2. Key Metrics in Product Management

In product management, certain metrics are crucial to understanding the health and performance of a business or product. These metrics provide insights into revenue, customer engagement, and product effectiveness, and help guide strategic decision-making. In this document, we will explore some of the most important metrics in product management, such as MRR, ARR, Gross Margin, Churn, NPS, CAC, LTV, and active user metrics (MAU/WAU/DAU).

Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR)

• MRR (Monthly Recurring Revenue): This metric measures the recurring portion of a product’s monthly revenue, especially relevant in SaaS (Software as a Service) businesses. It reflects the steady, predictable revenue that can be expected month-to-month. Non-recurring revenue, such as one-time fees (e.g., installation fees or overage charges), are excluded from MRR.

• ARR (Annual Recurring Revenue): ARR is essentially the annualized version of MRR and is calculated by multiplying the MRR from the last month by 12. This metric provides a longer-term view of the recurring revenue and is especially useful for growing businesses with relatively stable recurring revenue. It’s important to note that ARR should only include predictable, recurring revenue, excluding any one-off payments or non-recurring income.

Gross Margin

• Gross Margin: Gross margin is the percentage of revenue that remains after subtracting the direct costs associated with delivering a product or service. In SaaS companies, gross margin typically includes costs such as infrastructure (e.g., cloud computing expenses) and customer support operations. Marketing, sales, and development costs are not part of gross margin. For SaaS businesses, a gross margin of at least 70% is often expected, meaning that no more than 30% of revenue is spent on maintaining the platform.

Churn Rate

• Customer Churn Rate: Churn rate refers to the percentage of customers who stop using a product within a given period. It can be broken down into:

  • Customer churn: Measures the loss of customers.
  • Revenue churn: Measures the loss of revenue, accounting for customers who downgrade their plans or stop using the product.

  The Net Revenue Churn metric is calculated by considering both revenue lost from cancellations and revenue gained from upsells or cross-sells. Ideally, net revenue churn should be negative, meaning the revenue gained from existing customers exceeds the revenue lost.

Customer Acquisition Cost (CAC) and Lifetime Value (LTV)

• CAC (Customer Acquisition Cost): CAC represents the cost of acquiring a new customer, including marketing and sales expenses. A low CAC is a positive indicator of business efficiency and scalability.

• LTV (Lifetime Value): LTV estimates the total revenue a customer will generate over their entire relationship with a product. For healthy business growth, the LTV should be significantly higher than the CAC.

Active User Metrics (MAU, WAU, DAU)

• MAU (Monthly Active Users), WAU (Weekly Active Users), and DAU (Daily Active Users): These metrics measure user engagement over different time periods. The ratio of DAU/MAU can indicate user stickiness, showing how many of the monthly users are engaged daily.

Net Promoter Score (NPS)

• NPS (Net Promoter Score): NPS measures customer loyalty and satisfaction by asking customers how likely they are to recommend the product to others on a scale of 0 to 10. Based on the responses:

  • Promoters (9-10): Loyal customers who are likely to recommend the product.
  • Neutrals (7-8): Satisfied but not enthusiastic customers.
  • Detractors (0-6): Unhappy customers who may discourage others from using the product.

  NPS is calculated by subtracting the percentage of detractors from the percentage of promoters, resulting in a score that ranges from -100 to +100.

Best Practices for NPS

1. Survey Neutral Moments: Conduct NPS surveys at neutral moments, not immediately after specific events (e.g., after completing an onboarding process), to avoid bias.
2. Use Non-Human Channels: Avoid human interactions when gathering NPS data, as customers may feel uncomfortable giving negative feedback in person or on the phone.
3. Make the NPS Question the First Question: In surveys, always ask the NPS question first to avoid influencing customers’ responses with other questions.

Vanity Metrics vs. Actionable Metrics

A critical distinction in product management is between vanity metrics (metrics that look good but don’t necessarily reflect true business performance) and actionable metrics (metrics that directly inform decisions). For example, the number of app downloads is a vanity metric if those downloads don’t translate into active or paying customers. Instead, actionable metrics, like the number of paying customers or engagement rates, are more relevant.

Customer Acquisition Cost (CAC)

• CAC (Customer Acquisition Cost): This metric represents the average cost of acquiring a new customer, including expenses related to marketing and sales. In some cases, depending on the business model, additional costs such as onboarding, implementation, and promotional discounts may also be factored in.

  For example:

  • In B2B SaaS, if there is no charge for onboarding but implementation projects are required, the cost of these projects should be included in the CAC.
  • In Fintech companies, CAC may include the cost of manufacturing and shipping physical debit or credit cards.
  • Promotional discounts (e.g., a 20% discount on the first purchase) are also part of CAC, as they represent a direct cost incurred to acquire a customer.

  Accurately calculating CAC is essential for understanding the profitability and scalability of the product, and it’s crucial to account for all acquisition-related costs.

Lifetime Value (LTV)

• LTV (Lifetime Value): LTV measures the total value a customer generates over their entire relationship with the product. The most accurate way to calculate LTV is by using gross margin (revenue minus direct costs), rather than revenue alone, to account for the costs of serving the customer. The formula for LTV is:

  LTV=Gross Margin per Customer×Average Customer Lifetime\text{LTV} = \text{Gross Margin per Customer} \times \text{Average Customer Lifetime}LTV=Gross Margin per Customer×Average Customer Lifetime

  The average customer lifetime can be calculated as 1/Churn Rate1/\text{Churn Rate}1/Churn Rate, which gives the average number of months a customer stays with the product.

LTV to CAC Ratio

• The LTV to CAC ratio is a widely used metric to assess whether acquiring customers is profitable. It measures the relationship between the revenue generated by a customer over their lifetime (LTV) and the cost to acquire that customer (CAC).

  • LTV/CAC < 1: The product is not profitable because the cost of acquiring customers is higher than the value they bring.
  • LTV/CAC between 1 and 3: The product is profitable but may have room for improvement.
  • LTV/CAC > 3: The product is highly profitable, meaning each dollar spent on acquiring customers generates at least three dollars in return over the customer’s lifetime.

  For example, using public data from Hotjar, the CAC was USD 70, with a gross margin of 70%, and an average revenue per customer of USD 65 per month over a 20-month period. This results in an LTV of USD 910 and an LTV/CAC ratio of 13, indicating high profitability.

Active User Metrics (MAU, WAU, DAU)

• MAU (Monthly Active Users), WAU (Weekly Active Users), and DAU (Daily Active Users): These metrics track how many unique users engage with the product over specific time periods. The definition of an “active user” can vary depending on the product and business context.

  For example:

  • In Nubank, an active user is defined as someone who generates revenue (e.g., by using a product like a credit card or having money in their account).
  • In Viva Real (a real estate marketplace), an active user is someone who contacts at least one advertiser during the month.

  The DAU/MAU ratio is a useful metric, especially for social networks and apps, as it shows how many of the monthly active users engage with the product daily. A high DAU/MAU ratio indicates strong user retention and engagement, which is a key goal for platforms that rely on frequent interactions.

Industry-Specific Use of Metrics

The importance and application of these metrics vary depending on the industry and business model. Below are some examples of how different metrics are typically used across industries:

1. E-commerce (e.g., Amazon, Magalu):
   • Focus on NPS, CAC, LTV, churn, and engagement metrics.
   • Gross margin is crucial due to the cost of inventory.
2. Marketplace (e.g., iFood, Uber):
   • Engage in tracking CAC, LTV, user activity (MAU, WAU, DAU), and engagement from both sides of the marketplace (buyers and sellers).
3. SaaS B2B (e.g., Único, Zendesk):
   • Focus heavily on MRR, ARR, gross margin, and churn.
   • User activity metrics may be less relevant but can still be used to track product adoption.
4. Fintech B2C (e.g., Nubank, XP):
   • Use MAU, WAU, DAU to measure engagement, especially in monitoring how frequently users interact with financial products.
   • Churn and LTV/CAC ratios are critical for assessing profitability and growth potential.

Conclusion

Understanding and managing these key metrics is vital for any product manager. MRR and ARR provide insights into recurring revenue streams, churn highlights customer retention challenges, and NPS captures customer loyalty. Metrics like CAC and LTV help balance customer acquisition costs with the value customers bring over time, while active user metrics give a clear view of engagement. Effective product management requires not only tracking these metrics but also ensuring that they drive decisions and actions to improve product and business outcomes.

Metrics like CAC, LTV, and user engagement metrics provide crucial insights into customer behavior, product profitability, and growth potential. Understanding how these metrics fit into your specific business model allows you to optimize acquisition strategies, improve customer retention, and drive long-term profitability. Whether you’re in SaaS, e-commerce, fintech, or marketplace models, these metrics should guide your decision-making process and help align your product strategy with your business goals.