5 Critical KPIs for Measuring B2B Software Product Performance

Anyone who has been involved in B2B software product development is familiar with the myriad of questions from stakeholders, such as:

• When will the product development be complete?
• Does the product meet the necessary and desired functionalities?
• Who will use our product?

A competent Product Manager, armed with substantial Project Management experience, can answer these questions by relying on various project performance parameters. However, once development is complete, trial runs are conducted, and the product is launched, a new set of questions arises:

• Has the product been well accepted by customers?
• Is the product generating sufficient revenue?
• Does the product functionality fully meet target customers' needs?
• When will the product costs be fully recovered?
• How will we know when the product has reached the end of its lifecycle?

Unfortunately, project performance parameters do not suffice to evaluate market performance. To address these concerns, we need a set of Key Performance Indicators (KPIs) specifically designed to measure the performance of a B2B software product in the market.

This article presents five critical KPIs that provide stakeholders with actionable insights to effectively gauge a B2B product's market performance.

Description:?The PSI measures incremental engineering costs incurred during a year relative to the total engineering costs up to the previous year.

How to Determine:

·?????? Formula:

PSI = (Engineering?costs?incurred?on?product?development?for?the?current?year * 100 / Total?engineering?costs?(including?customizations)?incurred?up?to?the?previous?year)

·?????? Costs Definition :

Engineering?costs = Direct?human?resource?costs + Costs?of?other?resources?specifically?utilized?in?product?development?(excluding?SGAs)

Insights Provided by the PSI:

• Product Stability:?A high PSI indicates ongoing significant enhancements, suggesting the product is not stable. A low PSI indicates fewer customizations are needed, signifying a stable product.
• Cost Management:?Monitoring PSI helps manage development costs by identifying areas needing review and stabilization.

Interpretation:

• Lower is Better:?A decreasing PSI trend indicates product maturation, requiring fewer customizations for new deployments, thus reducing associated time and costs.

Description:?The IRI measures product revenue (including SaaS revenue) during the current year relative to the total product development costs to date.

How to Determine:

• Formula:

IRI = (Product?revenue?during?the?current?period?(year) * 100 / Total?product?development?and?sales?costs?(including?customizations)?incurred?to?date)

• Costs Definition :

Costs = Direct?product?development?costs + Indirect?costs?(including?marketing/sales?costs)?attributable?to?product?development/sales

Insights Provided by the IRI:

• Investment Recovery:?A high IRI suggests the product is recovering costs quickly or generating additional revenue beyond development costs.
• Product Profitability:?Indicates profitable product sales, signifying a mature, functionally rich product.
• Cost Management:?Helps manage and reduce customization costs by enhancing core product functionality.

Interpretation:

• Higher is Better:?An increasing IRI trend implies product maturation and better sales margins, aiding competitive pricing and market share growth.
• Decreasing Trend:If development costs are not fully recovered:?Indicates continuous development is needed.If development costs are fully recovered:?Suggests market share is shrinking, possibly nearing the product's lifecycle end.

Description:?The PLI measures product revenue (including SaaS revenue) during the current period relative to the total incremental engineering and sales costs during the current period.

How to Determine:

• Formula:

PLI = (Total?revenue?(including SaaS revenue) during?the?current?period?(year) * 100 / Incremental?product?development?and?sales?costs?(including?customizations)?incurred?during?the?current?period)

• Costs Definition:

Costs = Direct?product?development?costs + Indirect?costs?(including?marketing/sales?costs)?attributable?to?product?development?and sales

Insights Provided by the PLI:

• Investment Recovery:?Highlights how well current sales exceed incremental engineering costs.
• Product Profitability:?Indicates profitable sales with minimal incremental costs.
• Product Lifecycle:?Helps understand the product's lifecycle stage.

Interpretation:

• Higher is Better:?An increasing PLI trend suggests product maturation and better sales margins.
• Decreasing Trend:If development costs are not fully recovered:?Indicates the product needs substantial customization.If development costs are fully recovered:?Suggests shrinking market share, possibly nearing the end of the product lifecycle.

Description:?The PAI measures the proportion of annuity revenue (Annual Maintenance Contracts (AMCs)) in the total product revenue during the current period. For SaaS products, PAI measures the proportion of subscription revenue generated from previous sales to the total revenue during the current period.

How to Determine:

• Formula:

PAI = (Annuity?revenue?during?the?current?period?(year) * 100 / Total?revenue?during?the?current?period?(year) )

• Annuity Revenue Definition:

Annuity?Revenue = Revenue?from?AMCs?or?SaaS?subscription revenue from customer contracts?entered?up?to?the?previous?period?(year)

Insights Provided by the PAI:

• Customer Retention:?Indicates strong customer retention and acceptance of the product.
• Product Self-Sustenance:?Suggests the product can sustain itself through annuity revenue offsetting incremental costs.
• Product Lifecycle:?Helps understand the product's lifecycle stage.

Interpretation:

• Higher is Better:?An increasing PAI trend suggests good market acceptance and customer satisfaction.
• Decreasing Trend:?Implies existing customers are discontinuing the product, necessitating increased sales efforts and possibly reduced margins.

Description:?The FCI measures the product customization costs incurred during the current period relative to the total product development costs to date.

How to Determine:

• Formula:

FCI = (Costs?incurred?in?customization?during?the?current?period?(year) * 100 / Total?product?development?costs?(including?customizations)?incurred?to?date)

• Costs Definition:

Costs = Direct?product?development?costs + Indirect?costs?(excluding?marketing/sales?costs)?attributable?to?product development

Insights Provided by the FCI:

• Functionality Gaps Identification:?Highlights significant customization needs, indicating core product deficiencies.
• Product Maturity:?Indicates a mature, functionally rich product with fewer required customizations.
• Cost Management:?Helps manage and reduce customization costs by enhancing core product functionality.

Interpretation:

• Lower is Better:?A decreasing FCI trend indicates product maturation, reducing customization needs and associated costs.
• Threshold Consideration:?If the projected FCI exceeds 30% (or any other pre-defined threshold) for any new deployment, it implies significant enhancements are needed. Management might decide against bidding unless they are ready to absorb the enhancement costs.

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A Product Manager by tracking the above easy-to-measure KPIs on a periodic basis (quarterly, yearly) can always keep track of the product's performance in the market and by taking corrective measures when warranted, ensure the success of the product.

A version of this article is available on my blog - gyaan-alytics and more

About the author:

Jyoti Sahai has almost fifty years of experience in banking and IT industry and currently provides consulting on Fintech, Analytics, and Corporate Governance.