Decoding Key Financial Metrics for Product Managers
From MRR to CAC: How to Gauge Your Product's Financial Performance
Financial metrics stand as the heartbeat of any business. For product managers, these metrics are not just numbers—they are the language of business health, growth, and sustainability.
Whether you're piloting a B2B enterprise solution or a B2C platform, understanding how revenue flows, how much each customer brings in, and the cost of acquiring them is paramount.
This article provides a deep dive into the most common financial product metrics, elucidating their importance, computation, and applications.
Let’s dive in.
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Common Financial Product Metrics
1. Monthly Recurring Revenue (MRR) - this metric refers to the monthly revenue generated by a product from its customers.
It’s important to track this metric because it provides a good indication of whether previous strategies were successful in converting or retaining customers. In almost all companies, a healthy cash flow is of utmost importance in ensuring the seamless operations of the company. A healthy MRR provides a predictable source for a company’s cash flow.
Formula: MRR = number of customers X average billed amount
2. Annual Recurring Revenue (ARR) - this metric refers to yearly revenue generated by a product from its customers. It’s similar to MRR, except that this is tracked annually.
Why use ARR instead of MRR? Depending on your organization’s business model, tracking revenue per year may make more sense than monthly. For example, if you’re a product manager at an enterprise B2BSaaS company primarily dealing with multi-year subscription agreements, tracking revenue per month won’t be effective if your services are sold on a ‘per-deal’ basis.
Examples of popular B2B companies are Salesforce, Adobe, and Microsoft.
Formula: ARR = 12 X MRR
3. Average Revenue Per User (ARPU) - this metric refers to the average revenue generated by users, usually divided by segments. Products are rarely priced uniformly across the board. Businesses would often diversify their offerings as well as offer different payment options in a bid to convert potential customers. These result to ‘segments’ of users who interact with the product and generate revenue differently.
For example, Netflix has different payment tiers each offering an increasing number of feature offers.
Formula: ARPU = Monthly recurring revenue (MRR) ÷ total number of accounts
4. Customer Lifetime Value (CLTV) - this metric refers to the total worth generated by a user in the entirety of their relationship with your brand. This is important because knowing this value allows you to find the customer segment who brings in the most revenue.
Formula: CLV = (Average Life of Customer) * (Value of Customer)
5. Customer Acquisition Cost (CAC) - this metric refers to the cost needed to convert a customer, which includes resources going to marketing spend, sales initiatives, and internal processes needed to operate the product and the organization. Using CAC in tandem with CLTV provides you the ROI of your expenses. If you have this number, you will be able to strategize and scale your marketing and sales spends because you have a data-backed prediction of their ROI.
Formula: CAC = Related expenses ÷ Customers acquired
Product Financial Metrics are Your Keys to Success
Understanding and monitoring financial product metrics is non-negotiable for product managers aiming to drive business success. Such metrics offer profound insights into the health of a product, potential growth trajectories, and areas needing improvement.
From the reliability of monthly and annual revenues, the revenue diversity among user segments, to the balance between customer value and acquisition costs—each metric offers a piece of the profitability puzzle. Embracing these metrics ensures not just a product's survival but its thriving in an ever-competitive market.
Remember, in the intricate dance of numbers, every step, twist, and turn matters. The smallest percentage may mean onboarding a huge investor or spell your company’s ruin.
Stay informed, stay ahead.
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