8 Important Metrics For Product Managers
One in every five products fails to meet customers’ expectations. A product manager’s job is to ensure that their product isn’t the one that disappoints customers.
To achieve this goal, managers need to make data-driven decisions. These decisions can be made after performing A/B tests and getting qualitative or quantitative feedback from users. Or, they can be made by following trends in important product management metrics. These metrics tell businesses about customers’ interactions with products and whether these interactions are getting better or worse.
Read more about ten of the most critical metrics product managers need to track to increase engagement and success.
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What is the Contraction Rate?
While some customers upgrade to more expensive plans, buy add-ons, and pay more for your products, others do the opposite. Contraction is another name for these customers that “downgrade,” which could mean switching to a lower subscription plan or even canceling a subscription entirely.
The contraction rate measures the frequency of these downgrades in terms of your revenue. As MRR and ARR measure your repeating income (mentioned below), your contraction rate measures the revenue lost due to downgrades and cancellations. To calculate your contraction rate, take the sum of your Downgrade MRR and Cancellation MRR (also mentioned below.)
Contraction Rate = Downgrade MRR + Cancellation MRR
Why should you measure your Contraction Rate?
If your customers want to pay less for your products, there’s a reason. Unless there has been a sudden change in their budgets, customers won’t be likely to downgrade if they’re satisfied with a product and are frequent users of its features. So, if they decide to downgrade, your products aren’t giving customers their money’s worth or answering their needs.
Keep in mind that this metric should be analyzed together with your MRR/ARR to get the complete picture. Your contraction rate may not be as alarming as it seems when compared to your MRR.
What is the Expansion Rate?
The opposite of your Contraction Rate, the Expansion Rate tells you about the increase in your MRR due to upgrades, cross-sells, and upsells. Your Expansion Rate can make up for your lost recurring revenue, and it can even lead your company towards negative churn (which is possible!).
To measure your expansion rate, you could follow the same calculation as the contraction rate by adding all of the new recurring revenue due to upsells. Or, you can look at the difference between this month and the previous month to see the increase by performing the calculation below:
Expansion Rate = [[This month’s MRR – Previous Month’s MRR] / Previous Month’s MRR] x 100
Why should you measure your Expansion Rate?
In terms of your company’s finances, a high expansion rate means that your company’s recurring revenue is growing, that its customer base is stable and engaged, and that it’s stable in a monetary sense. A high expansion rate indicates customer satisfaction and engagement for product management.
The good thing about high expansion rates is that you’re increasing your revenue without acquiring new customers. This is good because you’re avoiding the Customer Acquisition Costs associated with generating new demand, and you’re generating demand from your existing customer base.
What is the Churn Rate?
Churn is probably one of the most frequently used terms in SaaS, and it stands for the percentage of cancellations. You could look at cancellations, so churn, from two perspectives. From a monetary view, you can look at the amount of revenue you’ve lost due to cancellations, corresponding to Revenue Churn. Or, you can look at the number of customers you’ve lost, corresponding to Customer Churn. Calculating either one is simple:
Monthly Customer Churn = Customers Lost Over the Month / Total Customers at the Start of the Month.
You can repeat the calculation with monthly revenue numbers to find your Revenue Churn Rate.
Why should you measure your Churn Rate?
It wouldn’t be logical to limit the uses of the Churn Rate to just product management. Measuring your churn rate is essential because of many reasons, such as:
- Growth forecasting: Knowing the rate at which customers tend to cancel helps you predict the number of people that’ll cancel in the future. These predictions may be vital factors in your financial decisions or marketing plans.
- Marketing optimization: dormant users, users with low LTVs, and others are all susceptible to churn. While measuring your churn rate, you don’t only look at the numbers but also the types of customers that tend to churn. With this knowledge, you can design targeted win-back, email marketing, or social media campaigns to get these customers’ attention.
- Product management: users don’t cancel their subscriptions if they’re satisfied with your products (though accounting for churn for this reason alone would be inaccurate.) Your lost revenue could be due to a lack of your product’s design or function.
However, note that many variables can influence your churn rate. Different segments and periods may have different churn rates, and your growth rate may also impact your churn. So, don’t use churn as a product management metric only.
What are Active Users?
While every company has its definition of an “active user,” this definition is rarely “someone who logs on and logs off of your tool/app.” Usually, an active user is someone who completes a designated action before logging off. For instance, for Instagram, an active user may be someone who views at least one post, and for Spotify, they may be someone who listens to at least one song.
While making your active user definition, think of the indicators of long-term usage. What do engaged customers do when they use your products? If there’s a standard action, you may use that in your active user definition. You can then measure the number of active users daily (DAU) or monthly (MAU).
Why should you measure the number of Active Users?
The number of your Active Users tells you about the “stickiness” of your products. If your products provide value to customers, they’ll become an integral part of their daily/weekly work, and you’ll see many active, engaged users. If not, you have to consider updating the services you offer or your features.
What is MRR/ARR?
Maybe the ultimate revenue, product, and marketing metric, MRR stands for Monthly Recurring Revenue and measures the income generated by that month’s active subscribers. Similarly, ARR stands for Annual Recurring Revenue and estimates the same thing yearly. Though the definition is straightforward, keep in mind that there are many types of MRR that you can be using:
- New MRR: only looks at the revenue generated by the newly acquired customers,
- Downgrade MRR: measures the revenue lost due to customers that have switched to lower plans,
- Cancellation MRR: measures the revenue lost because of the customers that have canceled (this and downgrade MRR are included in the Contraction Rate)
- Expansion MRR: also known as Expansion Rate, explained above,
And more. To calculate your MRR manually, you’ll need to know your Average Revenue Per User (ARPU.) Even though this results in an estimate, it can give you a rough picture.
Number of monthly subscribers x ARPU = MRR
Why should you measure your MRR/ARR?
As MRR is one of the significant metrics in SaaS, it’s impossible to summarize its uses in one point. Below is a list of the various ways you can use your MRR data.
- Budgeting: if you cannot estimate the revenue you’ll generate next month, you cannot make reasonable investments and budget plans. Your MRR/ARR lets you predict your future revenue so that you can make decisions based on data.
- Tracking Growth: Expansion MRR and Downgrade MRR are just two MRR types that can signal growth. If you see an increase in your MRR, your business is growing its customer base and/or its increasing engagement.
- Product Management: it’s not hard to deduce that a high MRR indicates high customer satisfaction. If your products provide the value you promised customers, you won’t see negative trends in your MRR data. If they’re providing even more value than customers had anticipated, you’ll be seeing high numbers for your Expansion and Upgrade MRR.
What is the Retention Rate?
A successful product helps you retain customers. One of your biggest goals as a company is to gain customers and ensure that they stay so that your money on acquiring them doesn’t go to waste. Your retention rate measures the success of your efforts by tracking the number of customers that have stayed with you over a certain period. For SaaS companies selling to small/medium-sized businesses, a reasonable retention rate is around 90%, and for SaaS businesses selling to enterprise companies, this rate goes up to 125%.
To calculate your retention rate, perform the calculation below.
Retention Rate = [ # of Active Users at the End of the Month / # of Active Users at the Start of the Month ]
Why should you measure your Retention Rate?
Acquiring new customers is five times more expensive than retaining old ones. Not only that, but the probability of you selling more (add-ons or upgrades, etc.) to an existing customer is 60 to 70%, while that probability drops to 5 to 20% with new customers. With that said, it’s easy to see that satisfying and keeping your existing customers is much more profitable.
Apart from giving you a stable source of revenue and profit, retaining customers also indicates the performance of your product management strategies. Once again, customers will stay with your brand if they get what they want.
What is Stickiness?
Your product “sticks” if users keep on repurchasing it. Just as it was with customer retention, stickiness means that your product has become integrated into users’ lives and has them visiting frequently. Thanks to the value you generate with your product and customer satisfaction, this is done.
But what is the difference between retention and stickiness if both look at returning customers? While stickiness drives retention, a product with high retention rates may not be sticky. Stickiness means the ability of your product to engage customers and drive value. On the other hand, retention doesn’t only depend on your product’s success: a company with excellent customer service, good UI, and customer experience could retain its customers based on service. So, in theory, you could have a product that customers don’t frequently come back to (one that is not sticky) but still not lose customers (have high retention).
Your stickiness can be measured by simply dividing the number of your Daily Active Users by your Monthly Active Users.
Why should you measure your products’ Stickiness?
Stickiness may very well be the end goal of all product managers. Your goal is to design products and set prices so that customers feel like your company is the best and only option that could serve them. If they think this way, they’ll keep working with you and become users with high lifetime values.
In short, by measuring and increasing stickiness, you’re reducing churn and increasing upselling and cross-selling opportunities.
Feature Engagement Rate
What is the Feature Engagement Rate?
What makes your product valuable, and hopefully irreplaceable, for your customers is its features. So, if you’re constantly adding new features to your products that go unnoticed, or if your most basic features aren’t getting the engagement they deserve, you should focus on making your product more valuable by providing your customer profile with what it needs.
The Feature Engagement Rate lets you deduce whether your product is delivering value by measuring the frequency with which customers use specific features.
Why should you measure your Feature Engagement Rate?
Just like various other metrics on this list, your feature engagement rate has multiple uses:
- Optimizing your onboarding process: if you’re getting low engagement with your features, think about the exposure step before jumping to conclusions about your feature’s usability. Maybe customers weren’t exposed to the feature when it first came out/when they first became customers, which can be fixed by tweaking your onboarding guides.
- Measuring product adoption: feature engagement is a significant indicator of product adoption. Customers can only get accustomed to your products if they use its features.
- Optimizing your products: in the end, the feature you thought to be vital may be unnecessary, but sometimes you can’t know before you try.
Trial to Expansion Funnel
What is the Trial to Expansion Funnel?
A customer’s relationship with your product is complicated, and it consists of many steps that you have to analyze. Customers’ interactions start when they first come in contact with your services, which is usually during their free trials. Customers first get a sense of your product, its user-friendliness, and its effectiveness in their trials. If you’ve designed a good product, they move on to the activation and conversion stages. They see the more nuanced features that your product offers in these stages. If they’re satisfied, they finally move to the expansion stage and buy even more.
Unfortunately, you lose a lot of customers in between steps. Thus, there isn’t a single drop-off rate that you should be looking at. If the most basic features are the problem, then the drop-off rate at activation matters. If more nuanced features lack attention, then the drop-off rate at conversion will show the problem.
A trial to expansion funnel lets you detect the problems with your products by analyzing each step in your customers’ relationships with your products. The funnel isn’t a metric; it’s a dashboard that puts together various metrics such as your drop-off rates or step conversion rates.
HockeyStack’s customizable dashboards include the Trial to Expansion Funnel and more. Try them out and see for yourself! 🙂
It’s not easy to satisfy customers, but it’s easy to know when and why they’re unsatisfied so that you can rectify your wrongs. That is the key to retaining customers: understanding the problems with your products, taking feedback, and even predicting users’ needs before they surface. To do this, product managers need to be tracking the metrics above and acting on any trends they may come across because the rest is simple when you know the problem and its source.
It’s hard to measure performance with quantifiable metrics, so you should be evaluating qualitative factors more often. These include their ability to work well with other teams in sales and marketing, execution and measurement when it comes to optimizing your products, and making regular updates and reviews.
The North Star metric is the one metric that’s chosen to predict a business’s long-term success.