Business Syntax 101: 10 Terms Software Developers and Technical Founders Should Know
Software engineering itself is overflowing with terminology, buzzwords and the acronyms-de-jour. It’s possible to become desensitized and possibly “glazed over” when encountering terminology from the business side of development.
For technical founders these concepts are crucial. You may not have the support of dedicated Data, Marketing or Product teams, but an understanding of these will be vital in getting your idea to survive and flourish in the wild!
For straight-up software engineers a grasp of such ideas can help guide interactions within the organization and make your code have the most impact in the real world.
1. Validation Checks
The urge as developers is to immediately jump in and start writing code to address the problem. STOP. Before opening an IDE the very concept for the feature or product should go through a validation check.
Is worth building? Some great methods to do this include:
- Ask your users and review existing feedback. Are users already suggesting this feature or asking for this product?
- Do existing team members have any organizational-insight? Perhaps there’s a reason or obstacle as to why this hasn’t been done already.
- Existing success. Are competitors already having success implementing this idea? If so what would be your competitive advantage?
- Google trends / keyword planner. Are users searching for a solution to this problem? Is it a growing or declining trend?
- User testing with non-functioning prototypes. I’ve experienced planning features using services such as usabilityhub.com . This has provided valuable user feedback before writing any code. It absolutely helped move the team towards building a UX that everyone was more confident in.
2. MVP (MLP): Minimum Viable (Lovable❤️) Product
In my opinion this means making the simplest version of the product or feature necessary to give a signal that it’s worth keeping and iterating on.
MVPs can go wonky in a few ways, including:
- The product is “viable” to the team but not the user. Meaning the feature looks pretty, the codes smells amazing, it nailed the deadline, 3 users told you they loved it!… but overal it waters down the core of the app and leads to a drop in engagement.
- No goalposts for success are defined (Key Performance Indicators). For example: consistently passing e2e and unit tests is irrelevant if the feature negatively impacts user engagement.
- MVP Overload! The app includes too many MVPs. MVPs should be used to test if the feature is worth investing more resources in. Once that’s established it’s likely that further iteration will be required. Either that or at some point it may be better to archive the feature.
- Slippage of viability. The marketplace as well as user expectations are constantly evolving. It’s possible that the MVP that was released 2 years ago is no longer “V”.
3. CAC: Customer Acquisition Cost
This is the cost required to procure a new user, pertaining to sales and marketing. This does not typically include the cost of development and platform running costs.
This metric helps a business understand the efficiency of its customer acquisition efforts. When compared with the value of a user over their lifetime, it’s crucial in determining overall viability.
Related is the concept of the “time to recover CAC”, i.e. how long it takes for the business to recover the cost of acquiring a customer. This helps in understanding the timeframe to break-even after spending the money to acquire a user.
Not to be confused with CAK: Cost of Acquiring Khakis
4. MRR: Monthly Recurring Revenue
MRR is the total amount of subscription or app sales revenue earned on a monthly basis. It’s a no-brainer that this is key in measuring the growth of a subscription based service. However it’s not the whole picture. This scenario can occur:
- MRR increases -> I’m the king of the world! 🚢
- CAC (cost of acquiring user) has increased faster than MRR due to spending more on marketing (or having less efficient marketing) -> Wait that doesn’t sound good. 🤔
- Gross margin drops -> DOH! 😢
5. CLTV: Customer Lifetime Value
The CLTV is the total revenue a customer is expected to generate over the course of their relationship with the business, whether it’s from the subscription directly or other one-time sales. This metric is important in understanding the profitability of a customer.
Predicting a user’s CLTV can be tricky and generally relies on having historical data.
Related to LTV is ARPU: the average amount of revenue generated per user.
6. APU / APC: Active Paying Users (Customers)
This is the number of active user accounts. Be sure to consider whether this includes users on unpaid trials, as they may not necessarily convert to paid users. If there’s a freemium tier it may be useful to think of paying subs as Active Paying Customers.
7. Churn Rate / Churn
This is the rate at which customers break your heart 💔 by canceling their subscription, take your dog and run away with your Peter Gabriel So vinyl.
A certain amount of churn is to be expected. The dilemma is in evaluating what is an acceptable amount of churn? Several factors come into play including: the customer acquisition cost, the average revenue per user and the role of the product within the organization.
As a general rule of thumb, an acceptable churn rate is typically considered to be between 5% and 7% annually.
Ultimately, it is important to track the churn rate over time and continually strive to lower it through improvements to the product, customer service, and overall user experience.
Not to be confused with Chum Rate: The rate at which you’ll loose friends if you bring up any of these terms at a dinner party.
8. Conversion Rate
This usually pertains to the percentage of website visitors who become paying customers, but could apply to other “conversions” e.g. users who complete a free trial and then convert to being paid users.
Generally speaking a conversion rate of 2–5% is considered to be average for most SAAS (software-as-a-service) products.
Conversion rate can be influenced by various factors, such as the quality of traffic to the website or landing page, the messaging and value proposition, the user experience, and the pricing strategy. Therefore, it is important to continually test and optimize these factors over time.
9. Gross Margins
Gross margin is the percentage of revenue left after accounting for all of the associated costs.
Not to be confused with Gross Margins: any margin that’s an odd point value e.g. “9”. Eek MY EYES! …jk
10. KPI: Key Performance Indicator
As the name suggests, these are the metric deemed to be “key” 🔑 for the success of the app or feature.
Hopefully having read through the terms above you can understand the meaning of these 6 common examples of KPIs:
- MRR
- CAC (of users wearing Kakhis)
- Churn Rate
- Conversion Rate
- CLTV
- DAU (Daily Active Users)
It’s vital for the team to know what KPI goals are important for the product’s success and to regularly monitor them.
It’s not as simple as saying “We need a higher monthly recurring revenue, so we’ll spend more to acquire users”. If users churn out of the product at an alarming rate it might be necessary to refine or add features instead of increasing paid advertising spend. Conversely if the conversion rate is improving and churn is low it might be a great signal to invest more in paid advertising 💵.
Conclusion
In much the same way that it’s important for a musician/songwriter to understand key concepts in the music business, so too can knowledge of the above ideas benefit developers. Hopefully having these on your radar will help you connect with the broader picture and empower you to make better creative decisions 🤘🏻.
