How To Evaluate a Value Metric?
Evaluating your or other value metrics is pretty simple, although there is some finesse required here. It comes down to fulfilling three basic principles:
1. Does your value metric align with customer’s need?
We’ve belabored this point above, but you need to make sure the way you’re charging aligns with the value someone is actually getting from your product. If you’re a help desk, then charging on a per seat basis makes sense. If you’re application performance monitoring software though, it probably doesn’t make sense. Figure out what your customers value at the center of your product and then back out to a way that you can charge for that value. Wistia determined that the value came from the number of people their customers had viewing their videos. A good proxy for this was bandwidth.
2. Is the value metric easy to understand?
Where Wistia fails a little bit is in the ease of understanding department. The value metric needs to be intuitive to the user. Large video customers Wistia serves would completely understand bandwidth needs, but smaller customers wouldn’t. Even though they did a phenomenal job explaining the concept of bandwidth to their prospects, they fixed this problem even further by not making bandwidth an issue on the lower end of their pricing page and limiting the number of videos per month (something much easier for lower end customers to understand).
However you decide to charge, it needs to make sense to your prospects, and they should be able to “get it” without talking to someone at your company. HubSpot could have continued to charge for events, landing page submissions, visitors, etc., as those align to their customers’ needs pretty closely. Yet, they backed out from where their customers found value and used “contacts” as a proxy for that value, which is easier to understand and much more predictable (the more contacts I have, the more I’m probably converting them and making money from the product that allowed me to cull those contacts).
3. Does your value metric grow with the customer base?
The first two principles were for your customer. This last one is for you. You need to make sure your value metric grows properly with your customer to ensure you’re increasing your MRR in a predictable manner. Phenomenal SaaS businesses are able to grow even if their acquisition stalls because their value metric is so aligned with their customers, they can simply wait for those customers to grow to ensure they also grow. It’s compound growth too, which is badass. Stripe, HubSpot, and even Salesforce are all examples of companies that have rapidly grown based on this growth, although acquisition definitely helped.