29/36 : 📊 Everything about Product KPIs
29/36 : 📊 Everything about Product KPIs
Behind every successful decision lies a metric, guiding the way forward with clarity and purpose
What is a KPI
Key Performance Indicators (KPIs) are essential metrics used to measure the success and performance of a product. They provide valuable insights into various aspects of a product's performance, helping businesses make informed decisions and track their progress towards achieving specific goals. Here's everything you need to know about Product KPIs:
What Are Product KPIs? Product KPIs are quantifiable measurements that assess the performance, effectiveness, and overall health of a product. They provide a clear understanding of how well a product is meeting its intended objectives and whether it's delivering value to users and the business.
Why Are Product KPIs Important? KPIs help product managers, developers, and stakeholders monitor and evaluate the success of a product. They enable data-driven decision-making and help identify areas for improvement. By tracking KPIs, teams can make informed adjustments to their strategies and prioritize efforts that align with the product's goals.
Structured KPI includes:
Key Performance Indicators (KPIs) are the elements of your plan that express what you want to achieve by when. They are the quantifiable, outcome-based statements you’ll use to measure if you’re on track to meet your goals or objectives. Good plans use 5-7 KPIs to manage and track the progress of their plan.
A Measure – Every KPI must have a measure. The best KPIs have more expressive measures.
A Target – Every KPI needs to have a target that matches your measure and the time period of your goal. These are generally numeric values you’re seeking to achieve.
A Data Source – Every KPI needs to have a clearly defined data source so there is no gray area in how each is being measured and tracked.
Reporting Frequency – Different KPIs may have different reporting needs, but a good rule to follow is to report on them at least monthly
What is a SMART KPI?
One way to evaluate the relevance of a performance indicator is to use the SMART criteria. The letters are typically taken to stand for Specific, Measurable, Attainable, Relevant, Time-bound. In other words:
Is your objective Specific?
Can you Measure progress towards that goal?
Is the goal realistically Attainable?
How Relevant is the goal to your organization?
What is the Time-frame for achieving this goal?
Defining the right metric
What is the one metric that matters most to the success of your company and that you can rally your team around? For Facebook, it is active users; for WhatsApp, it is the number of sends; for eBay, it is gross merchandise; for PayPal, it is total payment volume. Once you identify this “top-line” metric, you can set success criteria around it, monitor it, understand what drives changes in it, obsessively push it in the right direction—and properly evaluate and manage the health of your product.
A vision statement should be aspirational, inspiring, and future-focused. For example, eBay’s vision for commerce is “enabled by people, powered by technology, and open to everyone.” eBay’s mission is “to be the world’s favorite destination for discovering great value and unique selection.” Taken together, these two statements point toward eBay’s dream of a world where everyone can find whatever they want, however obscure, at a good price.
What top-line metric would best encapsulate this goal? It is not the number of active users shopping on the site; that metric doesn’t measure whether buyers are actually finding what they want and at the right price. How about the number of active buyers? While and similar buyer-side metrics can tell us whether users are finding what they want at the right price, they cannot address the “unique selection” criteria of eBay’s mission statement.
Guidance on choosing a top-line metric for your company:
Do not pick more than one metric. A single “metric that matters” is unifying and will enable you to set priorities across your entire organization. While it may be tempting to track everything and choose multiple metrics, this isn’t wise. Many metrics correlate with one another; they may help move the top-line metric but can become unimportant and distracting when measured on their own. The more metric goals you have, the more complicated it is to weigh them all and make trade-offs against them. Keep it simple.
Avoid vanity and non-actionable metrics. For example, the number of likes your company gets on social media generally isn’t correlated with business results or customer success.
When choosing between multiple metrics, pick the simplest measurable metric you can move. For example, if your number of advertisers is correlated with your revenue, and the number of advertisers is easier to measure and move, choose the number of advertisers. You can always establish an exchange rate to determine the impact from one metric to another. Likewise, if you are ultimately interested in a metric that has a low sample size or takes a long time to measure, consider instead choosing a correlated metric to measure.
Pick the metric that most closely represents the usage of your product. For a company like Facebook and Instagram, for example, the single most important metric is active users. To measure growth at such a company, we could pick one of several active user metrics, such as daily, weekly, or monthly active users (DAU, WAU, or MAU), all of which are typically correlated. Choose based on the expected usage of the product. For example, if you expect the product to be used once per day or more, select DAU as your top-level metric. If instead, you think the product will be used only on a weekly basis (e.g., when searching for specific restaurants, businesses, etc.), then choose WAU. One of these three—DAU, WAU or MAU—is a top-line metric for most consumer companies.
Do not be afraid to change the metric if you need to. This can lead to thrashing, but it is better to change to a metric that accurately reflects your mission than to move the wrong metric. Ideally, you will put in the time and effort upfront to make sure you begin with the right metric. But if you must change it, do so sooner rather than later.
Choose a simple metric that connects to your drivers. Let’s say you are looking to increase new user acquisitions. You send emails to potential customers, and a fraction of them visit your landing page. A smaller group of users then sign up, and an even smaller group becomes active users. From these numbers, we can create a simple framework to think about the problem of user activation (as seen below). You can increase the total number of users who activate by increasing any of the four terms above. For example, if you see the largest drop-off among people who visit the site but do not sign up, it may make sense to set the percentage of site visitors who then sign up as your metric to move.
Avoid ratios. If click-through rate is what you really care about, see if you can instead measure the number of clicks. However, this isn’t a hard-and-fast rule; there are many examples of companies that successfully used a ratio as the “metric that matters.”
Consider counter-metrics if needed. In the eBay example above, useful counter-metrics include the number of unique items sold and unique inventory listed. If such counter-metrics remain flat or decrease, that may indicate you are drifting from your mission. To address this, you could set an explicit goal that these counter-metrics not decrease. In eBay’s case, the primary GMV metric would remain in place, but the counter-metric would allow the company to maintain checks and balances in a complex environment.
Change the metric as your business evolves. Your top-line metric may need to change over time. For example, before the mobile age, users checked products such as Facebook less frequently because of lack of access and connectivity. As mobile use increased, these companies revised their primary metric from MAU to DAU. This evolution is also common when companies launch new products. For example, Amazon Video has likely increased overall visits to Amazon, which could warrant a change in the company’s top-line metric.
How to define a KPI
Defining key performance indicators can be a tricky business. The operative word in KPI is “key” because every KPI should be related to a specific business outcome with a performance measure. KPIs are often confused with business metrics. Although often used in the same spirit, KPIs need to be defined according to critical or core product objectives. Follow these steps when defining a KPI:
What is your desired outcome?
Why does this outcome matter?
How are you going to measure progress?
How can you influence the outcome?
Who is responsible for the business outcome?
How will you know you’ve achieved your outcome?
How often will you review progress towards the outcome?
How to write and develop KPIs
When writing or developing a KPI, you need to consider how that KPI relates to a specific business outcome or objective. KPIs need to be customized to your business situation and should be developed to help you achieve your goals. Follow these steps when writing a KPI:
Write a clear objective for your KPI
Writing a clear objective for your KPI is one of the most important – if not THE most important – part of developing KPIs.
Define Clear Objectives: Start by defining the specific business outcome you want to achieve. Ensure that the objective is clear, concise, and directly linked to your overall business strategy. Avoid vague or generic statements.
Example Objective: "Increase monthly subscription revenue by 15% within the next quarter."
Ensure Alignment with Business Goals: Each KPI should be aligned with a critical business goal or outcome, not just a product-specific or user-centric objective. This ensures that your efforts contribute to the broader success of the organization.
Example Alignment: The objective to increase subscription revenue aligns with the business goal of boosting overall profitability and sustainability.
Keep it Relevant: The KPI should be relevant to the area of your business you're focusing on. Avoid metrics that don't have a direct impact on the desired outcome.
Example Irrelevant Metric: Tracking the number of social media followers might not directly impact subscription revenue.
Make it Measurable: A KPI must have quantifiable measurements that allow you to track progress and assess success. Define how you'll measure the KPI and the data source you'll use.
Example Measurement: To measure subscription revenue growth, you'll use the revenue figures from your financial reports.
Consider Achievability: Set KPI targets that are realistic and achievable within the given timeframe. Unrealistic targets can lead to demotivation and frustration among teams.
Example Achievable Target: Increasing revenue by 15% is challenging yet attainable based on historical growth rates and market trends.
Define Reporting Frequency: Determine how often you'll report on the KPI. Regular reporting keeps the team informed and allows for timely adjustments if needed.
Example Reporting Frequency: You'll report the progress on subscription revenue growth on a monthly basis.
Assign Responsibility: Clearly define who is responsible for driving progress toward the KPI. This ensures accountability and ownership.
Example Responsibility: The sales and marketing team will be responsible for implementing strategies to achieve the revenue growth target.
Monitor Progress: Continuously monitor and track progress toward the KPI. Regularly review data, assess trends, and identify any deviations from the target.
Example Monitoring: Regularly review monthly revenue reports, analyze trends, and compare them against the 15% growth target.
Adjust and Optimize: If progress is not aligned with the target, consider adjusting your strategies or tactics. The purpose of monitoring KPIs is to make informed decisions for improvement.
Example Adjustment: If revenue growth is lagging, you might refine your marketing campaigns, offer promotions, or enhance product features.
Review and Evaluate: Periodically evaluate the effectiveness of the KPI in driving the desired outcome. If necessary, modify the KPI based on changes in business goals or market conditions.
Example Evaluation: At the end of the quarter, assess whether the 15% revenue growth target was achieved and if any adjustments are needed for the next quarter.
The business success of the SaaS product
The success of a Software-as-a-Service (SaaS) product hinges on a combination of strategic planning, effective execution, and ongoing optimization. Here are key metrics that contribute to the business success of a SaaS product:
Monthly Recurring Revenue (MRR)
Tracking business performance: You can see the number of accounts and the size of the purchases they make from you.
Budget forecasting: Salespeople can predict how much you can make which will help you see the big picture.
Managing cash flow: You should make more than you spend in a month. MRR will help you manage your operational costs efficiently.
2. Customer lifetime value (CLTV)
Customer Lifetime Value (CLTV) is a crucial metric in business that quantifies the total net value a customer generates for a company throughout their entire engagement with the business. It helps organizations assess the long-term profitability of acquiring and retaining customers. CLTV considers various factors such as purchase frequency, average transaction value, customer retention rate, and operational costs associated with serving the customer. By understanding CLTV, businesses can allocate resources effectively, tailor marketing strategies, and prioritize customer segments to maximize their overall profitability.
Formula for calculating CLTV: CLTV = (Average Purchase Value) × (Average Purchase Frequency) × (Average Customer Lifespan)
Average Purchase Value: The average amount of money a customer spends per transaction.
Average Purchase Frequency: The average number of transactions a customer makes in a given time period.
Average Customer Lifespan: The average duration a customer remains engaged with the company.
3. Customer acquisition cost (CAC)
Customer Acquisition Cost (CAC) is a vital business metric that quantifies the average cost a company incurs to acquire a new customer. It encompasses the expenses associated with marketing, sales, advertising, and any other efforts directed towards attracting potential customers and converting them into paying clients. Calculating CAC is essential for businesses to gauge the efficiency of their customer acquisition strategies and assess the sustainability of their growth.
Formula for calculating CAC: CAC = (Total Cost of Sales and Marketing) / (Number of New Customers Acquired)
Total Cost of Sales and Marketing: The sum of all expenses related to sales and marketing efforts, including advertising, personnel, campaigns, and associated overhead.
Number of New Customers Acquired: The count of customers successfully acquired within a specific time frame.
By comparing CAC with Customer Lifetime Value (CLTV), companies can determine whether their customer acquisition efforts are economically viable. Ideally, CLTV should significantly exceed CAC to ensure profitable and sustainable growth.
4. Average revenue per user (ARPU)
Average Revenue Per User (ARPU) is a key performance metric used by businesses, especially in subscription-based and recurring revenue models, to evaluate the average income generated from each individual customer or user over a specific time period. ARPU provides insights into the effectiveness of monetization strategies and helps companies assess the overall health of their customer base.
Formula for calculating ARPU: ARPU = Total Revenue / Number of Users or Customers
Total Revenue: The total income generated by the business during a given time period.
Number of Users or Customers: The count of unique users or customers during the same time period.
ARPU is particularly useful in subscription-based services, telecommunications, software-as-a-service (SaaS), and other industries where customers are billed on a recurring basis. By tracking ARPU over time, companies can identify trends, evaluate the impact of pricing changes or promotions, and make informed decisions to optimize revenue streams and customer satisfaction.
User/customer engagement metrics
User/customer engagement metrics are crucial indicators that businesses use to measure the level of interaction and involvement their customers have with their products, services, or platforms. These metrics provide insights into how well a product resonate with its users and how actively customers are using and interacting with it.
Here are some important user/customer engagement metrics:
Active Users/Customers: The count of users or customers who have interacted with a product or service within a specific time frame, such as a day, week, or month.
Formula : Count of users/customers who have interacted within a specific time frame.
User/Customer Engagement Rate: Calculated as the ratio of active users/customers to total users/customers, presented as a percentage indicating the level of participation.
Formula : (Active Users/Customers) / (Total Users/Customers) * 100
Session Duration: The average time a user spends on a platform or website during a single session; longer durations typically signify higher engagement.
Formula : Total time spent by all users in sessions / Total number of sessions
Pageviews or Screen Views: The number of pages or screens viewed by a user during a session; higher counts suggest more in-depth exploration.
Formula: Total number of pages/screens viewed / Total number of sessions
Bounce Rate: The percentage of users who exit a website or app after viewing only one page; a high bounce rate could imply inadequate content engagement.
Formula: (Number of Single-page Sessions) / (Total Sessions) * 100
Click-Through Rate (CTR): The percentage of users who click on a specific link, advertisement, or call-to-action relative to the total number exposed to it.
Formula: (Number of Clicks) / (Number of Impressions) * 100
Conversion Rate: The percentage of users who fulfill a desired action, like signing up or making a purchase, reflecting the effectiveness of calls-to-action and user experience.
Formula: (Number of Conversions) / (Total Visitors) * 100
Churn Rate: The rate at which customers cease using a product or service within a given period, potentially indicating dissatisfaction or disengagement.
Formula: (Number of Customers Lost) / (Total Customers at the Start of Period) * 100
Retention Rate: The percentage of users or customers who continue using a product or service across a specific time period, showcasing strong engagement and value.
Formula: ((Total Customers at the End of Period - New Customers) / Total Customers at the Start of Period) * 100
Social Shares/Interactions: The count of instances users share content from a platform on social media or interact through likes, comments, etc.
Formula: Count of social media shares, likes, comments, etc.
Feature Adoption Rate: The rate at which users adopt new features or functionalities introduced in a product, indicating the success of feature launches.
Formula: (Number of Users Adopting New Feature) / (Total Users) * 100
Time Spent per Feature: The average time a user engages with specific features or functionalities within a product, helping identify highly valued features.
Formula: Total time spent on a specific feature / Total number of users using that feature
Feedback and Ratings: Capturing user-submitted feedback, ratings, and reviews to glean insights into user sentiment and engagement.
Formula: Collect user-submitted feedback, ratings, and reviews.
Community Participation: Measuring the extent to which users engage with community forums, discussions, and user-generated content related to a product.
Formula: Count of user interactions in community forums, discussions, etc.
Product/feature popularity
The KPIs for product management for measuring product or feature popularity don't have straightforward formulas. Instead, they are monitored with the help of analytics tools that measure product management KPIs and metrics.
Session duration and frequency Session duration is the time spent by an average user on your app in one go. Session frequency is the number of times they reach out to your product in a given time period.
Session Duration: This represents the average time an individual user spends within a single session on your application.
Formula: Total time spent by all users in sessions / Total number of sessions
Session Frequency: This refers to the number of times users engage with your product within a specific time frame.
Formula: Total number of sessions within a specific time frame
The continuous enhancement of these two critical product management performance metrics should be a constant goal. When evaluating user data, it's advisable to compare session duration and frequency across various customer cohorts, including both existing and churned users. This comparative analysis aids in identifying trends and proactively addressing areas for improving customer retention.
User Actions per Session: For a metrics-driven approach to product management, understanding which features are more valuable and to what extent is crucial. Tracking the count of user actions per session offers insights into the most valuable features for a given cohort.
Formula: Total number of user actions / Total number of sessions
This metric proves especially valuable when introducing new features. It enables immediate testing of hypotheses and facilitates strategic planning for subsequent steps in the product management process.
Feature Fit Index (FFI): The Feature Fit Index (FFI) is a valuable concept that measures how well a particular feature aligns with the needs and expectations of your users. It is a qualitative assessment that takes into account user feedback, usability, adoption rate, and how effectively the feature addresses user pain points.
FFI allows product managers to prioritize features based on their alignment with user requirements and overall value to the user base. While not expressed by a specific formula, FFI is determined through a comprehensive evaluation of user data and feedback.
These metrics collectively contribute to a comprehensive understanding of how users interact with specific features and the overall popularity of products, aiding in effective product management decision-making and improvement strategies.
User/customer satisfaction
User/Customer satisfaction metrics are essential for understanding how content and services resonate with your audience, helping you make informed decisions to improve their experience. Here are key metrics to gauge satisfaction:
Net Promoter Score (NPS): NPS measures the likelihood of users/customers recommending your product/service to others.
Formula: NPS = (% Promoters) - (% Detractors)
Promoters (score 9-10) are loyal enthusiasts who recommend.
Detractors (score 0-6) are dissatisfied users.
Customer Satisfaction Score (CSAT): CSAT gauges user/customer satisfaction with specific interactions or experiences.
Formula: CSAT = (Number of Satisfied Users/Customers) / (Total Number of Respondents) * 100
Customer Effort Score (CES): CES evaluates the ease of completing a specific task or interaction.
Formula: CES = (Sum of Effort Scores) / (Total Number of Respondents)
User Surveys: Custom surveys tailored to gather insights on user satisfaction.
Formula: No specific formula; responses are analyzed qualitatively.
Churn Rate: High churn can indicate dissatisfaction and low user satisfaction.
Formula: (Number of Customers Lost) / (Total Customers at the Start of Period) * 100
Retention Rate: High retention often correlates with satisfied users.
Formula: ((Total Customers at the End of Period - New Customers) / Total Customers at the Start of Period) * 100
Feedback and Ratings: Collect user-submitted feedback, ratings, and reviews to assess sentiment and satisfaction.
Formula: Gathered through user input and analyzed qualitatively.
Support Tickets and Response Time: High ticket volume and long response times can indicate dissatisfaction.
Formula: Measure total support tickets and average response time.
User Complaints and Escalations: Monitor the frequency and severity of user complaints.
Formula: No specific formula; qualitative analysis required.
Social Media Sentiment: Analyze sentiment expressed on social media platforms.
Formula: Utilize sentiment analysis tools.
Product Growth Metrics
Product growth metrics are critical for assessing the success and impact of your product within the market. These metrics help you understand user adoption, engagement, and overall product performance. Here are key metrics for evaluating product growth:
Monthly Active Users (MAU) and Daily Active Users (DAU):
Definition: MAU measures the count of unique users engaging in a month, while DAU measures the count engaging daily.
Formula: MAU = Total unique users in a month; DAU = Total unique users in a day.
User Adoption Rate: Measures the speed at which users adopt your product after its launch.
Formula: (Number of New Users) / (Total Users Before Launch) * 100
User Churn Rate: Measures the rate at which users stop using your product over time.
Formula: (Number of Churned Users) / (Total Users at the Start of Period) * 100
Retention Rate: Measures the percentage of users who continue using your product over time.
Formula: ((Total Users at the End of Period - New Users) / Total Users at the Start of Period) * 100
Virality Coefficient (K-Factor): Measures how many new users are brought in by each existing user.
Formula: K-Factor = (Number of Invited Users per User) * Conversion Rate
Conversion Rate: Measures the percentage of users who complete a desired action (e.g., sign-up, purchase).
Formula: (Number of Conversions) / (Total Users) * 100
Revenue Growth Rate: Measures the rate at which your product's revenue is growing.
Formula: ((Total Revenue at End of Period - Total Revenue at Start of Period) / Total Revenue at Start of Period) * 100
Average Revenue Per User (ARPU): Measures the average revenue generated per user.
Formula: Total Revenue / Total Users
Customer Lifetime Value (CLTV): Measures the total value a customer brings throughout their engagement.
Formula: (Average Purchase Value) × (Average Purchase Frequency) × (Average Customer Lifespan)
Net Promoter Score (NPS): Measures the likelihood of users recommending your product to others.
Formula: (% Promoters) - (% Detractors)
These metrics offer a comprehensive understanding of your product's growth trajectory, user engagement, and financial performance. Analyzing these metrics can guide strategies for improving user acquisition, retention, and overall product success.