Also called: Product KPIs
Relevant metrics: Conversion Rate, Retention Rate, Customer Satisfaction, Average Revenue Per User, and Lifetime Value
What is Product Metrics?
Product metrics are the key indicators that reveal how users engage with a product. Derived from various measurements, these metrics often consist of numeric components such as time, ratio, or rate.
Quantifiable data offered by product metrics grant businesses crucial insights into the overall success of their products. By analyzing these metrics, companies can gather the necessary information to shape or adjust their product strategy, thereby enhancing revenue and customer satisfaction.
Product metrics serve as the foundation for driving product decisions related to:
- Pricing Strategies
- Payment Models
- Feature Selection
- Onboarding Processes
- User Interface Design
- Target Customers
- Marketing Messaging
For instance, you could conduct A/B tests to compare different pricing and payment models, evaluating the success of each experiment using activation rates. Monitor feature usage to determine which features are most valuable to average users compared to power users, helping you prioritize or eliminate features in future updates. Assess the performance of your onboarding processes by measuring the time taken to activate users.
Where did Product Metrics come from?
Performance measurement has been used throughout history in various contexts, from ancient civilizations monitoring agricultural production to the industrial revolution’s focus on manufacturing efficiency. As businesses and industries evolved, so did the need for more sophisticated performance measurement systems.
Product metrics typically refers to the quantifiable data used to assess and understand the performance, usability, and effectiveness of a digital product or software application. It is closely linked to the concepts of web analytics, data analytics, and user experience (UX) design.
In recent years, pioneers in the SaaS industry, such as Salesforce, Zendesk, and HubSpot, have championed the use of product metrics to make better decisions and drive growth. Thought leaders, including Eric Ries, who wrote “The Lean Startup,” and Ash Maurya, the author of “Running Lean,” have also emphasized the importance of using data and metrics to iterate on product development and optimize customer value.
Why is it important to track several metrics on your product?
Product metrics are essential because they offer teams a reliable method for understanding the performance of their digital product components. While business metrics can gauge a company’s overall success and customer interviews can provide qualitative information, only product metrics supply objective and immediate data on user interactions with a product.
Different product metrics are useful in varying contexts, with some offering a high-level view of product performance and others focusing on individual features.
Leading vs. Lagging Indicators
Each product metric reveals a story about a business’s past or future direction. These are known as leading indicators and lagging indicators, and a business requires both to comprehend its performance.
The metrics chosen as leading and lagging indicators depend on a product’s goals. For instance, if the goal is to increase the number of new subscribers, the number of new signups might be used as a leading indicator. An increase in signups suggests a likely rise in new subscribers in the future.
- Leading indicators should inform daily tactics. They must be measurable frequently and easily, as continuous hypothesizing, testing, measuring, and readjusting are necessary for improvement.
- Lagging indicators measure the success of actions taken. Annual recurring revenue could serve as a lagging indicator when aiming to gain new subscribers.
Lagging indicators are tied to long-term strategies. It is crucial to recognize that today’s changes may not manifest as improvements in lagging indicators until much later.
Product Metric categories
Product metrics reveal how users interact with your product, allowing your team to better understand what users find helpful, what keeps them coming back, and the optimal journey towards turning them into loyal customers. Monitoring these metrics helps you oversee your business, enabling you to make informed adjustments and foster growth.
These metrics can be divided into five categories: acquisition, activation, engagement, retention, and monetization. The first four categories represent the general user lifecycle within the product, while monetization can overlap with several stages of the customer lifecycle.
- Acquisition metrics, such as the number of new signups and qualified leads, assess when someone first begins using your product or service. They are instrumental in determining which marketing channels are most effective for your company.
- Activation metrics, including activation rate and time to activate, reveal how efficiently you are transitioning users from acquisition to that pivotal “aha” moment, where they discover your product’s value and, in turn, generate value for your business.
- Engagement metrics, like monthly active users and feature usage, measure the frequency and manner in which users interact with your product. These interactions may involve sharing a song or editing a profile. Users who engage with your product are considered active users. Increasing the number of daily, weekly, and monthly active users is crucial for company growth, provided they are measured accurately.
- Retention metrics, such as retention rate, free-to-paid conversions, and churn rate, gauge the number of users who return to your product over a specific period. These metrics are critical for your company’s growth, as rapid top-of-funnel expansion is futile if users leak out the bottom just as quickly.
- Monetization metrics, including net revenue retention, monthly recurring revenue, and average revenue per user, capture your business’s ability to convert engagement into revenue.
Each category of product metrics tells a unique yet essential story. Here’s a cheat sheet of metrics to track in order to monitor the health of your products.
Identifying the Right Metric
What is the one metric that matters most to the success of your company that you can rally your team around?
- For Facebook, it is Daily Active Users (DAU). This metric indicate the level of user engagement on the platform and the ability to retain users.
- For WhatsApp, it is Number of messages sent. This reflects the platform’s core functionality and signifies the level of user engagement and adoption.
- For eBay, it is Gross Merchandise Volume (GMV). This represents the total value of items sold on the platform, indicating the size of the marketplace and the effectiveness of its business model.
- For PayPal, it is Total Payment Volume (TPV). It represents the value of transactions processed by PayPal, showcasing the platform’s growth and market penetration.
- For Airbnb, it is Nights Booked. This metric shows the platform’s success in connecting travelers with accommodation providers, reflecting the overall health of the marketplace.
- Uber, it is Number of rides completed. This measures the core functionality of the ride-sharing service and indicates the platform’s growth and adoption rate.
- Slack, it is Messages sent per day. This metric gauge user engagement and the platform’s effectiveness in promoting communication and collaboration.
- For Netflix, it is Total Viewing Hours. Total viewing hours indicate the level of user engagement with the content.
- Spotify, it is Hours of Music Streamed . This metric reflect the platform’s success in engaging users and promoting content consumption.
By pinpointing this “top-line” metric, you can establish success criteria around it, monitor its fluctuations, comprehend the factors influencing changes, relentlessly steer it in the right direction, and effectively assess and manage your product’s health.
Choosing the Optimal Top-Line Metric
Which top-line metric would best encapsulate this objective? The number of active users shopping on the site wouldn’t suffice, as it fails to measure whether buyers actually find what they want at the right price. What about the number of active buyers? While this and similar buyer-side metrics can indicate whether users find what they want at the appropriate price, they do not address the “unique selection” criterion in eBay’s mission statement.
Best practises for discovering and selecting the one metric that matters are:
- Choose only one metric. A single “metric that matters” unifies your organization and enables setting priorities. Tracking multiple metrics can lead to complications when making trade-offs.
- Avoid vanity and non-actionable metrics. Steer clear of metrics that don’t correlate with business results or customer success, such as the number of likes on social media.
- Pick the simplest measurable metric. Choose a metric that is easy to measure and influence. If a particular metric is correlated with your revenue and is easier to manage, select that metric.
- Select a metric that represents product usage. For companies like Facebook and Instagram, active users (DAU, WAU, or MAU) are the most important metrics. Base your choice on the expected usage of your product.
- Don’t be afraid to change the metric. If necessary, change to a metric that accurately reflects your mission rather than sticking with the wrong metric. Make this change sooner rather than later.
- Choose a simple metric connected to your drivers. Focus on a metric that can improve user activation by increasing any of its components. For example, if most people visit your site but don’t sign up, set the percentage of site visitors who sign up as your target metric.
- Avoid ratios. Opt for measuring the number of clicks rather than click-through rate. However, there are exceptions when a ratio can serve as the “metric that matters.”
- Consider counter-metrics if needed. Employ counter-metrics to maintain checks and balances in a complex environment and ensure you’re not drifting from your mission.
- Change the metric as your business evolves. Adjust your top-line metric as your company grows, technology advances, or new products are launched. For instance, Amazon Video’s success might warrant a change in Amazon’s top-line metric.
Setting goals based on product metrics
Establishing goals is an integral part of defining your team’s strategy and roadmap. Goals represent what you aim to achieve and serve as stepping stones to drive business growth. They bring unity to your company around a shared objective and hold your team accountable for its commitments.
Consider an example where your objective is to increase your active users. A goal statement might be, “Grow MAU to 10M by Q4 2018.” This goal links the metric (MAU) to a target (10M) and a time frame (Q4 2018), offering a clear vision for the product team and a sense of purpose for the organization. Goals should be simple, actionable, achievable, and crucially, easy to measure and track.
There are several ways to choose goals, including:
- Product or business aspirations. Long-term goals often align with your company’s mission. For example, if your company operates in the video space, you may aspire to have the fastest-growing share of time spent on video. To achieve this goal within a specified timeframe, break it into smaller segments to determine the growth needed over the next few months to stay on track.
- Product metrics. For established products, conduct a “bottom-up” forecasting exercise to set a goal for your top-line metric over a specific period. For instance, a forecast of MAUs might consider historical data on seasonality, platform, country, penetration, and product changes.
- New products. When dealing with new products, look at external benchmarks and establish “top-down” goals. For example, if your product is a messaging app, research the growth of similar companies to inform your goals. Alternatively, consider postponing goal-setting for entirely new products until you have a few months of performance data.
The anatomy of Product Metrics and KPIs
Quantitative and Qualitative Product Metrics
Product metrics can be broadly divided into two categories: quantitative and qualitative metrics.
Both quantitative and qualitative metrics are crucial for a comprehensive understanding of product performance and user behavior. Quantitative metrics offer objective data to track and measure product success, while qualitative metrics provide insights into user experiences and underlying motivations. Combining both types of metrics enables product managers to make well-informed decisions that drive product growth and improve user satisfaction.
Quantitative metrics are numerical measurements that help track a product’s performance, user engagement, and overall success. These metrics are data-driven and can be directly measured or calculated from product usage, user actions, or financial performance. Examples of quantitative metrics include Monthly Recurring Revenue (MRR), Customer Lifetime Value (CLV), Daily Active Users (DAU), Churn Rate, Conversion Rate, and Net Promoter Score (NPS).
Quantitative metrics are valuable because they provide objective data that can be used to assess the product’s performance over time, compare it against competitors or industry benchmarks, and identify trends or areas that require improvement. By analyzing quantitative metrics, product managers can make data-driven decisions to optimize the product and drive growth.
Qualitative metrics, on the other hand, focus on the non-numerical aspects of product performance and user experience. These metrics are often based on user feedback, opinions, and perceptions, which help product managers understand the underlying reasons behind user behavior and preferences. Examples of qualitative metrics include user satisfaction, ease of use, product usability, and overall user experience.
Collecting qualitative data often involves methods such as user interviews, focus groups, surveys, or usability testing. By analyzing qualitative metrics, product managers can gain insights into user needs, preferences, pain points, and motivations, which can inform product improvements and enhancements that better align with user expectations.
Key Performance Indicators and Product Metrics
Key Performance Indicators (KPIs) are a vital subset of product metrics, focusing on the most critical aspects of a product’s success. They align with strategic objectives, offering a measurable view of progress towards goals. KPIs assist product managers and stakeholders in prioritizing efforts, monitoring progress, and making data-driven decisions. By carefully selecting and tracking KPIs, product teams ensure their focus remains on the right aspects, ultimately driving product success and business growth. In short, KPIs bridge the gap between product metrics and strategic goals, providing a clear pathway for optimizing product performance.
Key Performance Indicators (KPIs) represent the components of your plan that express what you aim to achieve and when. These quantifiable, outcome-based statements are used to determine whether you are on track to meet your goals or objectives. Effective plans employ 5-7 KPIs to manage and monitor progress.
- A Measure - Every KPI must possess a measure. The most effective KPIs feature more expressive measures.
- A Target - Each KPI requires a target that aligns with your measure and the time frame of your goal. These are typically numeric values you strive to attain.
- A Data Source - Every KPI must have a clearly defined data source, eliminating ambiguity in how each KPI is measured and tracked.
- Reporting Frequency - Different KPIs might necessitate varying reporting frequencies, but a good rule of thumb is to report on them at least monthly.
Objectives and Key Results and Product Metrics
OKRs are a goal-setting framework that focuses on defining clear objectives and measurable key results to track progress towards these objectives. Objectives are qualitative and describe what the organization aims to achieve, while key results are quantitative and outline how the organization will measure its progress towards the objectives.
Product metrics, on the other hand, are specific data points that reflect the performance of a product or feature. These metrics can include user engagement, conversion rates, retention, and more. Product metrics provide crucial insights into how well a product is performing and whether it is meeting the needs of users and the overall business goals.
Key results are typically represented by the product metrics that indicate progress towards objectives. By incorporating product metrics into the OKR framework, teams can set specific targets, monitor progress, and evaluate the effectiveness of their strategies.
For example, a company’s objective might be to “Increase user engagement and satisfaction.” Relevant product metrics such as daily active users (DAU), session duration, and Net Promoter Score (NPS) can serve as key results to measure progress towards this objective. By monitoring these metrics, the team can identify areas that need improvement and make data-driven decisions to optimize the user experience and achieve the desired outcome.
Integrating OKRs with product metrics enables teams to make informed decisions based on actual performance data in real time, rather than relying on intuition, guesswork, or late measurements.
What are Common Product Metrics?
Monthly Recurring Revenue (MRR) represents the total revenue your product generates each month. Useful for predicting cash flow, financial health, and identifying growth trends.
MRR = Number of customers x amount each customer pays per month
Customer Lifetime Value (CLTV, CLV, or LTV) is the average amount a customer spends on your product during their relationship with your company. Helps determine customer acquisition spending and identifies high-value customers.
CLTV = Average Order Value x purchase frequency x customer lifespan
Customer Acquisition Cost (CAC) is the average amount spent to acquire a new customer. Measures marketing and sales efficiency and evaluates if the acquisition cost is justified by customer revenue.
CAC = Total cost (marketing + sales)/Number of new customers
Churn rate is the percentage of users who stop using your product within a specified period. Indicates customer retention and serves as a proxy for customer satisfaction.
Churn rate = (Number of users beginning – Number of users end)/Number of users beginning
Adoption rate is the percentage of users who transition from exploring your product or feature to using it in earnest.
Adoption rate = (Number of new users / Total number of users) x 100
Daily Active User/Monthly Active User (DAU/MAU) measures user engagement frequency, capturing the value gained from your product. Often a key measurement for SaaS companies.
Ratio = (DAU/MAU) x 100
Conversion rate measures the number of users who complete a specified action or conversion event in your product.
Conversion rate = number of conversions / the total number of visitors
Sessions per user calculates the average number of active sessions for a user on your site or product.
Number of sessions per user = Sessions / Total users
Net Promoter Score (NPS) gauges overall perception and satisfaction with a brand, product, or feature.
NPS = Percentage of promoters – Percentage of detractors
By focusing on product metrics like daily active users, engagement, and retention, they identified areas for improvement, enhancing features to reduce friction and streamline the user experience. This focus on product metrics helped Slack become a leading player in the team collaboration market.
Dropbox, a cloud-based file storage and sharing service, used product metrics such as user adoption, file sharing, and collaboration to understand user behavior and identify areas for growth. This focus allowed them to optimize their referral program, leading to rapid user growth and setting them apart from competitors in the cloud storage space.
Zendesk is a customer support software platform that used product metrics like ticket resolution time, customer satisfaction, and agent productivity to continuously improve its platform. By optimizing their product based on these metrics, Zendesk was able to deliver a superior customer support experience, which helped them stand out in a crowded market.
HubSpot, a marketing, sales, and customer service platform, focused on product metrics such as user engagement, customer acquisition cost, and customer lifetime value. By continuously analyzing and iterating on their product based on these metrics, HubSpot was able to differentiate itself from competitors and become a market leader in the CRM and marketing automation space.
Atlassian, known for its project management and collaboration tools like Jira and Confluence, utilized product metrics to gauge user adoption, stickiness, and collaboration within teams. By focusing on these metrics, Atlassian was able to make data-driven improvements to their products, leading to increased customer satisfaction and a competitive edge in the project management and team collaboration markets.
As a streaming platform providing on-demand video content, Netflix uses product metrics such as viewing time, content engagement, user retention, and recommendation accuracy to continuously refine their platform.
What is the purpose of the product metrics?
Hint The purpose of product metrics is to measure the performance of a product.
What data points will be used to measure the product metrics?
Hint Typical data points used to measure product metrics include user engagement, customer satisfaction, revenue, and cost.
How will the product metrics be tracked and reported?
Hint Product metrics will typically be tracked and reported using analytics tools and dashboards.
What are the expected outcomes of the product metrics?
Hint The expected outcomes of product metrics are to identify areas of improvement and opportunities for growth.
How will the product metrics be used to inform product decisions?
Hint Product metrics will be used to inform product decisions by providing insights into customer behavior and preferences.
How will the product metrics be used to measure success?
Hint Product metrics will be used to measure success by comparing performance against goals and objectives.
What are the potential risks associated with using the product metrics?
Hint Potential risks associated with using product metrics include relying too heavily on metrics and not taking into account qualitative feedback.
- The Lean Startup: How Constant Innovation Creates Radically Successful Businesses by Eric Ries (2011)
- Hacking Growth: How Today’s FastestGrowing Companies Drive Breakout Success by Sean Ellis (2017)
- Lean Analytics: Use Data to Build a Better Startup Faster by Alistair Croll (2013)
- Running Lean: Iterate from Plan A to a Plan That Works by Ash Maurya (2012)
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