As you allocate time and resources across your portfolio, you should start by identifying which of your products are “Stars”, which are “Cash Cows”, and which are “Turkeys”. How do you go about this? By graphing each product based on relative market share vs the growth rate of the market served by each – see the graphic below.
Plotting Your Products Based Using Market Maturity Analysis
- “Stars” are those products that have strong market share in a market that is still growing rapidly. These are often products in which you were early to market with a solution to a problem that is both painful and pervasive. Your Stars are likely to carry your performance in the future (if they aren’t already) and you should typically be investing in these first.
- “Cash Cows” are those products in which you’ve cornered a market that is no longer growing. These are typically at a more mature stage in the product lifecycle, and are generating a steady annual stream of revenue. These may not drive a great deal of top-line growth, but you’ll want to invest enough here to defend your position as long as you’re continuing to see a heathy level of profitability (more on that further below).
- “Turkeys” are products that have captured a small share of a market that is not growing. You likely miscalculated the projected size of the market, and then failed to differentiate your product among this small market. The only way to grow revenue from these products is to capture share from competitors – a source of growth that is usually temporary as it invites retaliation.
- “Question Marks” raise some interesting conundrums. These problem children in your portfolio have low penetration in high-growth markets. They’re not contributing to growth right now, but they may offer significant upside. Your investment decision here lies in whether you believe that you are uniquely positioned to solve a problem that the market is experiencing.
Another View – Lifetime Value (LTV) vs. Customer Acquisition Cost (CAC) or Cost-to-Serve (CTS)
The framework described above is useful in understanding each product’s potential contribution to future revenue growth. However, not all revenue is created equal. In order to make informed product investments, you’ll also need to understand how each product drives bottom-line profitability. The best way to gain this understanding is to calculate the Lifetime Value (LTV) of the average customer for that product vs. either the Customer Acquisition Cost (CAC) or the Cost-to-Serve (CTS) of your average customer for that product.
- LTV: Customer Lifetime value is a prediction of the net profit attributed to the entire future relationship with a customer. LTV is critical to understanding optimal spend on customer acquisition, or in the case of a product leader, the optimal spend to serve the customer with a specific product.
- CAC: Customer Acquisition Cost is comprised of all Go-to-Market costs, including Product, Marketing and Sales that are focused on new customer acquisition for that product. This is most applicable when evaluating products that are still growing through new logo acquisition.
- CTS: Cost to serve is an all-in estimate of the average costs required to develop, install, and support a product for each customer. Knowing the average cost to serve of each product in your portfolio gives you better visibility to those products that are positively contributing to the bottom line. Cost-To-Serve is especially important as it relates to your cash cows, and other mature products.
For more reading on CAC and LTV, read the following articles:
So basically, you want to make sure that each of your products is deriving more profit from an average customer than it is costing you to either acquire a new customer or to deliver and support that product with existing customers. Seems simple, right? Well, the fact is most companies don’t develop this calculation at a product level. Develop this understanding and you’ll make better product investment decisions than your competitors.
Combining these frameworks will drive top-line and bottom-line growth
In summary, charting your products using Market Maturity Analysis helps you identify where future revenue growth will come from while understanding the ratio of LTV to either CAC or CTS will show you where revenue growth will convert to increased profitability. Armed with an understanding of each product’s growth potential as well as its prospects for contributing to bottom-line profit, you’re now equipped to make the trade-offs that every Product leader has to make. More importantly, you’ve improved your chances of outpacing your industry and making your number.
To see an example of how LTV:CAC is calculated for products that are still in a growth phase, download the CAC LTV Calculator Tool.