Metrics to predict business success of a product
Let’s face it: Stakeholders care the most about financial metrics. And rightfully so. These are the numbers showing how much you’re making today and will be making in the future, and subsequently – how much more you can develop or simply for how long you can stay afloat. Stakeholders care about the revenue, customer acquisition cost (CAC) and customer lifetime value (LTV or CLTV). These indicators define the fate of the company and the product.
Monthly recurring revenue (MRR)
These metrics measure a product’s total revenue in one month. To calculate them, consider the MRR at the beginning of the month, add gained revenue from new subscriptions, and subtract churned revenue from lost customers.
MRR calculation
Source: ProfitWell
Average revenue per user (ARPU) allows you to count the revenue generated per user monthly or annually. You need these metrics to define the future service revenue, in case you’re going to change the pricing plan or roll out a promotion.
There are two types of ARPU: per new account and per existing account. ARPU per new account refers to metrics based on new accounts appearing after the subscription plan or product price was changed. ARPU per existing account involves the data from accounts established before the price change. This is the ARPU formula:
Monthly recurring revenue / total number of accounts = ARPU
Use ARPU to compare yourself to competitors, consider different acquisition channels, or segment which tier of customers brings more value.
How to use MRR and ARPU. It’s an effective KPI to use to monitor a company’s current health and it’s especially valuable in SaaS businesses working on a subscription basis. Since you don’t need to worry about one-off sales after acquiring a recurring customer, MRR is easily calculated and predictable.
Customer Lifetime Value (CLTV or LTV)
These metrics allow you to calculate how much money a user will generate in the long term. LTV displays an average profit from one user before they cancel a subscription. The point of this KPI is to show you how much you can spend to attract a new customer at an early stage, regarding the probable profit from one person. To calculate it, establish an average duration of a customer lifetime (how long a customer uses a product before stopping) and average revenue per user.
Average Revenue Per User (ARPU) * Average customer lifetime = CLTV
How to use CLTV. Track this metric to test and select customer acquisition channels, purchasing cycles, and retention strategies.
Customer Acquisition Cost (CAC)
This metric covers all the costs spent on attracting customers: marketing spendings, sales team work, advertising. Sometimes these costs include salaries of marketing and sales professionals. Usually, customer acquisition cost involves setting a specific period of time and total revenue. There are several formulas to calculate CAC, but the simplest one is:
Sales & marketing spendings for a period of time / total # of customers generated for a period of time = CAC
How to use CAC. Use CLTV and CAC together to identify whether customers bring you less profit than what you spend on them, and whether it’s time to reconsider pricing and product marketing strategy to attract more users.
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