Metrics for Service-Led Growth
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
Service-led growth is a compelling alternative to product-led growth for many companies and solution categories. If your solution requires extensive configuration, human expertise to interpret the results and to guide action, integration with other parts of the ecosystem (for data or for additional functionality), then service-led growth is a better model than product-led growth.
Service-led growth also provides a route to growth that is not as dependent on large injections of growth capital from venture capital. Venture capital is a ‘hit business’ and the rapid scaling of successful product-led growth is addictive for them. They are happy to hook the company on large infusions of capital and then provide the capital needed. Service-led growth can get by on much lower levels of investment. The combination of service revenues plus subscription revenues working together as a growth flywheel that delivers highly scalable, profitable growth.
The mechanism of the service-led growth flywheel is as follows:
Professional services are provided to solve a key business problem
The services are provided through a software platform (this is critical and is the reason service led growth companies are not just professional services companies with some software
A subscription to the software platform is included as part of the delivery of the professional service
The software platform collects data that is used to generate insights
The insights lead to new professional services
These services advance the evolution of the software platform
The subscription revenue expands
Service-led growth needs its own set of metrics. Developing, tracking and setting goals for these metrics is at the critical to executing on a service led growth strategy.
Service-led growth metrics come in three buckets:
Metrics for the professional service
Metrics for the subscription
The critical business outcome, growth in aggregate customer lifetime value
The goal of these metrics is to measure how services drive subscriptions and subscriptions drive services. These need to be connected to have a service led growth flywheel.
Service-led growth metrics for professional services
The service-led growth metrics for professional services measure the degree to which the services lead to subscriptions. Effective metrics will help predict future subscription revenues.
They key numbers to track are as follows:
Probability a service contract leads to a subscription
Percent of service to subscription revenues
Percent of service customers with subscriptions
Perhaps the most important metric is the direct contribution of professional services to customer lifetime value. A couple of notes on this.
It is important to use Net Customer Lifetime Value, which is Revenues - Cost to Serve or the Gross Profit on the Service. This makes it possible to compare Professional Services with the Subscription.
If repeat business can be predicted with confidence, it is perfectly acceptable to have attribute a customer lifetime value to professional services. (In Jeff Robinson’s excellent new book Pricing for Growth he calls these ‘repeat-customer businesses.’)
Service-led growth metrics for software and data subscriptions
The service-led growth flywheel only works if subscriptions lead to additional services. The mechanism for this is the insights generated from the data collected by the software platform. These insights provide the opportunity to propose new services.
Probability a subscription customer generates additional services
Gross margin on the additional services
As with the service side of the business, the contribution to growth in customer lifetime value is the most important metric. This is normal for subscription businesses. David Skok SaaS Metrics 2.0 provides a good introduction and be sure to click through to the detailed definitions for guidance on how to calculate these metrics.
Why lifetime customer value is the integrating metric
There are two ways to think about integrating the service side and subscription side metrics. The first is technical. Calculate the Mutual Information and Covariance of service revenue (or gross profit) and subscription revenue (or gross profit) and track how these change over time. This gets complex fast and work is being done on supporting this with software. It is a good measure of the whether a growth flywheel is functioning, but it is not of direct interest to most business people.
A more direct approach is to ask how each aspect of the business predicts future lifetime customer value. Lifetime customer value is emerging as one of the important metrics and is being used to value companies, justify investments and to measure the overall health of the business. In the context of service-led growth, measure the following.
Aggregate customer lifetime value (as noted above, this should be lifetime value net of cost to serve)
Contribution of services and contribution of subscriptions to net customer lifetime value
Probability that an increase in services revenue will lead to an increase in subscription customer lifetime value
Probability that an increase in subscription revenue will lead to an increase in subscription customer lifetime value
Read other posts in the Service-Led Growth series
Product-Led or Service-Led Growth: Which is a Better Fit for Your Business?
Metrics for Service-Led Growth (this post)