Let’s make a bold assumption: Every software product you regularly use is data-driven. Example? Uber, Spotify, Amazon, Facebook, Netflix, the AltexSoft website you’re viewing right now — just to name a few. To deliver the most value, encourage your return and loyalty, executives of companies like to start their weeks by looking at metrics — pieces of quantifiable data that illustrate the changes in revenue and customer behavior.
Of course, knowing these changes exist won’t solve anything. Netflix’s ex VP/CPO Gibson Biddle, explained that they used data to hypothesize and then A/B test assumptions to find out what worked. That’s exactly how Netflix decided to replace their 5-star rating system with simple like and dislike buttons, introduce the “percentage match” of the movies, and majorly simplified the UI.
In this article, we will introduce you to metrics and KPIs to track your product success. While they will give you the knowledge, the real power lies in how you learn from them, how you interpret, hypothesize, and spark change.
KPIs and metrics for product management
Metrics is a quantifiable measure that allows businesses to define and track the success of a product or a business activity. Metrics are used by stakeholders, marketers, and the product management team to detect problems, set goals, and make informed decisions. These problems can relate both to engineering efforts that we covered in the article on Agile development metrics and to the results of the final product.
Today, the biggest issue with metrics is not how to measure them — Google Analytics alone is a valuable tool for calculating and visualizing your success. It’s choosing a few key metrics to keep an eye on, spend less time tracking, and more time acting upon the found data.
Depending on what your objective is — attracting a new customer segment, improving popularity with users, getting ideas for new features — you need to choose the right metrics. KPIs are among key points in building a product roadmap — they allow product managers to evaluate engagement, feature usage, user experience, and, of course, commercial success. First of all, pay attention to KPIs that contribute to your goals. Let’s start with the most significant area and learn how to measure revenue.
Metrics to forecast business success of a product
Let’s face it: Stakeholders care the most about financial metrics. And rightfully so. These are the numbers showing how much you’re making today and will be making in the future, and subsequently — how much more you can develop or simply for how long you can stay afloat. Stakeholders care about the revenue, customer acquisition cost (CAC) and customer lifetime value (LTV or CLTV). These indicators define the fate of the company and the product.
Monthly recurring revenue (MRR)
These metrics measure a product’s total revenue in one month. To calculate them, consider the MRR at the beginning of the month, add gained revenue from new subscriptions, and subtract churned revenue from lost customers.
Average revenue per user (ARPU) allows you to count the revenue generated per user monthly or annually. You need these metrics to define the future service revenue, in case you’re going to change the pricing plan or roll out a promotion.
There are two types of ARPU: per new account and per existing account. ARPU per new account refers to metrics based on new accounts appearing after the subscription plan or product price was changed. ARPU per existing account involves the data from accounts established before the price change. This is the ARPU formula:
Monthly recurring revenue / total number of accounts = ARPU
Use ARPU to compare yourself to competitors, consider different acquisition channels, or segment which tier of customers brings more value.
How to use MRR and ARPU. It’s an effective KPI to use to monitor a company’s current health and it’s especially valuable in SaaS businesses working on a subscription basis. Since you don’t need to worry about one-off sales after acquiring a recurring customer, MRR is easily calculated and predictable.
Customer Lifetime Value (CLTV or LTV)
These metrics allow you to calculate how much money a user will generate in the long term. LTV displays an average profit from one user before they cancel a subscription. The point of this KPI is to show you how much you can spend to attract a new customer at an early stage, regarding the probable profit from one person. To calculate it, establish an average duration of a customer lifetime (how long a customer uses a product before stopping) and average revenue per user.
Average Revenue Per User (ARPU) * Average customer lifetime = CLTV
How to use CLTV. Track this metric to test and select customer acquisition channels, purchasing cycles, and retention strategies.
Customer Acquisition Cost (CAC)
This metric covers all the costs spent on attracting customers: marketing spendings, sales team work, advertising. Sometimes these costs include salaries of marketing and sales professionals. Usually, customer acquisition cost involves setting a specific period of time and total revenue. There are several formulas to calculate CAC, but the simplest one is:
Sales & marketing spendings for a period of time / total # of customers generated for a period of time = CAC
How to use CAC. Use CLTV and CAC together to identify whether customers bring you less profit than what you spend on them, and whether it’s time to reconsider pricing and product marketing strategy to attract more users.
Metrics to analyze and grow user engagement
Albeit less relevant to stakeholders, customer-oriented metrics will show you how your product development efforts transform into user interactions. How many users find and use your product? How much time do they spend using it overall or a particular feature? How do customers react to a specifically planted action or feature? Also, these metrics include data on those who stopped using a product abruptly (bounce rates).
Daily Active User/Monthly Active User ratio
Besides revenue, the most valuable metrics of product growth is the number of users or subscribers for a fixed period of time. But the number of people who have subscribed or purchased your product isn’t a primary KPI. What really matters is the number of active users. Metrics of this category track how many unique visitors or users you have per day (DAU), week (WAU), or month (MAU). A unique visitor is one who visits a website at least once within a given period of time.
Daily Active User (DAU) — the number of active users per day. An “active user” is one who signed in an account and performed some valuable activities.
Monthly Active User (MAU) — the number of active users who complete valuable activities per month.
This KPI is applied to mobile apps, online games, websites, and social networks. A unique user is defined by ID and login. In identifying the “stickiness” of a product, apply DAU/MAU ratio.
DAU/MAU = # of Daily active users / # of Monthly active users
How to use DAU/MAU ratio. DAU/MAU of 20 percent is considered a good sign, while 50+ percent indicates extreme success. Growing DAU/MAU percentage allows for tracking growth or decline of a product. This ratio is used in forecasting, budgeting, or making a decision to develop new features. However, not every product must be used daily to be considered successful. You can use Uber once a week on a Friday night out or log into Airbnb twice a year. So, high-recency products are more prone to going viral.
This KPI is the easiest way to track digital product usage. The best way to measure it is to take the total time users spend in your product, divide it by a number of users, and take the mean value. Google Analytics calculates this number for you.
How to use the session duration metric. If you calculate the session duration of a group of bounced or churned users, you may find a clue on how to improve user interaction and understand what made them stop using a product.
This KPI mostly applies to websites, while for applications and software we use the number of users. It shows the general number of people who found and visited the website. While organic traffic is related to the number of visitors who found a webpage via search, paid traffic counts those who visited it from paid sources, for example, paid search, social media ads, or sponsored content.
How to use traffic metric. Paid traffic allows you to find out whether you should continue the promotion and how correct your targeting is. Traffic metrics also allows the product manager to understand which type of marketing is more effective.
Another metric is the bounce rate. It allows for measuring the percentage of users who visited only one page of a website or app and left.
How to use bounce rate. Bounce rate allows you to track the user behavior and understand how to optimize your product to reduce this number and increase user attention. The next section focuses on more KPIs for attracting users.
Metrics to keep users interested
Retention metrics help understand whether your marketing and customer support efforts pay off. If you know your Customer Acquisition Cost, you know how much it takes to attract a new user. Your current clients are much more likely to try a new feature, switch to a better plan, or take part in an interview for user research, so it makes sense to focus on retaining them.
Customer retention rate (CRR) is the percentage of customers who stayed with the company after a certain time period. You can base your calculations on a number of downloads or first logins to the app.
Retention rate = Customers at the end of the calculated period — New customers / Customers at the start of the calculated period x 100
How to use retention rate: Based on this KPI, you can understand if and for how long you’ll be able to retain new customers when your customer retention rate is growing. In case it dropped, you can be on the lookout for a new competitor or a problem in customer service. According to the Product Benchmarks Report by Mixpanel, the average CRR for most software products is below 20 percent over 8 weeks, depending on the industry.
You decide what type of incoming data to use for CRR calculations: what action is considered returning and over what time period you should measure retention.
Customer churn rate = Customers lost / Total customers
While retention rate measures the percentage of users who stayed, the churn rate measures those you’ve lost. There are two types of churn rate: customer churn (number of users who canceled paid subscriptions) and revenue churn (amount of revenue lost due to customer churn). To measure customer churn rate, take the number of customers lost during a certain time period and divide it by the number of customers at the beginning of this time period.
How to use churn rate. In terms of business success, it’s more effective to pay attention to revenue churn than to customer churn. However, customer churn rate can tell you a lot about customer satisfaction. If you measure churn rate after introducing a new subscription plan or applying a new feature, you can understand whether they were justified or not.
There also are KPIs that allows you to measure the popularity of new and old features and we will discuss them now.
Metrics to measure product/feature popularity
One of the central product manager responsibilities is to lead the product development workshop, where a product team works on ideation of new features and UX design. To make relevant decisions, you need convincing data on product and feature usage. Two key metrics here are the number of user actions and sessions per user.
Number of sessions per user
This metric helps understand key user behavior: how often users come back and use the site. It can be tracked with statistics that display the number of logins or site visits. This KPI reveals the popularity of a product — if the audience engages with it again and again. Unlike traffic or session duration, the number of sessions per user shows an average for a particular group of people in some time period.
How to use number of sessions per user. Compare this data within different groups of users or visitors (retained and churned) to forecast user behavior changes before churn and prevent it.
Number of user actions per session
This KPI seems similar to the previous one, but it tracks not just how many times a user opened an app. It displays which actions a user made and which feature(s) they used while using the app. This metric is used to understand the popularity of a certain feature since it was introduced and compared to a particular period of time. Also, you can compare these metrics of churned and retained customers and get an idea of what makes the users interested in your product.
How to use number of user actions. Use this data in A/B testing to make decisions about features, UX elements, and to understand customer behavior.
The last metric to consider is the level of customer satisfaction and the following section is devoted to key indicators that allow you to track it.
Metrics to evaluate user satisfaction
NPS = % of promoters — % of detractors
Churn and bounce rates, traffic, and retention rate tell about customer perception of your service or product indirectly. The primary way to learn if the customers are happy is direct customer feedback. Net promoter score, customer satisfaction score, and customer effort are metrics that can be obtained via surveys.
Net Promoter Score (NPS)
This metric measures the number of loyal customers who are likely to recommend a product (promoters), and those customers who hate it (detractors). To calculate NPS, ask users to rank your product from 0 to 10. Detractors would give it from 0 to 6 points, users with 7–8 points are neutrals, and those who gave it 9–10 are promoters. The NPS formula is:
Bain and Company who initially introduced the metric identified that high NPS leads to 20–60 percent of organic growth. Same goes for negative NPS — a high number of detractors results in economic penalties.
How to use NPS. NPS awareness throughout the organization motivates employees to deliver more value, react to issues faster, and get to the root of detractors’ problems. Besides, any information learned about detractors should be shared among all departments in a common effort to improve the overall experience of your customers.
Customer Satisfaction Score (CSAT)
It measures the overall level of content or discontent of a user about a specific product or service feature. Usually, users are asked to rank a product or service on a scale of 1–3, 1–5, or 1–10. It’s calculated by summing the score and dividing it by the number of respondents. Unlike NPS, CSAT is directed towards evaluating satisfaction with a particular feature. Customer experience is measured with other metrics: Customer Effort Score (CES). Measured like the CSAT, you need a customer survey where users rank how easy it was to find a necessary information about a product.
How to use the CSAT. Ask for user feedback at several points through the customer journey and do it before another subscription renewal so you have time to introduce improvements. Also, use this metric as an industry benchmark — the American Customer Satisfaction Index logs data from the biggest companies and compares stats with past results.
Final word: How to choose software KPI metrics?
According to State of Product Leadership 2019 survey by Pendo and Product Collective, the majority of product managers still focus on product features and feature delivery. Product goals remain their primary concern, while adoption, revenue, and user retention remain a secondary or even tertiary concern. Does it mean that product managers should keep measuring their success the same way? The survey shows that it’s not a very favorable strategy for a lucrative product: the less you focus on customers, the less successful your product becomes compared to your competitors. Here are several recommendations:
- Choosing your main KPIs, focus on those that reflect user needs.
- Align user, product, and business goals
- Focus on the average index rather than on total
- Focus on particular time periods (week, month, day)
- Accentuate KPIs that impact long-term growth in revenue
Keep in mind that a product is not just about the software itself, it is about the value and customer satisfaction — so the most important metrics should be concerned with the user.
Originally published at AltexSoft tech blog “15 Key Product Management Metrics and KPIs”