Product Marketing Rule #18 from the best-selling book, 42 Rules of Product Marketing, was written by Dan Olsen, Product Management Consultant, Olsen Solutions LLC
Using these online metrics will help you measure your product marketing efforts and make them more successful.
Products are increasingly delivered and marketed online. Tracking a product’s online metrics has grown in importance and has become a critical competency that separates leading companies from their competitors. This rule shows how to combine online metrics with a high-level product marketing framework to gain a better understanding of your business and how you can improve it. The framework analyzes the “per customer” economics for the three key parts of the customer lifecycle: acquisition, conversion and retention.
Acquisition
Acquisition means getting a prospective customer to visit your website or landing page. Prospects can arrive at your website through organic (free) traffic or through traffic that results from your advertising and marketing campaigns. The important metric for acquisition is Cost Per Acquisition, or CPA for short. To compute CPA for a given time period, you need to know how much you spent on advertising and marketing campaigns in that period. Divide the total amount you spent by the number of prospective customers that came to your website from your ads to determine CPA. Your CPA will vary by marketing channel, so it’s best to calculate CPA for each channel so you can compare them. Google Analytics lets you track how many visitors your website had and where they came from. If you are using Google AdWords, it will calculate the CPA for each campaign for you.
Conversion
Conversion means converting prospects to revenue-generating customers (e.g., getting them to buy your product). The top metric for conversion is your conversion rate. The conversion rate for a given time period is the number of new revenue-generating customers divided by the number of prospects and is expressed as a percentage. The cost of acquiring and converting a new revenue generating customer is your CPA divided by your conversion rate. Obviously, lower CPAs and higher conversion rates are better. Google Analytics and Google AdWords let you easily set up conversion tracking. Conversion rates are affected by the messaging you use on your landing page and how it’s designed. A/B testing is a common technique used to try out several variations of a landing page and statistically determine which performs best. Google Website Optimizer is a free tool that automates this process.
Retention
Retention means keeping your revenue-generating customers (e.g., getting recurring revenue or follow-on sales as appropriate to your business model). An important retention metric is your retention rate: what percentage of customers you keep from one period to the next. Your retention rate will determine another key metric: your average customer lifetime (in months or years). Another important metric is the average revenue per customer (or user), often shortened to ARPU. To calculate ARPU for a particular time period, divide total revenue by the number of customers for that time period. Using your gross profit margin (your profit margin before marketing expenses), you can use these metrics to calculate the Lifetime Value (LTV) of a customer. The total revenue your average customer generates is your ARPU multiplied by your average customer lifetime. To calculate LTV, just multiply that total revenue figure by your gross profit margin:
Lifetime Value = ARPU × Average customer lifetime × Gross profit margin
Now let’s tie acquisition, conversion, and retention together. In a healthy, profitable business, you want to make more money from each new customer than it costs you to acquire and convert that customer. That difference is your average profit per customer:
Average profit per customer = Lifetime Value – CPA/Conversion Rate
Your CPA and conversion rate will vary by marketing channel (and LTV can, too). So the goal is to experiment with new channels, see what values you get for your key metrics, and plug them into the above equations. You’ll want to spend more on the best channels and prune the under-performing channels.
Using these online metrics will help you measure your product marketing efforts and make them more successful.
Product Marketing Rule #18 from the best-selling book, 42 Rules of Product Marketing
