Identify the metric that matters most — part 3
Read the first part 1 of this article here.
Read the first part 2 of this article here.
This is part 3 of the series “Identify the metric that matters most.” In part 1, we learned the importance of understanding business health using product metrics. Product managers (PMs) use metrics to make better prioritization decisions. In part 2, we looked at critical business metrics for four business models: SaaS, Subscriptions, Marketplaces, and E-commerce. This post aims to cover metrics for the next four business models: Enterprise, Usage-based, Transactional, and Advertising.
Enterprise
Enterprise — An enterprise company sells services or software to other businesses on a single-license basis. These contracts have a fixed term and designated contract value.
Example Products — Docker, AWS, Google Cloud, FireEye, or any security-based products involving 3–6 months of integration (https://www.zscaler.com/).
Generally, metrics associated with SaaS and enterprise business models are the same. We track the below metrics for enterprise products, and details for each metric was covered in part 2 here.
- Average Contract Value
- MRR
- ARR
- Bookings
- Billings
- Total paying customers — Total number of paying enterprise customers. Generally, it is similar to the new logo from the SaaS business model.
Usage-based
Usage-based — A usage-based company sells products or services based on usage frequency.
A usage-based product’s revenue model is based on usage frequency (how often an individual uses your product). Usage could be the number of users or seats, time spent using the product or service, and feature adoption.
Example Products — https://userpilot.com/ or https://prosperstack.com/
Generally, usage-based products are SaaS products, and they follow similar key metrics as SaaS metrics described in part 2 here. However, the revenue metric for usage-based products usually comes from usage frequency. Revenue depends on below factors:
- Usage frequency — Usage frequency tells how often an individual uses your product.
- Time-to-value — Once users start seeing improvement in specific metrics, usage-based companies will use this improvement to decide pricing for that specific customer. For example, conversions in A/B tests; once you see a lift in a metric during A/B test, the A/B test’s product company will use that lift to decide product pricing.
- Time spent using the product — Number of days or hours spent on a product.
- Product and feature adoption — Number of features or capabilities used.
- Number of seats — Number of users who will use a product
Let’s consider an example for the below products:
https://userpilot.com/ — UserPilot delivers an in-app personalization experience. Once users signup, you want them to complete specific onboarding steps, and UserPilot allows you to configure those personalized steps depending on user attributes such as their location. Based on UserPilot’s pricing page, they charge you based on the number of users who completed the onboarding checklist.
https://prosperstack.com/ — Prosperstack allows you to offer personalized promotions to users in cancellation flow, avoiding users’ churn. They allow you to configure various promotional and billing offers such as give x% discount, extend trial period, share what your users lose if they cancel their account etc. Based on Prosperstack’s pricing page, they charge you based on the number of users who started their cancellation with Prosperstack’s workflow.
Transactional
Transactional — A transactional company enables a financial transaction on behalf of a customer and collects an associated fee.
Example Products — Stripe, PayPal, Coinbase
These types of companies make money by taking a percentage and fixed-fee cut on every facilitated payment. These companies focus on transaction volume, so the more transactions they process, the better the business will be. The company uses different price packages depending on the selected products. For example, Stripe takes 2.9% + 30 cents on each transaction. For international transfers, 1% is added to the percentage (to a total of 3.9 percent).
Gross Transaction Volume (GTV)
GTV is similar to Gross Merchandising Value (GMV) where a payment’s total dollar value is processed in a given period. GTV indicates how a business is growing or how customers are using their product or service. For example, if Stripe processes a total of 100 transactions in a day and the total value of all transactions is $500K, GTV for Stripe on that particular day is $500K.
Revenue
Portions of fees companies decide to cut on each transaction are recognized as revenue for their service. For instance, Stripe cuts 2.9% + 30 cents for each transaction. So if they process one transaction for $100, they will recognize revenue as $3.2 (2.9% = $2.9 + 0.30 cents). Stripe’s revenue will increase if the transaction count and the transaction volume increase.
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 and sales spending 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 lets, you know when your business would cover these costs and be profitable. CAC is a good indicator for understanding how a business will or will not scale in the future.
Advertising
Advertising — An advertising company offers a free service to consumers and derives revenue from advertisers. The most common companies include social networking sites or content sites.
Examples — YouTube, Twitter, Yelp, Pinterest
YouTube shows user-generated videos and allows users to create videos for free. They also show ads for various products and services during these videos and earn money from these advertisements. Based on Investopedia, “YouTube, like most other Google properties, earns the bulk of its revenue through advertisements. YouTube is able to embed targeted advertising directly into the video clips that its users watch, as well as promote featured content. In the first nine months of 2021, YouTube generated $20.21 billion from advertising.” Another social media giant, Pinterest, makes money via advertising, specifically promoted pins.
Daily Active Users (DAU) / Monthly Active Users (MAU)
Companies track users who interact with a website or a product on a daily, weekly, and monthly basis. DAU — The total number of unique active users in 24 hours. MAU — the total number of unique active users in the last 30 days.
Percent Logged-in (signups/visitors)
The total number of active monthly users with registered accounts is divided by total unique visitors. This ratio provides insights such as how users can connect with your value proposition and are willing to sign up.
Cost Per Click (CPC)
CPC is the amount you pay every time a user clicks your ads. Your maximum CPC is the maximum amount you’re charged for a click. Imagine you are giving an ad in a newspaper, and you are paying for that ad based on the number of customers the newspaper company has. CPC is something similar you will pay to an ad publishing company (Google, Meta, LinkedIn) to publish an ad and pay them based on the number of users who click on that ad. This is the most commonly used method among companies to start their customer acquisition. The formula for CPC is, CPC = total_cost / number_of_clicks
Cost Per Impression (CPM)
CPM is the bid you pay per one thousand views (impressions) when running ads. Selecting viewable CPM bidding ensures you only pay when your ads are seen. Imagine you are giving an ad in a newspaper, and you are paying for that ad based on the number of customers purchasing that newspaper; similarly, products like YouTube, Meta, and Instagram allow you to display your ads depending on users' activity and create a personalized environment. Depending on how many views your ad will get, you will pay a company to show an ad per 1000 views.
Conclusion
This three-part series, “Identify the Metric that Matters Most,” ensures PMs understand critical metrics associated with each business model. To test your understanding of the theories so far. Consider Twitter as a product. The metrics to track Twitter growth are DAU, MAU, and % of DAU posting tweets or replying to other users' tweets. % of users click on advertisements from their feed and based on these clicks Twitter team can calculate CPC and CPM. Now let’s think about identifying a product from one of the above four business models and add metrics associated with it in the comments section. Once you understand these metrics, applying them to a professional environment with a product or service becomes simpler.
In general, every PM must identify the metric that matters most with their leadership team. Once you track them, you need to have a conversation with your leadership to really know one or two key (growth metrics) metrics that you can review and report daily. This will help you to understand the ups and downs happening in the metric. As a result, you will be able to identify improvements in your product or service and come up with an action plan for growth. As a PM, knowing your metrics like the back of your head will help you build strong credibility and strengthen your analytical muscle to become a great PM. In short, do not forget to “Identify metrics that matter most.”
