Data-driven is a word that we always hear while talking about product development or business decision making.
Let’s focus on software development, what are the basic metrics we should focus on? This question may be a bit challenging to anyone working in a product team. In this post, I’ll try to answer that question by covering the foundation of Product Metrics.
Committed Monthly Recurring Revenue (CMRR)
This metric is extremely important to evaluate how the company is making money. Continuous growth is a good sign for investors to spend more money even though the company is not profitable yet.
However, continuous growing revenue is not always a good sign of making good business. This is one of the biggest illusion of product scaling. Stable revenue growth needs to have stable cohort-based dollar retention. In other words, revenue is not everything yet. We also need to keep Cost Per Acquisition (CPA) as low as possible, Life Time Value (LTV) as high as possible.
From 2 images above, we can easily know that LTV of the first case is very low since about 80% of new users are constantly leaving the product. To maintain the increasing CMRR, it requires a huge incremental investment to acquire new users who could fill in the missing ones.
If both companies stopped advertising campaigns (due to the economic crisis) in 2018, CMRRs would have dropped dramatically (which showed clearly in the above diagrams). Luckily, not all the investors were looking at other metrics besides CMRR and the economy was growing well 🙂.
Cost Per Acquisition (CPA)
This represents how much it costs to acquire a new customer. The lower CPA, the better. We have lower level metrics to evaluate this like:
- Advertising cost per thousand (CPM): the cash investment for advertising on average (via all platforms) to acquire 1000 subscribers
- Visits to lead: number of visits required to transform a visitor to an engaged client
- Visits to subscriptions: number of visits required to transform an engaged client to an official subscriber
Life Time Value (LTV)
The amount of money each customer could bring to the company in the whole user lifetime. Logically, a profitable business requires “CPA < LTV”.
The percentage of customers who are leaving the product / cancel the subscriptions (typically in a month).
Notice that Churn Rate can still be high although revenue and number of users are increasing. It’s possible as long as the number of new users is greater than the number of left users. We can accomplish this by spending massive advertising, promotion campaigns which noted as operation cost/investment.
North Star Metric
This metric visualize how the product is reaching its vision and goals. Usually the actions measured for this metric is the key flow of the product. The more users go through this flow, the more successful the product is in terms of solving user problems, increasing user lives.
These are some examples:
- Mobile Commerce Business: number of mobile orders delivered
- Facebook in early days: number of users adding 7 friends in the first 10 days
- Grown hack in SAAS companies: trial accounts with more than 3 users active in week 1
Net Promoter Score (NPS)
This is the core metric to measure the overall customer perception of the product which can help predict grown opportunity.
Nowadays, it’s a very popular tool being applied by most of the product teams to identify users’ critical pain points in using the products as well as identify the added values which users value the most.
Having metrics is fancy but reading them is difficult. We all should be very careful in extracting the meanings behind any charts, diagrams because the whole meaning can be changed by having other contexts.
Hope you found some meaningful information out of this blog. Give me comments for any suggestions. Thank you!