Product Ratios: How to see your product using different lenses?
What gets measured, gets managed. A Product Manager has to wear multiple hats at different times , like UX researcher, analyst, technologist, trainer etc. Of course there maybe specialised people for each of these roles but a PM has to be pitch in more often than not.
Today, we will talk about the Analyst hat. More specifically, what numbers a PM must analyse and the why and how behind it.
So without wasting time, lets start to see the ratios important to a PM, one by one.
1. Customer Lifetime Value
This is the Value that the customer brings in all through out the time he is associated with your product. This is generally measured in terms of Revenue.
Put simply, CLTV is Avg Order Value multiplied by how many times a customer will make an order.
CLTV= Avg Order Value/( 1- Repeat Purchase Rate)
So, if the Avg Order Value is Rs 10000 and the customer has a 25% chance of coming back again, CLTV would be Rs 13,333
As is clear from the formula, the way to improve lifetime value is to increase Avg Order value ( through cross sell and up sell) or to increase Repeat Purchase Rate ( better Retention and loyalty).
2. Customer Acquisition Cost
Customer Acquisition Costs or CAC is the amount of money you pay to get a new set of customers. The formula for CAC is
CAC= (Costs of Sales+ Costs of Marketing)/ No. of customers acquired
Sales and marketing costs include salaries, cost of campaigns and tools.
So, to reduce the CAC is to either decrease the costs (which is difficult and not always the right thing to do) or to increase the number of customers acquired (which is a better approach).
3. CLTV: CAC Ratio
This ratio tells us how much value the customers are bringing to your product as compared to what it costs to acquire them. This shouldn’t be less than 1 as then it’s a diminishing return for the company. However, it shouldn’t be very large either as then it would mean that you are not spending enough on acquiring new customers. Typically a ratio of 3:1 is considered ideal here.
4. Retention Rate
Retention rate tells us how many customers are retaining in a given time period.
Retention Rate= (No. of customers at the end of a time period- No. of customers acquired)/ No of customers at the beginning * 100
So to increase Retention is to increase the no. of customers who make a repeat purchase. Easier said than done!
Also, the ratios are inter related. Increasing Retention increases the CLTV.
5. Churn Rate
Churn Rate is the opposite of Retention rate.
Churn Rate= (No. of customers at the beginning of a time period- No. of customers at the end of the time period)/ No of customers at the beginning of the time period *100
6. Viral Coefficient
What good is my product if it is not bringing in more customers on its own!
Viral coefficient or K is a measure of word of mouth marketing. It tells how many new customers each customer is bringing on his own.
K= No. of referrals per customer* Customer Conversion rate
Example, if each customer brings in 5 referrals and conversion rate is 50%, K is 2.5
If the value of K is less than 1, it means you have to continue to spend money on acquiring new customers and organic growth in customers is not there.
Most of these ratios are an outcome of good product and sound business practices, and not an end in themselves. They should only be taken as a yardstick to measure the success of your product. It is also important to combine them with more qualitative aspects like User Research to get a holistic picture!
