Not everything that is measurable matters. Product managers know just how important it is to be data-driven, so they can invest a significant amount of time each week digging through data, creating charts and drafting reports.
But, it’s possible not all of that effort pays off.
You’ll know you are working with vanity metrics if the information looks good on paper but doesn’t inform strategy or affect decision-making.
So, how do you scrap the fluff and focus the meaty measurements? The answer to the question depends on your industry, business strategy and growth stage.
For example, the app Hinge measures “good churn” or the number of customers who stop using their app. This is unique because most companies do everything they can to prevent churn because it means lost revenue.
So, why would Hinge measure churn in as a success metric? Because Hinge is a dating app “designed to be deleted.” They tell their users that they are so good at helping people find a match with another person that they’ll be able to delete their dating app.
However, despite these variables, there are a few key metrics that great product managers consistently utilize (including churn) to predict revenue growth.
1. Customer Acquisition Cost (CAC)
Measuring and tracking customer acquisition costs is important because it helps you (and potential investors) predict the profitability of the business. Your company can use CAC to allocate resources and funds, strategize marketing campaigns and help during the hiring process.
To calculate your Customer Acquisition Cost, simply take your total expenses spent on acquiring customers over a specific time period and divide it by the number of customers you gained in that same time period.
Quick Example:
TeachIt is a fictitious company that allows individuals to host their online courses on their platform. Teachers pay TeachIt a monthly subscription fee to have access to the platform along with specialized tools and resources.
The cost of distribution is low because it is a web-based product and customers don’t require much support. Retention is fairly good because once a teacher creates their course content, transferring to a similar platform is both time-consuming and complicated.
During the last month, the company spent $15,000 on marketing efforts, and 300 new customers signed up to host their teaching account. This suggests the customer acquisition cost is $50.
How much is too much to spend on CAC?
The answer depends on your industry and business model, but a good goal is to strive for 25 percent of lifetime value (explained in #2).
If the average annual subscription is $239.88 or $19.99 a month, and the average customer uses the platform for 3 years, then their lifetime value is $719.64.
The acquisition cost is about 7 percent of the customer’s lifetime value, which means TeachIt is likely pleased with that metric or maybe it’s their opportunity to invest more in finding new customers.
2. Monthly Recurring Revenue (MRR)
MRR is at the core of any subscription-based business. It’s a powerful metric that provides insights about how much income you generate each month allowing you to plan ahead with ease and measure growth over time.
The growth rate of MRR gives you insights into the health of a business.
MRR calculation is a simple formula:
Total number of active customers X average billed amount = MRR
Quick Example:
TeachIt has 7,250 customers paying $19.99 a month, 550 customers paying $29.99 a month and 300 customers paying $39.99. The MRR would be $173,419.
3. Average Revenue Per User (APRU)
Simply put, ARPU is the average amount of monthly revenue that you receive per user. ARPU has often been called a vanity metric. Although it may lack depth, at times it can be invaluable because it can identify higher-paying customers, which can increase MRR. It can also help you compare new customers to other segments or measure financial health.
If your ARPU is too low it could mean that your product is too cheap or your market is too small. Alternatively, you could find that you’re operating in a large market with a high ARPU, which signals growth.
Calculating ARPU is fairly simple.
The basic formula is:
Total MRR / Total Customers = Average Revenue Per User
Quick Example:
The MRR for TeachIt is $173,419, and they have 8,100 users, which means the ARPU is $21.40. TeachIt could also calculate the average revenue per user for each subscription tier.
4. Daily Active User (DAU) to Monthly Active User Ratio (MAU)
DAU/MAU is the ratio of daily active users over your monthly active users shown as a percentage. This is a helpful metric because it is an indicator of engagement or stickiness.
Combining DAU and MAU is a powerful way to learn how a customer base engages with a product over time. This is especially true in the mobile app space. An app with 2,000 downloads and 1000 active users could be considered more successful than an app with 20,000 downloads and 200 active users.
Quick Example:
Of the 8,100 subscribers on TeachIt, 7,000 users are active on the product each month and 1,700 are active each day. That means the DAU:MAU is 20.9%, which is typically seen as good for most companies.
A company might be inspired to learn more about what makes the DAU different from the MAU and invest more resources toward capturing the types of buyers who use the platform daily.
This metric could also tell a story about new features or platform updates. If the DAU to MAU ratio drops or increases after a new update, it could inform future business decisions.
5. Conversion Rate From Free Trial to Customer
The percentage of users who have upgraded from the free trial period to a paid account is shown with the Trial Conversion Rate.
Most SaaS models offer a free trial period to let users test out its functions and gauge their overall experience with the product. These free trials are given in the hope that the user will convert to the paid experience.
To calculate the Trial Conversion Rate you simply take your users who upgrade from free trial and divide them by the trial users or Users / Trial Users = Trial Conversion Rate.
Quick Example:
TeachIt has 450 trial users and 120 of them converted to a full paid account. The Trial Conversion Rate is 26.6%
Using the results a company can identify the type of customer who is more likely to upgrade from free to paid. They can then focus on attracting more of those user types to test their product.
6. Net Promoter Score (NPS)
Net Promoter Score is a metric for identifying the loyalty level of customers. It’s measured through a single-question survey where higher numbers are more desirable. The question usually looks something like this:
“How likely are you to recommend TeachIt to a friend or a colleague?”
The customer responds by indicating how likely they are to recommend on a 0-10 scale, which helps you identify the customer type. The customer types are promoters, passives and detractors.
The promoter is an enthusiastic customer who is satisfied and highly likely to recommend the product, these customers responded with a score of 9 or 10.
Passives are satisfied but not likely to go as far as recommending it, their responses fall between the score of 7 or 8.
Finally, the detractors are your unsatisfied or unhappy customers, which are unlikely to buy again and are likely to not recommend the product to others. They responded anywhere from 6 and below.
The calculation for NPS is simply the number of promoters minus the detractors, with the passives being ignored. So an example would be:
Survey results were 40 promoters, 40 passives and 20 detractors.
NPS score is as follows 40 – 20 = 20
If your NPS score is above zero it means customers are more loyal than not. NPS scores above 20 are favorable and above 50 are considered excellent.
The NPS score can be used to see how you’re stacking up against your competition by comparing your products, stores, web pages, you name it. It can help you identify your target market, as well as how they respond to your services and even social media campaigns. Ultimately the goal is to strengthen your loyal customer base.
7. Customer Retention Rate
Keeping customers is more economical than finding new customers, which is why it’s critical to pay close attention to Customer Retention Rates.
Having a loyal customer base will help you build a brand that can retain its value through referrals instead of amping up your customer acquisition costs to replace your lost customers.
To calculate customer retention rate you need to know the existing number of customers at the start of a time period, the number of customers at the end of the time period and the number of new customers added within the time period.
Here is the simple formula:
(End of Time Period Customers – New Customers Added During Time Period) / Customers at the beginning of the time period multiplied by 100.
Quick Example:
TeachIt began the quarter with 7,700 customers, ended the quarter with 8,100 customers. There were 550 new customers added during the quarter. During the quarter, TeachIt had a 98.7% retention rate.
A good retention rate is as close to 100 percent as possible.
You might be thinking, “wait a minute, isn’t this the same as churn rate?”
The answer is no, but together with churn rate, these two metrics have a big story to tell you about who’s staying and who’s going. Then, all you have to do is figure out why.
8. Monthly Customer Churn Rate
We started talking about churn rate, so we’ll finish the list here. While retention rate focuses on the percentage of users who continue to use a product or service, churn rate is the percentage of users who cancel their product or service.
For most companies, churn is not ideal, because reducing churn usually results in revenue growth. However, companies like Hinge turned this negative metric into a positive, because they realized that when users leave its often not for a different dating app. Instead, users achieved what they set out to achieve using the app as a tool. And there are other industries and products that could potentially do the same (e.g. people looking to buy or sell a home).
The simplest calculation for churn rate:
Divide the total number of churned customers for a specific time range by the number of customers you had on the first day of the time range.
Quick Example:TeachIt began the quarter with 7,700 customers and 100 customers left during the quarter, TeachIt had a 1.2% churn rate, which is fantastic. In fact, most companies strive to keep their churn rate between 3-5%
Bonus Metric: Net Revenue Retention Rate
Net Dollar Retention is a metric that helps you identify if your company is losing revenue from contractions in the existing customer base or if you have engaged customers who are spending more money on the platform over time.
To calculate this metric you need to know MRR, expansions, downgrades and churn. To help you simply calculate this helpful complicated metric we’ve designed an infographic.
