Institute does a good job of painting a picture of product manager compensation. The average annual base salary for product managers is $105,400. 81% of Product Managers are eligible for a bonus. The average annual bonus for product managers is $14,800 (14% of base salary). Unfortunately this month, many product managers will realize that they will miss their annual bonus targets. The majority of product managers don’t work in startups, but for firms that have been in the market for quite a while. Almost 75% of product managers have been in their role for at least 3 years and manage on average five products. Achieving annual revenue and profit targets for mature products is tough. By the end of Q3 most product managers know where their products’ performance is going to end up for the year. The reality of subscription revenue recognition and ASC 606 make it virtually impossible to make up missed targets in the fourth quarter of a year. What can product managers do to avoid missing their bonus next year?
Baseline Product Performance
The first step is to develop a fact-based understanding of your products’ performance. To a certain extent product managers are victims of the boiling frog syndrome (a frog will jump out of a pot of boiling water, but if the pan is gradually heated they won’t). Product managers in non-startup businesses sometimes become immune to the gradual declines in revenues and profits. The first step is to develop a baseline understanding of product performance. There are four things product managers should examine.
1. Bookings and Revenue Trends
The first thing to look at is the history of bookings and revenues. Bookings are what the sales people sell — e.g. a customer two year contract at $12,500/month. Revenue is the money the company can recognize in any given period — month, quarter, and year. ASC 606 is the accounting standard that governs how companies can recognize revenue from customers. If you don’t fully understand the basics of ASC 606 you should brush up on the basic. Here is a chart that shows the bookings and revenue trends for a mythical company:
Charts like this show you what happened, but not why it happened. You will need to dig deeper into the data to figure out why your products are missing their targets and you are not getting your bonus.
2. Tiering & Cohort Analysis
Not all customers are the same. Some customers drive significantly more
revenue than others. The next step is to look at the tiers of customer revenues and their associated cohort of customers:
As you can see, only a quarter of the deals drive almost 60% of the revenue. Conversely about 45% of the deals drive only 16% of the revenue. Logically, focusing on more valuable opportunities will drive more revenue. Also sales efforts are less productive at lower revenue levels. To learn more about how to do tiering and cohort analysis check out Pareto Principle & Product Management.
3. Product Money Wheel Analysis
Tiering analysis gives some more insight into how customers buy, but you need to drive it to a deeper level. The Money Wheel is a sales deal analysis tool. It is basically a combination of root cause analysis and cohort analysis
and for sales deals. It helps product managers understand what type of traction their offerings are achieving in the marketplace. The Money Wheel categorizes sales transactions by broad category then by subtype (aka spokes). The Money Wheel helps answer the question ‘what is the root cause of sales success?’ The usual categories include:
- Net New Sales to customers who have never bought a solution before
- Add on Sales of add-on products to customers that already own a base product
- Expansion. Sales of expanded usage of an existing product i.e. more seats/locations
- Financial. Sales that revolve around financial instead of functional concerns. Examples include improper use, overages, and enterprise-wide licenses
If you study the sales transactions of the most successful sales reps you will find a pattern to their deals. They excel at finding repeatable types of sales transactions and scaling them up in their territory. The Money Wheel helps to visualize these repeatable types of sales transactions. An example of a high level Money Wheel is:
Money Wheel Categories & Spokes
Sales transactions are further categorized by the repeatable types of sales transactions. Most sales forces recognize that there is a common pattern underlying the deals they close. Some of these patterns deal with buyer personas; others deal with events that occur in the marketplace that trigger a prospect’s interest in a solution. An example could be:
Or you could look at it in table form:
The Money Wheel can help you understand where your product is having success, or is struggling. When you combine Money Wheel Analysis with Tiering, you can develop some powerful insights:
You can start to look at deals that were won, versus deals that were lost:
You can drill further and look at performance by sales territory and even sales rep:
This granular level of analysis can help you understand where the sales team is having success and where it is struggling.
There are dozens of ways you can analyze and slice the data. To learn more about the Money Wheel check out Product Manager Money Wheel Analysis.
4. Win-Loss Analysis
Quantitative analysis techniques like Tiering Analysis and the Money Wheel can tell you what drove customers to buy your solutions, but they can’t tell you why they did it. CRM, Sales Force Automation, and NPS data simply can’t provide you with the insights you need to understand why customers and prospects made the decisions that they did. You need to do some qualitative versus quantitative market research.
Win-Loss Analysis is a technique where you use structured interviews to learn market facts from companies that bought solutions from you, or decided not to buy. In a typical Win-Loss Analysis project 15 to 25 customers/prospects are interviewed by an independent interviewer. The interviews are conducted by phone and usually take 15 to 20 minutes. To encourage participation a modest incentive is offered to the interviewee — like a $25 or $50 prepaid VISA gift card. The interviews are recorded and later transcribed (Transcriptions generally cost $1/minute). The transcripts are analyzed and a final report is prepared.
The questions asked during Win-Loss Analysis interviews are open-ended. The goal is to get the interviewee to talk about why they made the decisions that they did. Typical topics covered in an interview include:
- Why did you start to investigate potential solutions?
- What business problems or opportunities were you
trying to address?
- How did you research potential solutions?
- Did you visit a user review site?
- Did you consult industry analyst research?
- How long did you wait before contacting a
vendor’s sales team?
- Was this purchase budgeted?
- Has the buyer used the solution before at another
- Did the buyer Issue an RFP?
- How did the different vendors’ solutions stack
up in terms of functionality?
- Did you conduct a pilot project?
- Why did they select the winning vendor?
- How many people were involved in the decision making
- How are you using the solution today?
- Have you received the benefits that you
anticipated from the solution?
Answers to these types of questions can give you great insight into what is working and not working in your total solution. Win-Loss Analysis is a qualitative analysis technique — it is not going to produce the statistical significance of a three question Internet survey sent to 1,000 companies. While Qualitative Research does not offer the ability to use statistical techniques like Student’s T-Test to determine the statistical significance or margin of error in a survey, there is a relevant branch of statistical analysis known as Grounded Theory. Grounded Theory is a systematic methodology in the social sciences involving the construction of theories through
methodical gathering and analysis of data. One aspect of Grounded Theory is the concept of saturation. Saturation of data means that researchers
reach a point in their analysis of data that sampling more data will not lead
to more information related to their research questions. In conducting Win-Loss Analysis interviews, saturation is often achieved after 15 to 20 interviews. If 15 prospects say “I chose you competitor because their pricing was 40% less than yours” a product manager can reasonably infer that there is a problem with their pricing strategy.
If you want to learn more about Win-Loss Analysis check out Win-Loss
Analysis: Process & Lessons Learned.
Optimize Current Revenue Streams
Once you have a baseline understanding of what is and is not driving your products’ revenues, the next step is to optimize your current revenue programs. The quantitative and qualitative analysis you did in the baselining activities will give you specific insights. Now is the time to leverage those insights to drive improvement in your business. These tactics may bring some short term benefit, but probably won’t drive so much improvement that you’ll make your bonus targets this year. The math of subscription revenue recognition is tough. You can’t make up for poor performance early
in the year by a blitz at the end of the year. But you can lay the foundation for next year’s success. Here are three tactics you can consider.
1. Optimize Demand Generation Programs
Armed with the knowledge gained from Tiering, Money Wheel and Win-Loss Analysis re-examine your current demand generation programs. Look at the segments of the market where you are succeeding and double down on the investments you are making to target them. Add more ad spend, more webinars, more events/conferences, more thought leadership blog pieces. Conversely, look at areas where you are not succeeding. Experiment with
eliminating investments in demand generation that target those segments. The risk is not too high — those segments are not producing significant revenues for you anyways.
2. Re-evaluate Pricing & Packaging
In a mature business a significant part of Money Wheel transactions will involve Expansion and Add-on sales. Pricing and packaging can have a major impact on sales in these areas. Win-Loss Analysis can help confirm customers’ acceptance or rejection of your pricing and packaging policies.
An interesting story from a Win-Loss Analysis project helps confirm this. A SaaS company that offered a solution for marketing automation was concerned that customers were not upgrading in expected numbers from their standard offering to their enterprise package. Pricing was based on
what feature set the customer selected and the volume of transactions processed by the platform every month. In the standard offering, customers were allowed 10,000 transactions a month for a flat fee. Anything over 10,000/month resulted in an overage fee. The company had two basic packages — the standard package and an enterprise edition that offered more tiers/prices based on usage. The company had a built in lead generation system — when a standard edition customer exceeded their 10,000 transaction/month usage for more than two months, it triggered an alert to the sales rep to reach out to the customer and offer an upgrade to the enterprise package. On the surface it makes sense, the customer obviously saw value in the solution and the enterprise package should give them a bigger bang for the buck. Unfortunately the customers strongly resisted upgrading.
Win-Loss Interviews revealed why. When customers were presented the enterprise package the cost was anywhere from five to ten times more than they were spending today. The enterprise package also included eight new premium features that were not available in the standard package. Customers had two problems with the enterprise upgrade proposals. First almost all of them did not find significant value in the newly available features. Second the volume tiers in the enterprise package were so huge even the largest users of the standard package could never consume them, even if they tripled their current volume. Customers simply did not see the benefit from spending five to ten times what they were spending today. Instead what most customers did was to ration the use of the product so they would not incur significant overage fees. The company’s pricing and packaging strategy actually encouraged customers to use and spend less. It opened the door for competitors to come in an offer commoditized pricing and steal-away customers.
3. Focus on Sales Enablement
Money Wheel Analysis when combined with sales region and sales rep quota performance can give you insights into why the most successful reps are winning and why the lowest performing reps are struggling. Sales management and sales rep performance are complicated topics. Most sales teams have top performers, average performers, and low performers. Performance can vary across territories and countries. Some sales reps are innately more talented than others. You can use the information you developed in your baseline analysis two ways. First, you can understand why specific reps are having significantly more success in selling certain types of transactions that others. Is their territory richer in prospects that respond to these types of sales transactions? Or do they have an approach and process that resonates especially well. Understanding how to replicate the success of the best sales reps across the entire sales force. This is one of the most
productive investments you can make.
You can also look at sales reps that are struggling. While some reps just are not good at sales, most performance problems can be traced to gaps in knowledge and experience. For example, if the Money Wheel Analysis shows that a rep has not done any financially driven deals while the best reps achieve 40% of their quota from these deals, it is usually a knowledge/experience issue versus sales incompetence. By sharing your Money Wheel Analysis with the sales force and reaching out to the underperforming reps you can help them improve their performance and results. A rising tide lifts all boats and more revenue will help you get closer to achieving your bonus.
Innovate New Revenue Streams
Optimizing existing revenue streams can only yield so much incremental revenue. It is important to start with optimization strategies since they tend to yield increased revenue sooner and at a lower risk. For mature software
companies (>5 years old), the next step is to look at structural changes. These changes can include new add-on products, expanding to new geographic markets, or competitive steal-away programs based on price commoditization.
1. Add-On Products
The first strategy is to consider developing a new add-on product that complements your core product. Through the use of open source software components and Agile development techniques the time and cost to deliver a Minimal Viable Product is a fraction of what it was five years ago. While a
new product will not solve your bonus problems this year, it can lay the
foundation for long term success. New product development always is risky.
Companies with a portfolio of existing products are often loathe to take
the risk of new product development. Past experiences that have failed are often a barrier as well.
The new paradigm of Minimal Viable Products is a potential game changer for mature organizations. It can also provide a boost of energy for marketing, sales, and development teams. Given the relatively low cost of
developing an MVP that can be cross-sold into your existing customer base it is a risk worth taking.
2. New Geographic Markets
International expansion is critical for every software company. International expansion is almost always required for a company to scale beyond $50 million in revenue. As noted in American Product Managers Should Live Overseas for a While
A Senior Vice President who ran my company’s international operations had a famous quote “We have more in common than what divides us.” In general you will find that international customer business processes have similar challenges and opportunities like their American counterparts. The process to sell and deliver just-in-time bumpers for Mercedes cars in Germany is similar to the process they use in Tuscaloosa, Alabama. A master purchase order is negotiated, a purchase order release is sent with that day’s quantity requirements, the vendor confirms the shipment with an advanced shipping notice, the truck shows up at the right dock at the right time with the bumpers, a shipment receipt is generated, the vendor generates an invoice, Mercedes checks the shipment receipt and the purchase order release and sends an electronic funds transfer to pay for the bumpers. The only material difference is that in Germany the documents are exchanged using the EDIFACT EDI standard, in Alabama they use the X12 EDI standard.
Beginning international expansion or moving into new geographies is not a short term proposition. While it is easier today to internationalize a SaaS application in comparison to the old days of on-premise software, there is a lot more that is required to be successful. Your company needs to build a marketing, sales, enablement, and support infrastructure to serve international customers. In certain geographies like the U.K., India and Australia/New Zealand you can get away with an American English version of your product and English speaking marketing, sales, and support personnel.
In other geographies like Germany, France, Spain, Italy and Russia you
will eventually have to take the plunge and build a business infrastructure
with people that can speak the local language. Again, international expansion is important, but it is a long term strategy.
3. Competitive Steal-Away
A third strategy is to focus on competitive steal away. In most mature markets (>5 years old) there are multiple competitors chasing the same customer opportunities. Your competitor’s customer bases are prime opportunities for you. These customers have already seen the value of investing in solutions like yours to address their business needs. If they saw value in a competitor’s solution, they should see value in your solution as well. A radical strategy is to consider commoditizing the price of your offering to steal away your competitor’s customers.
In most mature markets price eventually becomes an issue. Solutions that address the same business problem usually end up with prices that are at least in the same order of magnitude of each other. Assuming that the cost of migrating from a competitor’s solution to yours is not too cost prohibitive, you can use price as a tool to steal away your competitors’ customers. Almost all markets commoditize eventually. Some examples are the cost of long distance telephone calls or mobile phone minutes. CPU processing power is another example. The impact of Netflix on cable TV subscriptions is a third example.
For SaaS companies, you need to understand the unit economics of delivering revenue on your platform. Most companies have a lot of surplus capacity
in their infrastructure. The costs of adding another ten, twenty, or hundred customers is minimal. You can use the same infrastructure and same enablement, support, and operations personnel that you use to service your existing customers. Therefore, adding incremental revenue is almost cost free. You can continue to do this until you hit an inflection point where you need to add material amounts of new costs to service the revenue.
While you are in this zone the price you charge for the service is almost irrelevant. This gives you an opportunity to commoditize and decimate your competition. You can lower your price by 50% and steal your competitors’ business. Customers that use a solution only switch to a competitive solution for a few reasons. One reason is that there has been a serious performance issue such as frequent and prolonged outages. Another reason is cost. If the cost of a comparable competitive solution is a fraction of the current solution, there can be a compelling economic reason to make a change. The
risk of making the change, however, has to be minimal. There can be no hiccups or surprises during the migration.
This is a radical solution to your stalled revenue growth challenges. Changing the price economics carries both significant risks but opportunities as well. This strategy works best when your agreements with customers are not month-to-month but have some fixed term, like 12 or 24 months. In this type of situation your existing customers are locked into their contracts and pricing. You can pillage your competitor’s customer base while not risking too much damage to your own customer base. Eventually your existing customers will come up for renewal and they will expect to get price concessions similar to what you offered the ‘steal-away’ customers. But you will have enjoyed the benefit of the incremental revenue in the interim which was the goal of the exercise.
Price commoditization eventually comes to all competitive software markets. History has shown that the first market player to commoditize pricing can enjoy outsized benefits.
How to Get Next Year’s Product Manager Bonus
Consistently missing or underachieving a product manager bonus is frustrating. There are several things product managers can do to ensure they achieve next year’ bonus. Product managers should develop a baseline understanding of their product’s revenues. Both quantitative as well as qualitative analysis techniques like Money Wheel Analysis and Win-Loss Analysis should be used. Next tactics to optimize current revenue streams should be explored. Finally significant effort should be spent on innovating new revenue streams.
Originally published at Development Corporate.