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It is imperative for any Product Manager or anyone in product team to define, track, compare & analyze relevant metrics. In this post, we'll look into some basic metrics (what, how to measure, when to use it) and learn together!
CPM - Cost per mile / 1000 impression:
What? It is the measure of cost that the advertiser agreed to pay per 1000 views for a particular ad. The 'M' (Mile) in the CPM refers to 1000, as per roman numerals. It follows a model that is closer to the print style of ad sales, with advertisers paying a set price just to show their ads.
How to measure? The website’s ad server monitors the number of impressions and adjusts the display rate to match a given advertiser's desired spend on a monthly or quarterly basis.
CPM = (Amount spent for ad / Total number of impressions) * 1000
When to use? To identify the effectiveness of the marketing campaign. The lower the rate, the better the campaign is. You can estimate the amount to be spent for the marketing campaign by knowing CPM and guesstimates of impressions.
CPC - Cost per Click
What? A “click” on one of your PPC (pay-per-click) text ads or display banner ads represents a visit, or an interaction with your company’s product or service offering. Every click on a PPC campaign represents attention from a person who is searching for something that you offer.
How to measure? Cost per click = Advertising cost / number of clicks
Average CPC = Total cost of clicks / total number of clicks
When to use? Cost-per-click is important because it is the number that is going to determine the financial success of your paid search campaigns. If you're paying more than average CPC, which means you're spending more for your marketing campaigns than supposed to be.
CPI - Cost per Install
What? CPI is a pricing model used in user acquisition campaigns in which the product advertisers pay each time a user installs their app from their ad. This metric would be utilized by the mobile app builders / companies. The best indicator of the effectiveness of campaigns.
How to measure? CPI = Total ad spend / Total installs
When to use? CPI helps us to generate marketing insights. Simple metric, which allows us to filter down the efficiency of the marketing spends to the Location (Country, State, Locality), Platform (Android, iOS), Channel (Facebook or Twitter or etc.)
However, note that this metric is a high level one i.e. It can only say the number of installs. It doesn't guarantee that the user will perform other funnel actions such as in-app engagements.
CPA - Cost per Action (such as, Cost per Order)
What? CPA is a pure performance pricing model in which marketers pay media sources a fixed rate based on a pre-specified action. The action could be purchase, registration, sharing etc.
The value of CPA is that we can exactly able to find out how many users are actually performing the actions we intended.
How to measure? CPA = Total ad spend / Total number of pre-defined actions done by users (acquired by ads). Most often, the analytical tool like Google analytics or Zoho analytics would directly show the number.
When to use? Cost per action advertising generally involves less risk for advertisers than other advertising techniques. Since we only pay when you get a lead or a sale, you are protecting yourself from potential eyeballs that won’t convert. At the same time, you are ensuring that you only pay when you have money coming in, or when the prospect for money coming in is relatively great.
Found this amazing chart from: https://www.appsflyer.com/glossary/cpa/
TAM - Total Addressable Market
What? TAM is also referred as Total available market, i.e. The overall revenue opportunity if our product or service attains 100% of sales. For example, if we're going to sell smartphones in India, the TAM would be the total number of persons who don't have smartphones and who want to exchange their existing smartphones.
Unless a company is a monopoly, it can’t capture the total addressable market for their product or service. Even if a company just has one competitor, it would still be extremely difficult for them to convince an entire market to only buy their product or service.
How to measure? There is no exact formula to calculate TAM. It is an approximation and elimination process using necessary relevant data.
There are three approaches to find out TAM:
- Top-Down approach: We shall use industry data, market reports, government data and research studies to identify the TAM. However, there are limitations here. Data generated by industry groups may not always be kept up to date and may not reflect the targeted market. Here, most of the companies hire a market research consulting firm to conduct fresh research that is focused on your need areas.
- Bottom-Up approach: This is based on internal sales data. The way to calculate TAM if you have enough sales, customer base would be:
TAM = Total number of customers * Annual contract value
where Annual contract value = Average sales price * Total number of current customers
- Value Theory: This is based on how much value would the customers receive through the product or service. A value-theory TAM relies on an estimate of the value provided with a set of users by the product, as well as a guess at how much of that value creation can be captured through pricing.
Why? Before diving into building a product or service, we should be knowing how much is the possible growth, right? That's where, TAM helps us! It tells us an actual market a company can focus on.
AOV - Average Order Value
What? AOV is a straight forward one, how much the customers are paying for the order in average. It does not describe gross profit or profit margins, but offers insight into how those figures come to be.
How to measure? AOV = Revenue / Number of orders
Why? By knowing the AOV, the pricing strategy could be analyzed, set & revamped. It also helps us to evaluate the marketing efforts. When you improve your average order value, you directly scale your profits and revenue growth upward.
CVR - Conversion rate
What? Conversion rate is the percentage of users who completed the desired action (clicking the advertisements, payment) out of total crowd. Raising your conversion rate means that more of your site traffic converts to meaningful actions that grow the business.
How to measure? CVR = Number of users completed desired actions / Total number of users
Why? Again, one of the metrics which tell us the effectiveness of marketing campaigns, which also help us to compare and contrast the performance of different marketing channels.
Okay, then what would be the good conversion rate. Refer this site to check the benchmark CVR based on different categories. For example, from the US data, the average CVR for the Travel related app is 23%.
CAC - Customer Acquisition Rate
What? CAC is the metric which tell us the cost of convincing the potential customers to buy the product or service. It includes Advertising costs, Cost of marketing & sales team, Creative costs, Technical costs, Publishing costs, Production costs etc. The use of the CAC has risen in popularity as organizations use web analytics to make data-driven decisions.
How to measure? CAC = Total amount spent on acquiring customers (Marketing & Sales) / Total number of customers acquired
Why? Lower the CAC, better it is, which means we're spending less amount a acquire a customer. It is valuable for measuring the effectiveness of your customer acquisition strategy and adjusting it over time. It is also a meaningful metric for potential investors, allowing them to gauge the scalability of your business.
CLTV - Customer Life Time Value
What? CLV is the total worth to a business of a customer over the whole period of their association with the product or service. It’s an important metric as it costs less to keep existing customers than it does to acquire new ones, so increasing the value of your existing customers is a great way to drive growth.
CLV goes hand in hand with another important metric - CAC. Customer lifetime value only really makes sense if you also take the CAC into account.
How to measure? Customer Lifetime Value = (Customer Value * Average Customer Lifespan)
where Customer Value = Average Purchase Value * Average Number of Purchases
Why? If we're spending more amount on customer acquisition (CAC) than CLV (business worth, the customer gives back) the business will sink. Hence, tracking the ratio of the CAC:CLV is imperative.
CTR - Click Through Rate
What? A ratio showing how often people who see your ad or free product listing end up clicking it. Click through rate (CTR) can be used to gauge how well your keywords and ads, and free listings, are performing.
How to measure? CTR is the number of clicks that your ad receives divided by the number of times your ad is shown.
i.e. CTR = (Total Clicks on Ad) / (Total Impressions)
Why? Higher the CTR, the more effective the marketing campaign is. (😤 again!) But CTR is important to advertisers, too.
If you have a:
- High CTR, users are finding your ad to be highly relevant.
- Low CTR, users are finding your ad to be less relevant.
North Star Metric
What? North Star Metric is a predictive model which does three things: lead to revenue, reflection of customer value, and measure progress.
The NSM should provide evidence of a clear and direct relationship between your product’s problem and the degree to which it is solving it for your target market. It is the single metric your team or company decides will be the one that best represents how well your product is performing in the market
How to measure? It is not a specific metric (like above). Moreover, it is a single or combination of different metrics we choose based on the product or service needs and goals.
For example: NSM for e-commerce space could be CLV, Number of daily purchases;
NSM for B2B SaaS could be Monthly retention rate, No. of trail users converted to paid one.
NSM for Zoom (online web conferencing tool) is the number of weekly hosted meetings.
Why? NSM gives a picture of the common goal to everyone in the organization. It benefits us by providing Alignment of different internal teams, Transparency in the organization, Customer focus by targeting the value.
Note that there are lots of metrics out there and the above metrics are just samples from a lot. Most of them are related with each other. As a product enthusiast, we have to select which are the ones we want to track. 📈📉
Saludos! See you in the next one! Cheers! 🍻
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4 Comments
Firstly , what is exact meaning of Matrics here ? If you don't mind Would you tell it in brief.
ReplyDeleteMetrics are a number or magnitude, which help us compare, track the performance of our product or feature or anything!
DeleteOkay Thanks for your explanation 🙌
ReplyDelete🙌
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