Updated: January 24, 2024 - 10 min read
Love it or loathe it, if you’re an aspiring product manager you’ll need to get comfortable with metrics. While the world of Product Metrics may seem intimidating, familiarizing yourself with the most common ones is a good start. So let’s look at five essential metrics for product managers, why they’re used, and how to calculate them. And if you’re still not convinced about the importance of data, here’s a quick refresher.
Why are metrics important for product managers?
Collecting metrics about product performance helps you to:
Identify patterns and trends – Tracking metrics can help you identify patterns that emerge and more accurately predict product performance over the long term.
Understand customer behavior – Metrics can generate insights into how your customers are using your product and help you to adapt your product strategy accordingly.
Prioritize your time – Time is a scarce resource, especially for product managers who often face competing demands for their time. Metrics illuminate the areas that need most of your attention, helping you to allocate your efforts and focus effectively.
Align teams – As a product manager, you need to be an expert at cross-collaboration between various teams, such as marketing, design and Business Intelligence (BI). Metrics are tangible pieces of data that teams can use to inform their objectives and make sure everyone is on the same page.
Convince stakeholders – Product managers often have to lead without authority, and often the best way to convince key stakeholders of your product decisions is objective data.
Identify areas for improvement – As well as showing what’s going well, metrics also highlight areas that need improvement. This will help you to decide where you need to reiterate.
As you can see, metrics are essential for making informed and ultimately better product-related decisions. Of course, it’s also important not to get too bogged down with numbers and only track the metrics that are important to your product. With that in mind, let’s take a look at some of the most useful metrics for product managers.
Top 5 Product Metrics
1. Cost Per Acquisition (CPA)
Definition: Cost Per Acquisition, or CPA, is simply the cost of acquiring a new potential customer. Note that we’ve specified it’s a new potential customer and not a paying customer. CPA is all about the cost of attracting potential customers. This could take the form of webinar registrations, account activations, or other types of leads. (If you want to calculate the cost of acquiring paying customers, you need to use customer acquisition cost (CAC), but let’s leave that for another day.)
Gathering method: To calculate CPA, you divide the total costs spent on marketing (including advertising, sales expenses, etc.) by the number of new potential customers acquired during the period you're measuring.
Use: CPA is one of the key metrics for product managers because it will help you evaluate the effectiveness and profitability of your marketing campaigns.
For example, if one month you spend $1000 on marketing that leads to 500 potential customers signing up for a free trial of your accounting software, your CPA is $2 per lead. If the next month you spend $1500 and get 520 leads, your CPA is $2.88. This indicates that your marketing efforts have been less successful in the second month. Sure, you got more leads than the previous month, but for a much higher cost. As you can see, Tracking CPA helps product managers to better allocate their marketing budget and strategies.
2. Conversion Rate (CVR)
Definition: Conversion Rate, often abbreviated as CVR, is the percentage of users who take a desired action. The 'desired action' can be anything from making a purchase to signing up for a newsletter, to downloading a whitepaper, depending on the company's objectives.
Gathering method: To calculate CVR, you divide the number of conversions by the total number of users (or sessions), and then multiply this figure by 100 to express it as a percentage. The higher the CVR, the better.
Use: CVR is a critical metric in assessing the effectiveness of various customer touchpoints in driving desired actions, for example, signing up for a newsletter. By monitoring CVR, you can identify bottlenecks in your conversion funnel and improve user experience.
For example, imagine you’re a product manager at an eCommerce platform selling wine and you’re interested in knowing what percentage of visitors to your website make a purchase. In August, your website attracts 50,000 visitors who add products to their shopping baskets. However, only 20,000 of them complete their purchase. By calculating the CVR, you find only 40% of users make a successful purchase. This gets you thinking. Is the account sign-up process too complicated? Is there a lack of payment options? Is there a bug?
You make some changes and see that the next month only 40,000 visitors add products to their shopping basket, but 30,000 complete their purchase. Woohoo! Your CVR is 75%, a whopping 35% higher than the previous month.
In this way, you can identify drop-off points and optimize your funnel to increase desired user actions. This makes CVR one of the essential metrics for product managers.
3. Lifetime Value (LTV)
Definition: Lifetime Value (LTV), also called Customer Lifetime Value (CLV), represents the predicted net profit from the entire future relationship with a customer.
Gathering method: LTV is typically calculated by multiplying the average purchase value, average purchase frequency rate, and average customer lifespan
Use: LTV basically helps you to put a price tag on your users. For example, if you run a snack box subscription service that the average customer pays $30 per month for and the average customer lifetime is 2 years, you can predict that the LTV per customer is $720.
You can even calculate the LTV for each segment of your users and tweak your product strategy accordingly. If the average B2B customer spends $40 per month for an average of 5 years, you’ll find the LTV is $2,400, meaning you would be justified in spending a bigger proportion of your marketing budget attracting B2B customers.
LTV provides significant insights into customer behavior and the overall health of the business. It also helps product managers evaluate a product's long-term profitability, which can inform both their customer acquisition and retention strategies.
4. Customer Retention Rate (CRR)
Definition: Customer Retention Rate, or CRR, is a metric that measures the number of customers a company retains over a given period.
Gathering method: To calculate CRR, you subtract the number of new customers acquired during a period from the total number of customers at the end of that period, divide that figure by the number of customers at the start of the period, and multiply by 100 to get a percentage.
Use: This rate provides insights into customer loyalty and satisfaction, and it is especially crucial for businesses operating under subscription or repeat purchase models. A higher CRR usually means that customers are more satisfied with the product or service and that the company is successful in its customer retention strategies.
Imagine you’re a PM at a subscription-based streaming service. You’re interested in how many customers you retain after a 6 month period. You gain 3,000 new customers between January and June, bringing your total number of customers to 15,000. To work out the CRR you subtract the number of new customers (3,000) from the total number of customers (15,000). You then divide that number (12,000) by the number of customers at the start of January (13,000) and multiply by 100 to get a percentage. This gives you a CRR of 92.31%. The fact that you manage to retain over 90% of your customers after 6 months is an indicator that your customer retention strategies are working well. If your CRR goes down, it’s a sign you need to iterate and focus more on this area.
As an Airbnb Growth Product Manager says,
“Companies that haven’t understood retention, and stepped on the gas too fast with their acquisition, have then lost all of their users very quickly. Without users, your product is nothing.”
5. Net Promotor Score (NPS)
Definition: Net Promoter Score, or NPS, is a metric used to gauge customer loyalty and satisfaction. NPS was developed by Fred Reichheld, Bain & Company, and Satmetrix as a simple yet effective tool for understanding customer sentiment. The NPS is determined by asking customers a single question: "On a scale of 0-10, how likely are you to recommend our company/product/service to a friend or colleague?" Based on the responses to this question, customers are categorized as Promoters (9-10), Passives (7-8), or Detractors (0-6), and the NPS is calculated.
Gathering method: Measuring NPS involves collecting responses to the NPS question via surveys and categorizing the respondents accordingly. The NPS is then calculated by subtracting the percentage of Detractors from the percentage of Promoters and multiplying the result by 100. This score can range from -100 (all customers are Detractors) to +100 (all customers are Promoters).
Use: The importance of NPS lies in the insights it provides into customer sentiment. As a relatively straightforward metric, it can give a quick snapshot of how your customers feel about your product or service. Moreover, the NPS can be a good predictor of customer retention and word-of-mouth referrals - key factors that can greatly impact a company's growth and success. NPS also helps to identify areas for improvement in customer experience.
Here’s an example of NPS in action. You’re a product manager in the healthcare industry and you recently launched a new app that collects and analyzes data about user’s menstrual cycles. You’d like to understand if your product has been well received.
To do this you send your users a push notification with the question "On a scale of 0-10, how likely are you to recommend our app to a friend or colleague?”. 1000 users respond. 100 give a score between 0-6, 200 give a score of 7-8 and 700 give a score between 9-10. This means that 10% of your users are detractors, 20% are passives and 70% are promoters. To calculate your NPS score you subtract the percentage of detractors (10) from the percentage of promoters (70), giving you an NPS score of 60. What a success! Most of your users would recommend your product.
If the results had been different, let’s say you had 45% detractors, 20% passives, and 35% promoters, giving you an NPS score of -10%, you would know that you needed to make serious improvements to improve customer satisfaction.
FREE Resources to Learn More
If you’d like to learn more about metrics for product managers, check out our blog posts about how to identify the right metrics for your product using metrics trees as well as the dangers of tracking vanity metrics.
And to really dig deeper, don’t miss our free micro-certification on Product Analytics. The self-paced course will help you to harness the power of data to make better decisions at every stage of the product lifecycle. Plus, upon completion, you’ll receive the Product Analytics Micro-Certification!
Updated: January 24, 2024