What is a KPI?
Key Performance Indicator or KPI are used for measurement of the success of a business to know if goals are being achieved.
KPIs provide a clearer picture of any business objective at a given point in time and can call for an immediate reaction to gain advantage. An example includes spike in the total downloads of time tracking apps leading to high adoption rates. This may call for decisions to provide support to a larger audience and may involve development of new features for customer retention. It also helps an organization to plan, prioritize and budget its products.
Difference between KPIs and Metrics
Metrics refer to the numbers like number of visitors, revenue, bounce rate while KPIs quantify if the goals were achieved. KPI may refer to engagement, growth rate, retention rate or even conversion rate
Deriving KPI
You may look at the industry specific KPIs which are available or may create your own KPI which will give an accurate measurement towards your goals. Frameworks like HEART by Google and AARRR use KPI extensively to track the progress of a product.
A few categories where KPIs are used may fall into
1. User growth
Organic and inorganic: Organic downloads refers to the the downloading of an app or decision to use a product out of interest in the product. While inorganic refers to the adoption of a product as a result of referral or promotional activity.
Increase in number of users: This KPI tracks how the number of users have changed over a period of time. The period can be defined to be on daily basis or Month on Month basis. The KPI is often classified as DAU (Daily Active Users) or MAU (Monthly Active Users) to find if the users are using the app. A fall in the active users often leads to a churn (un-installation of the app).
2. Happiness
How happy are the users with the product? Less happiness may result in user churn, app uninstalls or even competitor advantage.
Net Promoter Score (NPS)
This is a widely used metric and measures the customer loyalty. The metric helps an organisation focus on operational processes that maximize promoters and minimize detractors.
The metric is captured from the user after the user completes a task and is shown a form to rate his experience. Based on the input of all the users the score is then calculated in below steps:
a. Find the percentage promoters and percentage detractors ignoring the passives.
b. Subtract the percentage detractors from percentage promoters to arrive at the NPS Score.
NPS = % Promoters — % Detractors
CSAT
Customer Satisfaction Score (CSAT) is a relatively straightforward way to measuring customer experience. A user is given a question like “How satisfied were you with your experience?” with ratings like 1–3, 1–5 or 1–10. It is a simple approach and occurs generally after interaction with customer support. This score may vary over the product journey with additions and modifications in the features of the product. Although widely used, CSAT measures the short term judgement of the customer specific to a contact.
3. Revenue
What is the revenue generated by the product?
ARPU
Average Revenue Per User (ARPU) refers to the revenue generated by the product per user. It helps a PM to analyse growth patterns and compare the growth with other companies.
ARPU = Total revenue / # of users
The metric can be segmented based on channel, geographical location, features of product, customer segments to further understand the user behaviour, revenue forecasting and explore opportunities for generating revenue.
MRR
Monthly recurring revenue (MRR) is a sales metric typically used to identify the growth or de-growth of a product. It is the total predictable revenue a product expects to make each month.
Ways of calculating MRR:
a. Add up the monthly revenue brought from each customer for total MRR.
b. Multiply ARPU by your number of paying customers.
MRR is further classified into expansion MRR (taking into account the existing customers who upgrade, cross buy or generate colume), new MRR (refers to the revenue from the new customers)
CLTV
Customer Lifetime Value (CLTV) is total value a customer will generate for a product over its relationship with the product. The longer the relation, the higher the value of the customer will be. The KPI also measures the loyalty of the customers.
CLTV = Average Purchase Value X Average purchase frequency rate of the customer
CAC
Customer Acquisition Cost is the total cost incurred to convert a potential into a customer. The marketing cost may include all the operational, technical, creatives and publishing cost. While the metric determines the conversion to a customer it may sometimes also be referred for paying customers specifically.
Customer Acquisition Cost = Cost of acquiring the customer via sales, marketing or referral / Number of New Customers Acquired
A reduction in CAC results in higher profit and PMs often look for opportunities to reduce it via different approaches including automation, different ways of marketing like generating inorganic acquisition.
CLTV to CAC ratio is often used to determine the spending strategy for acquiring new customers.
4. Engagement
How frequently are the users interacting with the product? It measures the effectiveness of a product.
Stickiness DAU/MAU
Often used by the VCs to understand how active the users are for a product over a period, the KPI helps in evaluating traction and potential revenue. It measures how often users come back to the product to use it. # of daily sessions provide a deeper analysis into the
Stickiness = Daily Active Users / Monthly Active Users
Likes. shares. reach. They all change.
Social media apps often measure their user engagement with likes, comments and shares. This may also be interpreted to be a save or reach of a product in ecommerce app or shortlist of a stock in a trading app. Changes in all these metrics form the reachability and interaction of the users with these products. These metrics can be measured on an hourly basis or geographically to gaugs the interest of the users.
Page views per session
This KPI defines if the users are finding your website useful. A higher number for this KPI will lead to a user looking for multiple resources in your product. It may also indicate that the user is unable to find the resource he is looking for. Such scenarios help a PM to understand the user desirability from the product and the points where it can be improved.
Tools for tracking KPI
There are many tools for tracking KPIs and the below tools can help in tracking the same realtime.
- Mixpanel
- Google Analytics
- Kissmetrics
Are KPIs always useful?
While KPIs are helpful in tracking the overall progress towards an organization’s goals, there are certain practices which may lead to pitfalls in this technique.
1. Too many KPIs may lead to data which don’t move and it is good to consider only those which impact business decisions and move the numbers.
2. Irrelevant KPIs may lead to a different path than laid out in the strategy. It is important to focus only on the metrics which are aligned to the goals and strategy. Each KPI must drive a high level business strategy.
3. Outdated KPIs must be eliminated. A product undergoes a feature upgrade and so must the KPIs
4. Not acting on the KPI. KPIs which do not trigger action or do not give an insight into the happenings in the product may lead to wastage in time and effort as the purpose of a KPI is to make new and track past decisions that drive business.
Every product’s KPI needs to be different as the customers they serve and the product journey they have is different. The KPIs serve as a medium of conversation between a product and its customers on what the customers like and what they do not.