Nik Pai on rethinking your product strategy for high growth vs high efficiency
Product State Q&A
Nik Pai is the VP, Product & Design at Preset, a modern business intelligence tool. Nik previously held product executive roles at Shortcut and Hootsuite. Prior to that, Nik was the Co-Founder & CEO of LiftMetrix. Nik also advises and invests in startups.
EC: During a year like this, how does a B2B SaaS product strategy and your mindset change from previous years?
NP: Given the current macroeconomic conditions, we are seeing the market shift from ‘growth at all costs’ to ‘efficient growth.’ As a result, product leaders need to re-think their product strategy for the next several quarters and where they invest.
Here is an example of a framework that I like to use when prioritizing product initiatives:
What is the impact or opportunity size?
What is the confidence in achieving that impact?
What is the timeline or ramp to that impact?
What is the development / design effort required?
Are there any additional costs associated?
What is the confidence on executing the initiative within the timeline and with the resources?
As a product team, if you are asked to find paths to 3x+ revenue growth, the strategy is very different than if you are targeting <2x revenue growth.
EC: How do you think of impacting revenue targets when your company is on a high growth trajectory?
NP: When you’re in a high growth phase, there are typically 4 areas of revenue you can focus on:
New - Invest in bringing new customers into the business.
Churn - Invest in reducing the number of customers that leave your business each year.
Expansion - Invest in increasing the amount of revenue your customer spends each year.
Contraction - Invest in reducing the number of customers who decrease their spend each year.
For illustration purposes, let’s say the goal is to go from $5M ARR to $15M ARR in a year.
How is your product strategy going to help add $10M of ARR?
Let’s assume the prior year you tripled revenue by adding $3.5M of new ARR to go from $1.5M to $5M. You feel confident that you can easily add $3.5M again.
You now are left to figure out how to add $6.5M of ARR.
You could invest heavily in churn and expansion rate, but even if you moved this from 100% (good) to 150% (above average) net retention rate, this would only result in an additional $2.5M of ARR.
This leaves about $4M of ARR that needs to come from new business.
You could be in a position to achieve this growth linearly by:
Investing in more paid acquisition. Since paid only makes up a portion of your overall demand generation, you may need to increase your paid by 4x-8x to see a 2x lift in demand generation.
You can 2x your sales people and all the support that goes with that (pipeline, SDRs, SC’s, etc).
When you think about payback periods, sales ramp time, quota attainment, CAC — both of these strategies require significant upfront investment and are very difficult to scale quickly while maintaining efficiency.
To get more exponential growth, the product strategy / development can lead the way by launching new products, improving the overall funnel, focusing on new buyer segments (up or down stream), and entering new markets.
These strategies typically are expensive as well since you need to grow the entire product engineering organization and fall into a higher risk / reward category.
If you don’t plan early enough… You are now trying to hire, build a roadmap, execute, and generate results fast enough to meet revenue objectives — the result is that you often start projecting huge Q4 results, and big quarterly ramps.
You also need to start thinking about next year’s growth as well and starting to think about how to go from $15M to $45M. These are the types of challenges the product team and go to market teams are focused on in hyper growth. Planning early and actively monitoring metrics is essential.
In order to de-risk, companies may invest in all 3 of these growth strategies (grow demand gen, grow sales team, and grow product).
You add a bunch of sales headcount
You add new product development teams
Your burn rate shoots up with additional staff and bigger marketing budgets
Your sales / marketing efficiency metrics can go down
You likely need more funding to maintain the burn rate and this becomes tough when capital dries up
EC: How do you approach prioritization — and product management talent — when growing more conservatively?
NP: Ok, let’s take a look at the efficient growth phase. As an example. Let’s say the company is looking to grow 50% - 100% over the year. In our example above, this would be going from $5M to $10M ARR in a year.
By investing in retention and expansion, they could grow the existing customer base to $7.5M of ARR by increasing net retention to 150%.
If we assume they doubled revenue the year before from $2.5M to $5M of ARR, we can assume that there is high confidence on adding $2.5M of new business.
This would result in them achieving the $10M of ARR goal.
Given a clearer path to the revenue target, the product strategy does not need to be as high risk and high reward. It can be very calculated and focused on doubling down on things that are working and making trade-offs between retention, expansion, and new revenue initiatives. Assuming modest growth on demand generation and sales capacity, this also just further de-risks the ability to achieve the goal.
The set of business problems and how the product supports those problems can completely shift between high growth and efficient growth.
Going back to the initiative framework — the overall plan doesn’t need as many high risk / high reward initiatives to hit the goal so you start to really shift towards high confidence items.
This also relates to the talent you need on your team.
In high growth mode, you need product managers who are good at identifying new markets, taking products 0 to 1, and have strong GTM skills.
In an efficient growth mode, you need product managers who are extremely customer and data centric and can figure out where to double down and to what depth.
One final thought: While I focused this answer a lot on how a multi-quarter product strategy might differ between a high growth and efficient growth phase, the foundational parts of the overall product strategy should not change. The vision should not change — and you still need to build a product people love.
“As a product team, if you are asked to find paths to 3x+ revenue growth, the strategy is very different than if you are targeting <2x revenue growth.”
- Nik Pai
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