Product success metrics such as revenue, profit and retention show whether your users stick around, and whether they pay.
These product success metrics are often called hard metrics because they are the major ones which mean whether a business can survive.
They are lagging metrics or indicators: a scorecard of how you did in the past, that defines your current success and your potential investments in the future.
Engaging with these metrics is critical because:
- They’re the metrics which matter: retained customers, generated revenue and retained profit drive the business
- They are your problem: these may be shared metrics, but the product’s performance tends to be the core driver
- Commonly (mis)understood: they get thrown around a lot, but people understand them differently.
In this article, we’ll take you through some of the most common revenue and retention metrics.
We’ll talk about how to calculate them, why people care about them and some common pitfalls to avoid.
This article is one of a two part series covering product metrics:
- Revenue and Retention metrics ← this one
- Leading product metrics
Check out the Hustle Badger Product Metrics Cheat sheet
Introduction to revenue and retention metrics
Revenue and retention metrics drive all business goals. Taken together they provide a scorecard which allows a reader to understand the overall health of the business from an investment, growth and yield perspective.
They’re all output, or lagging metrics. They show how actions taken in the past truly affected customer behavior, costs and monetary value received by the business now.
These metrics are the ones which drive C-suite decisions and investor critiques. They concretely impact today's decisions, such as: Can we hire more people? What should we be building? Where should we focus? Tear up the roadmap, now!
Many of these product success metrics now have clear definitions, an agreement about their importance at specific business stages or industries and a common way to calculate them.
This has largely been driven by VCs identifying core business drivers across multiple businesses, or looking to standardize metrics across their portfolio; and is a process which has taken several decades as the tech industry has matured.
A helpful by-product of this is that you can usually source benchmarks by industry and company stage for nearly all these metrics, in order to be able to assess performance from an external perspective as well as an internal one.
Benchmarks are often published by major venture capital funds, such as Andreessen Horowitz, or Index Ventures, and are frequently commented on and analyzed by top tech finance and growth influencers.
Using revenue and retention metrics
As with all product success metrics they’re adaptable and have porous borders, and people interpret, calculate and define these differently.
It’s important to:
- Agree an understood definition: There are many different ways to calculate common business metrics. They can vary wildly by sector and category type and the wrong definition can be fatal to credibility, and lead to poor decision making. Agree how you will calculate it and get stakeholder buy in.
- Make the definition transparent: If you’re showing the metric, it’s best practice to add a footnote or table of definitions.
- Not massage the metric: Metrics can be sliced and diced to show positive or negative pictures. Your goal is to define and report on the true health of a metric which helps you improve the business, not just show a pretty picture. The metric should do what it says on the tin.
“Whenever I calculate and report churn, I have to step back to understand the entire business model and its product offering. Churn rates for B2C, B2B, and SaaS differ significantly….You can’t simply apply or copy the churn reporting technique from one business to another” - Olga Berezovsky, analytics thought leader and author of Data Analysis Journal
Why are revenue and retention metrics important?
This might also be phrased: why are revenue and retention metrics my problem and not commercial’s?
While business metrics are a shared responsibility between all teams in the business, they demonstrate user value and engagement with a product in a tangible, hard way.
It’s not sales, marketing or finance’s sole responsibility if users churn, or don’t want to pay for the product. Responsibility also sits with the product and the teams which develop and iterate it.
Revenue, profit and retention metrics are also important because:
- These metrics are the ones which matter: Traffic, activation, satisfaction rates are important, but nothing matters as much as the business’ revenue growth and the underlying profitability and viability of the business.
- Long term viability is critical: The average product team costs c. $1m a year to run. The CEO has a choice about where to put that money, and if they invest it in product and engineering teams, it’s important that that investment pays back. Your activity must meaningfully move one of these metrics and impact company returns.
- It’s a great way to manage your career: Because these metrics are the ones which senior management are laser focused on, understanding them, linking them back to your work and planning forwards to your future scorecard helps you be a credible and capable employee. Understanding them well also helps you pick the best businesses to join.
Let’s get into it.
