How B2B SaaS metrics can cause unintentional confusion for DTC product managers
The similarities between LTV calculations for B2B SaaS and DTC subscriptions businesses can catch unsuspecting PMs.
In my last two articles, I discussed important metrics for direct-to-consumer (DTC) businesses. I had planned to shift my writing onto important metrics in B2B SaaS products. However, while researching, I identified an issue.
Because B2B SaaS products often have subscription pricing models, it shares the same core concepts with DTC subscription business: CAC, recurring revenue, margins, retention rates, and LTV. However, I noticed that the similarities masked some hidden differences that can easily confuse DTC PMs, especially when PMs working on DTC products with subscription pricing try to copy SaaS metrics.
Starting with similarities
Regardless whether you’re trying to understand metrics for B2C or B2B businesses, the underlying core concepts are the same. As I wrote previously, you want to know:
How much do you spend to acquire paid customers?
How much do paid customers spend on your product/service?
How much does the product or service cost to make and sell?
How many of those paid customers will buy something next month, in month 3, and so forth.
But not all direct-to-consumer businesses have a subscription business model. Take a traditional ecommerce company like Zazzle, which sells t-shirts.
No subscription. The implication is that when calculating AOV (average order value) (a.k.a., How much do paid customers spend on your product/service?), it takes a little effort. Unlike DTC subscription businesses, you can’t pull users and look at their subscription tier. Instead, you have to:
Cohort (i.e., group) customer who all purchase something at the same time (i.e., last 5 days)
Calculate the contribution margin by either:
Take the AOV and subtract the average COGS (cost of goods sold) for those various goods sold or
Subtract the total cost of goods sold from total revenue. Then divide by the number of customers in your cohort.
Here’s a spreadsheet that demonstrates this and a math article.
Sounds easy, but identifying item level COGS to calculate average COGS isn’t always straightforward. Even if you have the cost data, you might have dozens, maybe hundreds of items/SKUs to manage. You don’t have subscription tier pricing to make your life easier.
But this is still the easy part. Step three is figuring out your customer’s natural purchase cadence. Without a subscription pricing model, which has a fixed cadence (e.g., monthly), ecommerce orders don’t have an artificial cycle. Depending on the type of items you sell or combination of items, your natural customer purchase frequency will differ. So, you’ll need to:
Start with a frequent (e.g., monthly).
For the cohort, identify who made another purchase (e.g., within next 30 days)
Repeat step 3 and 4 with longer frequencies to validate your customer purchase cadence.
All this effort is to calculate your churn rate and LTV, not to mention defending your rationale for purchase cadence.
SaaS subscription business metrics and DTC subscription business
Moving to DTC subscription businesses, there’s a different problem. The metrics used to describe both businesses share, but hides subtle and important differences. Those metrics are often: CAC, Average Revenue Per User (replacing Average Order Value), COGS/COS, Churn rate (replacing Retention rate).
In DTC subscription business:
The buyer == the user
This isn’t true in B2B SaaS, especially if it’s enterprise SaaS. This is why PMs in SaaS have to track not only users, but also buyers whereas PMs for consumer products, they are the same*.User growth == revenue growth
Again, not true for B2B SaaS. For DTC subscription businesses, many of the products are physical (e.g., coffee, jewelry, etc.). This means the variable cost isn’t as low as software, making freemium or trials difficult to sustain. As a result, user growth for DTC subscriptions directly translates to revenue growth. This isn’t always the case for B2B SaaS, especially when selling to enterprises. Even when there is incremental revenue growth because of users, the revenue growth for B2B SaaS is less linear than DTC subscription.
I argue that the implication is DTC PMs in subscription businesses can start off by tracking user and user growth, which is a good enough proxy for revenue growth. This won’t be the case for B2B SaaS PMs.
So, you don’t have to get advanced day one and start figuring out how to incorporate recurring revenue metrics into your thinking. You can keep it simple by looking just at CAC, APRU, COGS/COS, and Retention rate. Keeping things simple and building up is always a good foundation.
*I am aware there are cases where buyer/user in DTC aren’t the same. Take Spotify Family Plan which supports up to 6 users. I’m not sure how I reconcile that fact, perhaps because Spotify is more like SaaS (software), the physical DTC subscriptions businesses. Drop a comment if you have thoughts.
Inspiration for this article: