Most software businesses receive a lot of feature requests, especially as they gain traction in the market. While there are many ways to prioritize them, revenue is one of the most important considerations—especially for business stakeholders.
Let’s take a look at four ways that feature requests could impact revenue and how to estimate the potential for each of them.There are a lot of ways to organize feature requests, but revenue potential is one of the most important—especially to stakeholders. Click To Tweet
Collecting the Right Data
Accurate estimation requires the right kind of data. For example, estimating the revenue impact of 1,000 new users is much easier if you know your average revenue per user or ARPU. The data are commonly known as key performance indicators, or KPIs, among product managers and are an essential prerequisite to estimating revenue potential for feature requests.
The four most important KPIs to track revenue include:
- Monthly Recurring Revenue (MRR): The amount of recurring revenue generated each month by the business.
- Average Revenue per User (ARPU): The MRR is divided by the number of active users during the month.
- Churn Rate: The current month’s MRR divided by the MRR lost due to downgrades or cancellations during the month.
- Customer Lifetime Value (LTV): The ARPU is divided by the churn rate.
There are many different ways to track these metrics, ranging from simple spreadsheets to live dashboards. For example, Baremetrics integrates with existing payment providers to automatically aggregate these KPIs and keep them all in one place.
Amoeboid’s Roadmap Portal – Source: Amoeboids
It’s equally important to understand customers. For example, Roadmap Portal makes it easy to collect customer feedback on feature requests and the overall roadmap to effectively gauge interest. Following up with customers after they have canceled is also important to determine if there are feature requests that could reduce the churn rate.
4 Ways Features Impact Revenue
There are a handful of different ways that feature requests can impact revenue. While some of them may simply justify a higher price point or close sales, others might reduce the churn rate or open up entirely new markets. Of course, the impact of a new feature may be a combination of these different factors (e.g., reduce churn and increase per-action revenue).
#1. Expanding into New Markets
Suppose that you have built a simple invoicing platform that enables businesses to generate invoices and send them to customers. While the platform is geared toward large businesses, you start receiving a lot of requests from freelancers for a timer that would automatically multiply the time they spend on a task by their hourly rate and send an invoice to a client.
These kinds of feature requests may not apply to existing users, but they could expand your platform into an entirely new market (e.g., freelancers in our example). You can estimate the revenue potential for these new features by multiplying your existing MRR by the number of requests and/or the estimated size of the new market.
#2. Enhancing User Monetization
Suppose that you have an advertising platform that connects publishers with advertisers. While you currently only run display ads, you start receiving a lot of feature requests for video ads. These ads would generate a much higher CPM rate than display ads, which could increase the revenue that you generate from each publisher.
These kinds of feature requests could increase your ARPU since you can generate more revenue from each existing customer. You can estimate the revenue potential for these new features by multiplying the new feature’s per-action or per-user revenue by an estimate of the number of people that will use the new feature or their number of actions.
#3. Preventing Customer Attrition
Suppose that a competing advertising platform introduced video ads in our previous example. In addition to increasing ARPU, the feature might help reduce customer attrition—or the number of customers that leave your platform because you don’t offer video ads. Customer churn is a key performance metric for any software-as-a-service business.
The best way to measure attrition is to survey customers that cancel. If you know why they cancel, you can estimate the number of customers that are canceling due to the lack of a certain feature. You can then use ARPU and LTV to determine the value of these lost customers and the revenue potential for a feature that might keep them around.
#4. Adding Value to Raise Prices
Software businesses that charge a flat monthly fee can have a difficult time raising prices, but with the addition of new features, it’s easy to add a new pricing tier. For example, suppose that you receive a lot of feature requests for cloud storage. Adding the feature could enable you to create a new pricing tier that effectively raises the ARPU over time.
The best way to calculate the revenue impact of adding a feature designed to raise prices is to determine a new pricing tier, estimate the number of people that would switch to it (based on interest or surveys) and then recalculate a projected ARPU and LTV. You can even estimate the impact of different pricing tiers to determine whether it’s worth developing the new feature.
The Bottom Line
There are many different ways that feature requests can impact revenue and estimating revenue impact can be a helpful way to prioritize them. With Baremetrics, Roadmap Planner and other tools, you can access all of the data that you need to make these decisions and ultimately drive revenue, profitability and user satisfaction higher over time.