As a B2B SaaS consultant, I help a lot of software product companies make improvements to their product development efforts. Something I always ask my clients is what type of return they are getting from their investment into product development. The answer I usually get is either a blank stare or something along the lines of ‘no one has ever asked that question before, but it’s a good one’.
The vast majority of product development organizations are not viewing the performance of their SaaS operation through this lens and it is a MAJOR problem. I say this because most product development effort is wasted which means massive losses and significant building in the wrong direction.
This article is about the economics of product development and how to ensure your company is receiving a positive return on your investment.
Background
Research dictates that the vast majority of investment into product development for B2B SaaS companies is largely wasted. A research report published by Pendo states that 80% of shipped product development features for SaaS businesses are either rarely or never used. This leads to losses of nearly $30 billion dollars a year in wasted product development investment.
Having been a B2B SaaS consultant that helps companies with product development for many years, it’s relatively easy for me to see why this is the case. Product backlogs are a mess and work tracking isn’t much better. SaaS product teams are constantly scrambling to ship the next feature that everyone at their company is convinced will be a huge hit. At the same time, little to no effort goes into measuring whether or not anything the previously built lived up to this great hype. It’s a majorly broken process for almost every client I’ve helped.
Financial modeling at SaaS companies is often only done at the executive level. It’s here that terms like lifetime customer value (LTV), churn rate or annual recurring revenue (ARR) are discussed. However, what is rarely evaluated is how well product development is performing in this regard. What always surprises me the most about this realization is that product development has the single greatest impact on the financial performance of a B2B SaaS company.
If any of this sounds like your product operation, not to worry because we’re going to talk about how to fix it so your B2B SaaS product can get a return on your investment into product development for both your customer and your company.
Measuring The Current Performance Of Product Development
By far the biggest opportunity to evaluate the performance of product development is to review what your team has accomplished historically. You need to review what product development features you’ve added to your B2B SaaS product in the past week, month or quarter. From what you’ve added to your product, how well has each performed?
Here are some of the questions I’d like you to try and answer when measuring the historical performance of your product development operation:
- Which features do our customers use?
- How often are they using these features?
- What value are they getting from these features?
- How much time or cost are these features saving them?
- What type of return do our customers get from these features?
If you don’t know the answers to these questions with regard to the features you’ve been adding to your product then you have little if any context for the performance of your product development operation.
Leverage whatever resources you have at your disposal to gather this information and evaluate it. Analytics tools from Google and Hotjar are a great place to start for collecting performance data asynchronously.
For whatever you can’t get from these tools, you should perform discovery interviews with your users and customers after they’ve had a chance to experience the new product development features. Work off of the list of questions I provided above and use them to have meaningful conversations in an attempt to measure customer value.
Once you’ve gathered some of this data you can start to determine how your product development operation is truly performing.
Let’s talk about how to get a strong return from your investment into product development.
Validate Features Before You Build
The second biggest opportunity I typically see when consulting with B2B SaaS companies is the opportunity to validate what they want to build before they actually invest in building it. It always blows my mind just how much time, effort and capital most SaaS companies invest in building features that are not properly validated. Would you build a feature you knew you couldn’t sell? Me neither.
Every single feature you wish to add to your product experience needs to be directly connected to a problem your customer needs to solve. It really is that simple yet B2B SaaS companies get this wrong ALL THE TIME. I’d shout it from the rooftops from a megaphone in cities everywhere if I thought that would help.
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Think of it like a boat taking on water. This may be where your product development operation is at the moment. You’ve got a few problems to worry about, but you need to prioritize to eventually fix everything because you can’t solve all your problems at once. The first and biggest problem you need to address is that your boat is taking on water. By this I mean that you are constantly stuffing your backlog with features you shouldn’t build. Those won’t produce value for your customer or a return for your B2B SaaS company. As such, you need to properly validate features before they are prioritized for development. At that point, you will have stopped taking on water and solved the most important problem.
Start performing your research proactively. Develop relationships with your users and customers so that you can interact with them on a regular basis. When you speak with them, look to identify their top problems that are impacting the progress they need to make. If you do this well, you’ll identify lots of opportunities to build valuable features into your B2B SaaS product.
As you gather greater context around their problems, look to measure the impact of those problems and how much of that impact you can reduce by extending the capacities of your SaaS product. This will give you greater context for the return on investment or ROI you can produce for your users and customers. Additionally, as you measure the financial impact of these problems, you will also be able to measure how much quantifiable value your product development operation has been able to produce for your company by solving your customers’ problems.
Now that we know more about how to fix these problems, let’s discuss how to rebuild your product development process with ROI at the core.
Rebuild Your Roadmap By ROI
Now that you know how to properly validate opportunities before you build, you can stop wasting product development resources. Use this strategy to purge your product backlog. Remove anything that isn’t directly linked to a customer problem that will provide them with value and your company with a return on investment.
What you’ll probably realize upon accomplishing this step, is that it greatly reduces the pressure on your team. Once you’ve purged your backlog, you’ll have the time necessary to invest in critical areas so you can rebuild your product development process by ROI.
Moving forward, plan to track problems and ROI for each feature you want to develop. Use this data to sort what your team plans to build next by ROI. ROI should be measured by a combination of value provided to your customer and financial return to your B2B SaaS company. Value for your customer comes in the form of solved problems which typically looks like giving them time back or enabling them to make greater progress. A return for your B2B SaaS organization comes in the form of greater revenue, lower costs and higher profitability.
Measuring ROI by feature on your product roadmap is an excellent way of measuring unit economics of your product development. This process can be described as financial modeling at the operations level. This is where we focus on the metrics that matter financially at a building block level enabling us to make smarter decisions financially at a level that will have greater impact on the bottom line for your B2B SaaS company.
Back in the early 2000s, Intuit makers of the popular Quickbooks software for bookkeeping and tax planning needed to decide on the future of their B2B SaaS product. At the time it was aging local software which required local installation and management. Customers were growing weary of managing these logistics because they were complicated, expensive and not particularly flexible. Intuit seized this opportunity to convert a VERY popular application to a cloud version in what amounted to essentially a ground up rebuild of the entire application. However, once complete what they began calling Quickbooks Online was not only improved, but it provided significantly MORE value to the customer and dramatically greater profits for Intuit.
Intuit was able to accomplish this because they invested in the research which indicated a huge opportunity to rebuild their product roadmap by ROI. Their investment paid off significantly and continues to do so to this day.
Real-World Example
When I was working with a B2B SaaS client of mine in Exyn Technologies, we rebuilt our product roadmap by ROI. When we began, the product roadmap was static. This meant that product development lacked the ability to confidently deliver new features in a timely fashion. We were also unaware what type of return building anything on that version of the roadmap would mean for customers or the organization.
Over the course of a few months, I helped the executive team realize the value in converting the product roadmap into a dynamic version which was linked to the metrics we needed to truly measure the efficacy of our investments into product development. This meant we could measure what these investments cost and the returns they produced. This made it significantly easier to prioritize because we had access to data and metrics that mattered to the customers as well as the financial performance of the organization.
With a dynamic product roadmap prioritized by ROI, your B2B SaaS company will be able to measure the efficacy of your product development operation.
Summary
Evaluate the effectiveness of your product development operation today so you can remove what isn’t providing value for your customer and a return for your B2B SaaS company. Invest in the research which will uncover the opportunities to perform impactful financial planning. Leverage what you’ve uncovered to rebuild your product roadmap by ROI.
If you want to know more about how well product development is performing at your company, schedule a free strategy call to learn more on the topic, Solid product development economics are foundational to building a path to product-market fit.If you want to reach product-market fit faster for your B2B SaaS product, sign up for my free 5 day email course.
