The key to startup success lies in product metrics (if you know what to measure)
Finding the right metrics to measure your startup growth can be tricky. There are so many product metrics available that it makes your head spin. Don’t you worry, you don’t need to measure all of them to calculate your profits!
Our product manager Evgeniy Sergeiev created a short guide of business metrics your team needs to start tracking your success.
Let’s talk business! This guide covers:
- The main metric — profit
- Finding your business model
- E-commerce metrics
- Digital media metrics
- SaaS metrics
- Setting your North Star metric
The main metric to rule them all
You don’t need to dig deep into analytics to find which metric is most important for any product — the profit. We should never forget that profit is the core of any product that is made to gain some monetary value.
Profit = Revenue - Expenses
If expenses are bigger than revenue and you get negative profit, it should ring a bell that something is not right. There are exceptions such as the product being an early-stage startup. But overall, if you have a classic business model — the profit must be positive and constantly growing.
This metric is the highest and the most important one you should never forget about. All the other metrics to boost your startup are one level down.
How to calculate Revenue and Expenses
To calculate profit it’s crucial to understand where the revenue and expenses come from.
Revenue = number of sales
Simply put, to have revenue you need to have something of value to your customers, something they are willing to pay for. This goes for any type of business from small online stores to SaaS product companies.
Expenses = Salary + Marketing + Administrative + Etc.
Expenses are all you spend to operate your business. Tech product companies usually divide the expenses into two parts — expenses on customer acquisition (marketing and sales) and other expenses.
Your profit MUST grow, one way or another
There are dozens of scenarios where your revenue grows equally with expenses, slower than expenses, remains stable while expenses are going down, and so on. All this depends on the stage of the product life cycle and other factors.
But you should always keep in mind that in the end your profit must grow. That means your revenue has to grow also.
To grow revenue, a company has two levers:
- Increase the price of their products;
- Increase the number of sales;
- Something in between like when the price grows and the number of sales falls, but the revenue still increases.
How to cut the expenses is rather obvious — giving fewer perks for your teammates or finding your customers cheaper.
The core metrics of any product or service
Put all this info together to finally get to the core of any business model. Calculate these metrics every month to see how your business is doing.
Profit = Average check (X number of sales) - Customer acquisition cost (X number of customers) - Other expenses
Finding your business model
Of course, it is not enough to manage your startup only according to these parameters. To track more meaningful metrics you need to understand your business model.
To find the right model for your business, you need to understand the answers to these questions:
- What, when and where you’re providing (selling) to your customers or partners?
- What is your product price?
- What do you need to deliver your product?
Don’t rely on random luck. Always ask yourself these questions, because different business models have different product metrics to look into. If you can’t understand what and to whom you’re selling, you won’t find your business model and won’t be able to calculate your product metrics correctly.
And the last thing you need to do before going into the field of metrics is to define your monetization model. Some people put this model on the same level as a business one, but in reality, monetization is just a part of a business model that is telling you how exactly you can achieve your profits.
Remember, you don’t need to be stuck with just one model! You can have several types in one business, for example, your app can have a subscription for content and at the same time a fee to download the app.
Online store or eCommerce business model
This model is typical for online stores when you sell some goods to the customers and the difference in price goes into your profit bucket. The scenario usually goes like this: you buy or produce for 3, sell for 5, and get 2 in profit.
Key eCommerce metrics are:
- CAC — Customer Acquisition Cost: how much money you spend on each customer (from the first touch to the actual purchase)
- AOV — Average Order Value: average purchase amount
- RP — Returned Purchases: how many products were returned and what they cost you
- LTV — Lifetime Value of the client: has your customer become a regular and how often have they returned to purchase something?
If you track these metrics, you’ll be able to work with your profits. For example, if you see your CAC increasing, dive deeper into the campaigns and find where something goes wrong on the buyer journey. It helps you to experiment and to find the optimal model to attract your customers at a minimal cost.
If your average purchase amount is small, you can experiment with cross sales and up-sales to increase it. If the return rate is high, you can change the contractor to increase the quality of the products.
Each metric can show you where you need to improve some processes. The most important metrics to expand are always ones that require some polishing.
Media business model
There are two typical scenarios for this model:
- Attract users for 4, show something free plus some advertising, and sell advertising for 5 — the media is free, but you can show ads from other companies.
- Attract for 4, show bits of something valuable, and offer full access for 6 — this media has a paywall and users need to pay for full access.
Key media metrics are:
- CAC — Customer Acquisition Cost: how much money you spend on each customer (from the first touch to the actual purchase). This metric is not so valuable as in the online stores model, because it’s easier to bring viewers to a website where they get something free.
- MAU/DAU/WAU — active users and subscribers are the key metrics for this business model.
- ENGAGEMENT — how much the content is shared or commented on;
- RETENTION — how many customers are staying and what can be done to make them stay longer.
- LTV — Lifetime Value of the client: has your customer become a regular and how often has he returned to read/engage?
To get advertisers you should use MAU/DAU/WAU, ENGAGEMENT, and RETENTION metrics to show your value to potential partners. These numbers will say how many people visit your website, meaning how many people will look at the ad of the partner whether it’s a banner, article or another piece of content.
Free media (first scenario) usually has endless LTV, but you’ll need a lot of people to go to the website and actually click on some ads to get money from it.
The second scenario works a little bit differently. If you’re going for the paywall model, think about the content consumption culture beforehand — are your users ready to pay for the content you provide? If the answer is yes (like in the case of The New York Times audience), give this model the green light!
Free/Freemium app and SaaS business model
The free model usually monetizes through advertising while freemium has paid features or payment for product options.
This business model has three main scenarios:
- Attract users for 4, show something free plus some advertising, and sell advertising for 5.
- Attract for 4, give some features for free and some paid features for 6.
- Attract users for 4, sell them something for 5 — in this model the value of the product must be really high to attract people and make profits. It also needs to be highly protected from copying by competitors.
Key metrics are:
- CAC — Customer Acquisition Cost: how much money you spend on each customer (from the first touch to the actual purchase)? This metric is not so valuable as in the online stores model, because it’s easier to acquire users for a site or app where they get something without paying.
- MAU/DAU/WAU: active users and subscribers are the key metrics for such a model.
- ARPU — Average Revenue per User: purchase amount for a given period (basically it’s an average check all over again but for apps and SaaS products).
- FREE/PAID CONVERSION: free conversion rate and conversion rate from free to paid user.
- RETENTION/CHURN RATE: how many customers are staying and what can be done to make them stay longer if they are leaving;
- LTV — Lifetime Value of the client: has your customer become a regular and how often has he returned?
Once again, you need to look closely at each metric. For example, APRU is usually measured once per month. If the ARPU goes down, it’s a sign to change your features or experiment with pricing.
If you have several subscription plans and you see that your ARPU goes on closer to the max, you can easily increase the price — people are willing to pay more.
If you’ve published some new features — look at the CHURN RATE. If it suddenly goes up, then maybe something is wrong with the update and it needs a quick fix before your users leave.
Feature flags are super helpful here — you can test new features with targeted user cohorts before a full release.
Setting your North Star metric
There is always a metric that shows the main value of your product or service for the customer. Such a metric is called your North Star and shows the exact results of the work that was done with the product. For example, in the case of an online store business model, it’s the AOV.
All other metrics show some actions taken by the users or customers.
How to find your product’s North Star metric? Simply look at these 3 criteria:
- Profitability — the metric that show how much the company earns.
- Value for users — the metric depicts the main value for the customers.
- Measurability — it’s easy to measure.
Your North Star can change during the lifecycle of the project. Sometimes even if the metric doesn’t meet all the criteria above but shows some problems within the product, it can be named North Star as a key metric to focus on.
Remember that you need to start working with the North Star metric as soon as your product begins to bring profits.
A quick checklist to measure your product
- Define the business model and monetization model (or models).
- Online store model — measure CAC, AOV, RP, and LTV regularly.
- Media model — measure CAC, MAU/WAU/DAU, Engagement, Retention, and LTV regularly.
- Free/freemium model — measure CAC, MAU/WAU, DAU, ARPU, FREE/PAID CONVERSION, RETENTION/CHURN RATE, and LTV.
- As soon as you start making a profit, find your North Star metric and focus on it;
- In case of any problems metrics show, experiment to get a better outcome.
- Calculate your revenue and expenses to find the profit and see how you’re doing.
These are the first steps to analyzing your product and polishing it on a regular basis to increase your profits. The numbers and metrics have the power to help you at any stage of your product development, so don’t rely on random luck — measure to grow.