Identify the metric that matters most — part 2

11 min readFeb 20, 2023

Read the first part of this series (Identify the metric that matters most) here.

As a Product Manager, it is essential to understand product metrics in order to accurately measure the health of the business and make informed business decisions. Every company tracks specific success metrics which function as criteria for measuring overall business performance. North Star metric serves as an indicator of sustainable growth and acts as a connection between product development and the broader goals of the organization; however, PMs cannot just rely on North Star Metric. They need to think about overall metrics associated with their product’s business model. Thus, PMs should have thorough understanding of different digital business models such as SaaS, Subscriptions, Marketplaces and Ecommerce, along with associated metrics. This will help PMs prioritize initiatives effectively and create innovative solutions when interviewing for roles or transitioning into new ones.

This post aims to cover metrics for the first four business models: SaaS, Subscription, Marketplace, and Ecommerce. I will cover the remaining four models in part 3.

SaaS

SaaS — A SaaS company sells subscription-based licenses for a cloud software solution. Companies sell these subscription-based licenses to other organizations.
Example Products — Segment, Sendbird, HotJar, MixPanel

Monthly Recurring Revenue (MRR)
When companies provide products or services, customers provide income in return. We refer to that income as Revenue. Monthly recurring revenue is the predictable revenue that a business can expect every month. It doesn’t take into account any one-time payments, and understanding the various components of your MRR will let you know what works and what doesn’t. For example, if you have 100 customers and each customer pays you $5K each month then your MRR is $500K.

Annual Recurring Revenue (ARR)
ARR is an accumulation of the MRR throughout the year. It is useful for predicting sustainability and other revenue through new sales, renewals, and upgrades. This is a forward-looking metric, and companies always calculate it to predict their growth. It helps a PM understand the business’s growth considering downgrades and lost customers. It also provides a projection of the revenue growth over time. Formula to calculate ARR; ARR — 12 * MRR. For example, if you have 100 customers and each customer pays you $5K each month, then your MRR is $500K, and your ARR is 12 * $500K = ($6MM)

Bookings
As per Chargebee’s SaaS Accounting Guide, “Booking is a forward-looking metric that typically indicates the value of a contract signed.” Bookings represent the commitment from your customers to pay you money for the products or services you provide. Booking numbers help companies to learn various sales KPIs such as which pricing plan is popular among prospects and the salesperson responsible for bringing leads. Bookings are especially valuable in the SaaS industry, as they capture recurring and non-recurring revenue, unlike MRR. For example, if you have a customer who signed an annual contract for $60K on Dec 31, bookings for that customer will be $60K.

Billing
Based on the bookings or initial contract value, companies bill or invoice a fixed amount to their customers monthly, quarterly or yearly (Based on the time frame highlighted in the contract). The process of actually collecting money from customers is known as billing. Let’s consider a customer who signed an annual contract of $60K on December 31 with monthly payments of $5K. On January 31, the company will send that customer an invoice of $5K. In that case, the $5K will be considered billing.

Net New Logos and New Logo Annual Contract Value (ACV)
New logo is one of the most celebrated and tracked metrics in SaaS companies. As the name indicates, it shows how many new logo brands a company acquired in a given period. Generally, it is tracked over the period of a quarter and shows how your sales team performed in that quarter. As A16Z highlighted in one of their posts, “New logos are oxygen for businesses.” They’re the foundation you’ll have to expand in the future.

New logo ACV is the “Annual Contract Value” of new logos, meaning total contract value for each logo. For example, if a company acquired 4 logos in Q1 and each logo contract value is $50K, $20K, $30K, $50K respectively then total ACV for new logos is $150K for Q1. This value shows % growth over time and it helps you manage your GTM strategy. This is particularly important to track if you’re trying to move upmarket.

Net Burn
This is the most critical metric for SaaS to track a company's profitability. Net Burn, often referred to as Burn Rate, is the amount a company is losing or spending per month. It occurs when a company’s operating costs are higher than its revenue. A company that is profitable and generating cash has a “negative Net Burn”. For example, if a company’s revenue is $100K every month but they are spending $120K on various areas such as employees’ salaries, marketing cost, cost of product or service, and any other miscellaneous areas then it means they are not cash flow positive or profitable. Their burn rate is negative $20K. Before thinking about how a company is acquiring customers, look at its balance sheet and check how they are spending its money.

Subscription

Subscription — Technically, subscription-based products are part of the SaaS bucket, but these companies regularly sell a product or service to consumers on a recurring basis.

Example Products — Spotify, Disney+, HBO and HBO Max, Apple Music, Hulu, Netflix, LinkedIn Premium, HBR, Amazon Prime.

For subscription based business, it is important to understand where your users are coming from. For example, how many users are visiting your website every day, and out of that number, how many of them are signing up?

Key Subscription Metrics (Upgrade Funnel) are

# of people visit websites from different sources
# of people signup
# of people start trial
# of people do not cancel their account during trial period and become a paying customer — Trial to Paid
# of people cancel their account during trial period — Churn from Trial
# of people cancel their account after becoming a paid customer — Churn from paid

Revenue (MRR and ARR)
Revenue metrics remain the same for SaaS and Subscription-based businesses. I explained both revenue metrics in detail above.

Average Revenue Per User (ARPU)
ARPU is used interchangeably with Average Revenue Per Account (ARPA) and Average Revenue Per Subscription (ARPS), depending on how you price your customers. The formula for ARPU — ARPU (monthly) = Total MRR / Total Active Subscriptions or Users.

For example, if you have 100 customers and each customer pays you $5K each month, then your MRR is $500K. In this case, your ARPU is $5K. Note that because all our customers are paying $5K each month, your ARPU is also $5K. If you have different pricing and customers are paying different amounts based on the service or product you are providing, ARPU will look different.

Customer Acquisition Cost (CAC)
Customer Acquisition Cost (CAC) helps you discover the average dollars spent to acquire a customer. CAC is calculated by adding the marketing & sales spend for a given period and dividing that by the number of customers gained during that period. CAC is an inevitable cost, and gauging these expenses would let you know when your business would cover these costs and be profitable. CAC is a good indicator to understand how a business will or will not scale in the future.

Lifetime Value (LTV)
Lifetime is roughly the average number of months or years customers use your product. Customer Lifetime Value or LTV is the revenue that the customer will bring throughout their time with your company. It tells you the actual value of your conversions. There are multiple formulas to calculate LTV. One way to calculate LTV is to divide ARPU by Churn rate. LTV and CAC will give you underlying unit economics to understand business viability.

Companies or investors calculate unit economics to forecast when a business will break-even or become profitable. CAC:LTV ratio will give investors insight about a business’s value. A general rule of thumb for SaaS businesses is to demonstrate three times more value than customer acquisition cost; thus it is better to have CAC:LTV ratio 1:3 or better.

Marketplace

Marketplaces — A marketplace company acts as an intermediary in the sale of a good or service between sellers and buyers. Marketplace company revenue generally collects the % of each transaction’s buyer process using the marketplace for a product or service.

Example Products — DoorDash, Airbnb, Uber, Lyft, Etsy, eBay

Gross Merchandising Value (GMV)
GMV refers to the total sales dollar value of the transactions in a given period. GMV indicates how a marketplace business is growing or how customers are using a marketplace product or service. For example, if Doordash received a total of 200 orders in January and total $ value of 200 orders is $200K; GMV for DoorDash in January is $200K.

Revenue
Revenue for marketplace products or services is a percentage a company decides to take on every order they process between buyers and sellers. For example, Uber charges partners 25% fee on all fares (Note: This fee is known as Take Rate and generally falls anywhere between 10%-30%). So in January if the total trip $ value for Uber is $200K, their revenue will be 25% of $200K = $50K. Reference — Uber Document

Market Depth
Market depth allows us to understand if a marketplace has enough supply and ask, “Does it fit users’ needs?” As per A16Z, market depth means, “The concept of ‘offer depth’ or market depth originated from financial markets, where it’s defined as the market’s ability to sustain relatively large orders without price movements. The higher the number of buy and sell orders at each price, the greater the depth of the market.” For example, when consumers go to Etsy or eBay, do the sites have enough listings? On Doordash, do they have enough restaurants in each city to run their service? A critical question, in this case, for the supplier operations team to answer is how is the seller onboarding, and how often are sellers churning?

Match Rate
Marketplace businesses reduce search costs — making it efficient for customers to discover and match products or services. This creates an optimal environment for matching supply with demand. To measure the effectiveness of a marketplace, it is crucial to track the “match rate” — the rate at which buyers can successfully find sellers and vice versa. However, there is no single formula or definition to determine this metric, and it varies depending on the specific needs and objectives of each business. Therefore, it is up to individual marketplace operators to decide how they define and measure match rate for their particular platform.

Consider a few examples of match rate based on popular marketplaces.

Doordash — Restaurant order rate — % of the time are customers searching for a particular cuisine and end up ordering the same food.
LinkedIn — Application rate — How often are candidates discovering the right role and immediately applying for that role?
Airbnb — Booking rate — How often are consumers able to find listings on Airbnb and book a night?

To find more about marketplace metrics, please refer to the sample dashboard daphni — marketplace KPI Spreadsheet — Reference from Reforge Blog

E-commerce

E-commerce — “An E-commerce business is a business model where buyers and sellers exchange goods and services with consumers over the internet. Two common types are Business to Business (B2B) and Business to Consumer (B2C) e-commerce.” — Start an Ecommerce Business in 2023 + Checklist.
Example Products — Any eCommerce site such as ShopDisney, Staples, Target, BestBuy, Maceys

Revenue
Revenue is the total dollar value of orders processed on an E-commerce website in a given period.

Gross Margin
Gross margin is gross profit in a given period divided by total revenue in the same period. You can calculate gross profit using this formula– “total revenue — cost of goods sold”.

Average Order Value (AOV)
AOV is the average revenue per transaction. You can calculate that using (total revenue / number of transactions). It indicates how much a business can afford to spend on acquisition and similar per-transaction expenses. For example, if total online revenue for Target is $200K in January and Target site processes 2000 orders then their AOV is $100. If your business is spending more than $100 per transaction, it means it is not profitable.

Sales Conversion Rate
The sales conversion rate is the total transactions or successful purchases divided by total unique visitors. The formula looks like this: CVR = (# of transactions / # of Unique Sessions) x 100

For example, if unique sessions 5K and # of purchases are 200 then conversion rate is (200/5000) = 4.00%

Review the SaaS section for below metrics because definitions of those metrics do not change depending on the business models.

Lifetime Value (LTV)
Customer Acquisition Costs (CAC)

Shopping Cart-Related Metrics
Add to Cart Rate — The add-to-cart rate is the percentage of visitors who place at least one item in their cart during the session. Add-to-cart rates are important to track since they can tell you about the success of your product selection, marketing efforts and site usability.
Cart Abandonment Rate — The formula for Cart Abandonment Rate is [1 — (total completed transactions / total initiated transactions)] * 100.
This number will give you how often customers need a nudge to complete a transaction on your site. This means they are still unsure whether to buy a particular product or not because of price or a product specification, or they completely forgot about a product added to a cart.

E-commerce Website Related Metrics
Unique Page Views to Home Page — Number of unique visits the E-commerce website gets daily.
Daily Active Users (DAU) / Monthly Active Users (MAU) — Companies track users who interact with a website or a product daily, weekly, and monthly. As per Klipfolio.com, “The number of Active Users who interact with an application daily is known as Daily Active Users (DAU). Similarly, the number of Active Users each month is known as Monthly Active Users (MAU).”
Returning Customer Rate — The returning customer rate measures how many existing customers made two or more purchases within a given time frame. This includes first-time customers making their first purchase and returning to buy something else from your company soon after.

Summary

As a PM, you want to understand overall business models and metrics associated with them. After reading this post, you can select one product from each business model and one or two critical metrics highlighted in the post with that product. Once you do that, think about how you can improve these metrics to grow your product. For example, for subscription-based products like Netflix, it is critical to improve the number of customers trying a product (consumers that are initiating a trial) and eventually becoming paying customers. Come up with various ideas that will allow more consumers to become paying customers. Please share your thoughts on how you would improve the product you selected.