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Creating metrics that matter

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Tim Ferguson is a product marketing manager of APIFuse. He specializes in writing about SaaS, marketing, technology, entrepreneurship, and education. When he is not writing and editing, he spends time learning more about content marketing and getting better at it.

Tim Fergurson

<p>Product managers juggle a lot of roles and responsibilities to achieve success for their products. From defining the product roadmap, resource allocation, to defining key metrics and KPIs to track, measure, and analyze, they guide all the operational and functional teams to create a product that customers can fall in love with.</p>
<p>Among all their roles and responsibilities, defining metrics and KPIs is one of the most important ones. These metrics and KPIs help product managers to make data-driven decisions towards product development, feature prioritization, customer engagement and satisfaction, and more.</p>
<p>The old decision-making methods of guessing, following the gut, gambling, and limited feedback from small groups of customers might have worked in the past. But the competition’s going to be cut-throat. In 2020, the entire SaaS industry was valued at $110 billion and is expected to reach the $146 billion mark by the end of 2021.</p>
<p>Product managers need to be data-driven, knowledgeable, and intuitive to gain an edge over their competitors and stay ahead of the curve. And most importantly, they need to define the right metrics and KPIs to track, measure, and analyze.</p>
<p>It’s not quite easy to decide on the metrics and KPIs to track since there’s so much data that’s gathered.</p>
<p>So, we are going to explore some important metrics and KPIs you, as a <a href="https://www.mindtheproduct.com/saasifying-an-on-prem-offering-a-case-study/" target="_blank" rel="noopener">SaaS</a> product manager, should track and measure to make the right decisions. To make it easier for you, we’ve categorized them to measure the following things:</p>
<ul>
<li>The success of a product</li>
<li>The popularity of a product/feature</li>
<li>User engagement</li>
</ul>
<h2>Metrics to measure the success of a product</h2>
<p>The following metrics will give you a 360-degree understanding of the revenue, cost, and lifetime value of an average customer of your product. When put together, these metrics can help you gauge your product’s overall success in the market and profitability.</p>
<h3>Monthly Recurring Revenue (MRR)</h3>
<p>As the name suggests, this is the monthly predictable recurring revenue your product is grossing. This is a steady source of income for your organization. This metric normalizes/standardizes, the otherwise quite dissimilar, subscription rates.</p>
<p>It’s quite possible that one customer pays for a whole year while the other has opted to pay monthly or quarterly.</p>
<p>You can easily calculate MRR by multiplying the total number of users with the average revenue per user (ARPU).</p>
<h3>Average Revenue Per User (ARPU)</h3>
<p>This metric helps you calculate the average revenue generated per user giving you an overview of how much a customer is bringing you for a given period of time. This metric is also useful to calculate monthly recurring revenue as mentioned above.</p>
<p>Here’s how you calculate ARPU—take the total revenue from the product for a particular period and then divide it by the number of users you acquired during that period.</p>
<p>Our quarterly revenue at APIFuse was $12,500 in the first year of launch and we acquired 100 customers during that period, so ARPU will be calculated as $125. In this case, to calculate MRR, you’ll have to divide ARPU by 3 as it’s easier to take ARPU on a monthly basis.</p>
<p>So, if your total number of users is 1000 (including the 100 you acquired in the last quarter) and your ARPU is $41.66, then your MRR would be $41,660.</p>
<h3>Customer Lifetime Value (CLTV or LTV)</h3>
<p>CLTV/LTV gives you an understanding of how much a customer is going to spend on your product during their time with you. This metric can help you forecast sales, decide on customer loyalty strategies, and more.</p>
<p>Here’s how you can calculate LTV &#8211; divide the average monthly revenue expected from each user by your churn rate (the rate at which you are l<a href="https://www.mindtheproduct.com/12-ways-to-reduce-customer-churn/" target="_blank" rel="noopener">osing your customers every month</a>).</p>
<p>For example, if your current average monthly revenue expected from each user is $300 and your churn rate is 10%, then your LTV is $3000 (300/0.10).</p>
<h3>Customer Acquisition Cost (CAC)</h3>
<p>CAC is the average cost you incur to acquire a customer. To calculate CAC, you need to take all the costs incurred by the sales and marketing department for a particular period and divide the amount by the number of customers acquired during that period.</p>
<p>For example, let’s say your sales and marketing departments incurred  $1,00,000 in a quarter to acquire 1000 customers. Then your cost to acquire a single user is $100.</p>
<p>This metric is used along with LTV to make sure the average revenue from a user is more than the cost incurred to acquire them.</p>
<p>By taking both the examples, we can say your product is making a profit since the LTV is $3000 and the CAC $100 &#8211; which means, on average, a customer is worth $2900.</p>
<h3>Cash Burn Rate</h3>
<p>This metric helps the product manager to understand the overall financial health. Cash Burn Rate is the rate at which a company is burning its funding before generating positive cash flow.</p>
<p>Here’s how you calculate Cash Burn Rate &#8211; take the difference between opening and closing cash balance for a particular period and then divide the difference by the number of months in that period. So, if you are calculating the cash burn rate for a quarter, then you’ll be dividing the difference number by 3.</p>
<h2>Metrics to Measure Product/Feature Popularity</h2>
<h3>Number of Sessions Per User</h3>
<p>As the name suggests, this metric gives you an understanding of how much your product is being used and which features are being used the most.</p>
<p>At APIFuse, we have worked hard to build organic traffic from scratch, we have created content with targeted user persona and informational keywords consistently, and with the help of our SEO professionals, we have built significant traffic that has led to growth in our number of sessions per user.</p>
<h3>Number of User Actions Per Session</h3>
<p>The ‘number of sessions per user’ metric can be further dissected down to the number of actions they are taking per session to understand their behavior, their usage, and their patterns around your product. This metric can provide great insights for <span style="text-decoration: underline;"><a href="https://www.mindtheproduct.com/a-product-development-framework-with-a-focus-on-problem-solving/" target="_blank" rel="noopener">further product development</a></span> and feature prioritization.</p>
<h2>Metrics to Keep Users Interested</h2>
<h3>Trial-customer Conversion Rate</h3>
<p>This is quite similar to lead-customer conversion rate but since there’s an extra step for SaaS products which is the free trial, product managers need to calculate the trial-customer conversion rate.</p>
<p>It is one of the most useful ways to gain customers to your SaaS, Ada Chen in <span style="text-decoration: underline;"><a href="https://adachen.com/freemium-and-free-trial-conversion-benchmarks-9fab38d096da" target="_blank" rel="noopener">her article</a></span> says that Slack had about a 30% conversion rate, whereas companies like 37signals, Dropbox, Evernote, GitHub, HootSuite, New Relic, SurveyMonkey, Weebly, Zendesk had 1-10% conversion with free trials.</p>
<h3>Retention Rate</h3>
<p>A retention rate is essentially the number of customers that stick with you and continue to pay for a given amount of time.</p>
<p>To calculate, you want to subtract the number of customers acquired for a given period of time from the total number of customers at the end of that period. Take that number and then divide it by the total number of customers at the beginning of the said period and then multiply it by 100.</p>
<p>Here’s a <span style="text-decoration: underline;"><a href="https://clevertap.com/blog/retention-rate/" target="_blank" rel="noopener">retention rate calculator</a></span> which is handy for all product managers.</p>
<h3>Churn rate</h3>
<p>As mentioned above, the churn rate is the average number of customers you are losing on a monthly basis.</p>
<p>So, if you are gaining over 1000 customers in a month but losing around 100 customers, then your churn rate is 10% (100/1000).</p>
<p><span style="text-decoration: underline;"><a href="https://www.mindtheproduct.com/12-ways-to-reduce-customer-churn/" target="_blank" rel="noopener">To gain a better understanding of churn rate, you can read this article that explores ways to reduce it.</a></span></p>
<h2>How to choose software KPI metrics?</h2>
<p>Based on your short-term and long-term goals, you can filter out the above metrics and make your decision process clearer and more effective.</p>
<p>For example, if your short-term goal is to improve <a href="https://www.mindtheproduct.com/the-hierarchy-of-engagement-by-sarah-tavel/" target="_blank" rel="noopener">user engagement</a> then you would want to track DAU/MAU, Session duration, etc., and maybe introduce some valuable features after following the steps mentioned in roadmap prioritization.</p>
<p>You can also make your product more valuable by offering integrations to widely used applications like Evernote, Google Drive, Slack, etc. by using an <span style="text-decoration: underline;"><a href="https://apifuse.io/">embedded integration platform</a></span>. This way you’ll be integrating your product into their current ecosystem which can directly impact session duration and DAU/MAU.</p>
<p>If your long-term goal is to increase the overall trial-customer conversion rate, then maybe you can plan out an exhaustive customer onboarding strategy that involves creating useful resources, email marketing, extra support, etc.</p>
<h2>On a closing note</h2>
<p>It’s quite easy to get lost in the world of metrics and KPIs especially when there are so many tools with advanced technology that lets you track everything, literally. What will help you take your SaaS product to great heights is the ability to track the right metrics and KPIs based on your short-term and long-term goals.</p>
<p>We will be back with another insightful article on metrics and KPIs every SaaS product manager should track where we will be discussing metrics &amp; KPIs revolving around user satisfaction, user engagement, and product resonance.</p>
<p>Stay tuned!</p>
<p>Discover more content on <a href="https://www.mindtheproduct.com/category/product-management-metrics-and-kpis/" target="_blank" rel="noopener">Product Management Metrics and KPIs</a>.</p>

Metrics and KPIs every SaaS product manager should track

Tim Fergurson

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