According to research by Shikhar Ghosh, a senior lecturer at Harvard Business School, digital products fail because their creators don’t focus on the right measurements, neglecting the metrics that most influence their success.
Therefore, choosing the right metrics for a digital product is critical. Successful product leaders across businesses and industries use product metrics to track, visualize, and analyze a product’s success with customers. Defining and measuring the impact of a product on its users is crucial to improve and optimize features so that they return to it time and again.
Here’s the good news: there are plenty of product metrics that you can use to measure the success of your application or website, or any other digital product. However, metrics vary depending on your product type and industry. Therefore, choosing the right metrics from the start of the product development process is essential. We recommend you to start with your North Star metric. This focus will help you see the big picture in customer engagement and inform the most relevant metrics for success.
This blog will help familiarize you with the most common product metrics widely used across industries and help you learn more about how customers engage with your product.
7 key product management metrics:
1. Customer acquisition cost (CAC): This is what you spend on attracting new customers. CAC helps determine the efficiency of your marketing and sales teams and whether the average customer brings in enough revenue to justify the cost you incur to acquire them. CAC is also helpful in deciding whether you need to restrategize your customer acquisition and pricing strategies to stay competitive and profitable.
How it’s calculated: Divide the total cost of marketing and sales by the number of users who become new customers over a specific period of time.
CAC = Total cost (marketing + sales)/Number of new customers
2. Customer lifetime value (CLTV): According to HubSpot, “Customer lifetime value (CLV, or CLTV) is a metric that indicates the total revenue a business can reasonably expect from a single customer account throughout the business relationship.” The CLV metric can help you streamline your marketing and sales efforts and build strategies to improve the revenue and profitability you generate from each customer.
How it’s calculated: To calculate it, establish an average duration of a customer's lifetime (how long a customer uses a product before stopping) and average revenue per user.
Average Revenue Per User (ARPU) * Average customer lifetime = CLTV
3. Conversion rate: Customer conversion rate is the percentage of customers that visit your site or application and complete an action that benefits your business. A higher conversion rate indicates a good user experience (UX) and the efficiency of your teams in capturing sales. However, there can be numerous conversion events depending on your product type and industry.
How it’s calculated: Now that you’ve got a basic grasp on the topic of conversion rate, it’s easy to calculate the magic number.
Conversion Rate = Total number of conversions / Total number of unique visitors * 100
Examples of conversion events:
- Signing up to become a member
- Saving credit card information
- Signing up for a newsletter subscription
- Downloading a whitepaper, software, or ebook
- Filling out an information form
- Using an app after downloading it
- Upgrading to the paid version of the product
4. Monthly recurring revenue (MRR): Product management teams use the MRR metric as a health check for their products. This metric helps you predict the income you c expect to earn each month from your subscriptions (if you’re a subscription service) or customers in general. For example, if you have 1000 customers who pay you $10 per month, your MRR would be $10000.
How it’s calculated: To calculate MRR, multiply the number of active accounts by the average revenue generated per account.
MRR = Total Number of Active Accounts x Average Revenue Per Account (ARPA)
5. Customer retention rate (CRR): this metric helps you measure your ability to retain customers over a given period of time. The higher your CRR is, the better it is for your business. A good customer retention rate means customers like your company or product. With an increased customer base, you can generate more recurring revenue and contribute to customer journeys with more upselling and cross-selling offers.
Customer Retention Rate = (Customers at the End of the Period) - (New Customers Acquired) / Customers at the Start of the Period.
6. Active users: Active Users is a rather broad term. As an important product metric, it measures the number of users who interact with your digital product over a period of time. You can also look at this metric as your website or application health check. What’s important to remember is that you define a whole set of actions that a user has to perform to qualify as an active user and use the data to see how they engage with your product. Based on time periods, you can track:
- Daily active users (DAU): unique visitors that interact with your site/application within a 24-hour window.
- Weekly active users (WAU): unique visitors that engage with your digital product within a 7-day window.
- Monthly active users (MAU): users who interact with your product within a 30-day window.
7. Net promoter score (NPS): This is a powerful metric to determine how happy your customers are with your product/service and how likely they are to recommend your offering to their peers. In today’s digital-first era, customers trust online reviews and recommendations from friends while visiting a website/application or making a purchase.
In fact, 91 percent of people regularly or occasionally read online reviews, and 84 percent trust online reviews as much as a personal recommendation. Net Promoter Score is, thus, a critical metric to identify your brand advocates. To calculate your NPS:
- Survey your product users; ask them, "On a scale of 0 to 10, how likely are you to recommend our product/service to a friend or family?"
- Define your customers based on their scores: Scores 9-10 are your brand promoters, scores 7-8 are passives, and scores 0-6 are detractors.
- Now forget about the passives; just subtract the percentage of detractor responses from the percentage of promoter responses to determine your net promoter score. This score can range from -100 to 100.
How can Kellton help you craft seamless customer experiences?
Tracking product metrics is vital to the success of your product. During our Product Discovery Workshops, we take clients through the process of identifying the north star metrics and help create a plan for mapping the success of the product. With the right product performance indicators, all teams - from product management to development to marketing and sales - will gain a holistic view of what makes the product a true success. Then, based on the insights derived from these metrics, you can drive important product decisions about its pricing, user engagement, further iterative design, and development, develop a monetization model, focus your messaging, and more.
Kellton is a global product development company that helps businesses build truly customer-centric products. In addition to recommending tech stacks, we help our clients select and measure critical metrics during product discovery and development.
Contact us to learn more about product metrics or tools to drive customer engagement and business growth.