Measuring the Success of a Chosen Business Model For a Robust Product Built
By Kiran Joshi, Sudeepa Raina
In today’s market, a product’s quest for sustainability is not only desirable but essential. To achieve this goal, defining a structure in the business model using key performance indicators (KPIs) is critical to evaluate performance and facilitate decision-making in the early stages of the product.
KPIs are metrics that help a business understand how effectively it is achieving its goals and objectives. They are essential in a business model as they enable a company to track progress toward specific targets, identify areas for improvement, and make informed decisions based on data-driven insights.
Throughout this article, we aim to explain why key metrics are essential in a business model and list several key metrics you should track.
The business model is constantly at the center of the product or service. An adequate business model can be utilized by startups or well-established organizations to analyze the performance, predict growth, and for investors to assess the companies operating economics over the years in the marketplace.
With regard to the product, service, or company, your ultimate goal will be to create products for the customer and keep their needs in mind. More often than not, another objective of delivering an incremental work product is a return on investment.
In this way, key metrics defined in a Business Model allow you to evaluate strategy, operating economics of the business, gaps, and risk exposure. It enables you to assess risks and plan a remedy. The Product Managers can use these key metrics to measure the success and failure of the product while identifying the necessary actions for business growth. It assists with the decision-making of acquiring new customers or working with existing ones, identifying new trends to be the top-tier in the marketplace.
- How to create the value that users want?
- How will the market react to this current increment?
- How to generate revenue?
- What will be the ROI for this increment?
- What will be the impact on financial growth?
- What will be the break-even?
- What underlying economic logic elaborates on delivering value to customers at a reasonable cost?
Let’s look at the KPIs below, which can be defined to assess, evaluate, manage financial viability, and monitor customer growth, profits, and revenue.
Annual Recurring Revenue (ARR)
Predictable recurring revenue a company receives annually from their customers for the products or services. It is used in the Subscription-based model. Companies and investors use this metric to evaluate overall performance.
ARR = (Annual Subscription cost + Recurring Revenue) — Revenue Lost from Cancellations.
Sales Revenue
Identifying the revenue from top sales will determine the quality of products and services in the marketplace.
Sales Revenue = Income from sales — Returned sales
Net Profit Margin
Net Profit Margin is a financial metric that measures a company’s profitability by calculating the percentage of revenue that remains after deducting all expenses, including taxes, interest, and depreciation.
Net Profit = Total Revenue — Total Expense
Net Profit Margin = (Net Profit / Total Revenue) x 100
Gross Margins
Gross Margin is a financial metric that represents the percentage of revenue a company retains after deducting the cost of goods sold (COGS).
Gross Margin = (Revenue — Product/Services Sold) / Revenue x 100
EBITDA
Earnings before interest, taxes, depreciation, and amortization are used to assess and evaluate the company’s operation economics. It is considered a key metric in evaluating the financial health of a company because it provides a measure of the company’s ability to generate cash flow from its operations before taking into account interest payments, taxes, and non-cash expenses like depreciation and amortization.
EBITDA = Operating Revenue - Operating Expenses + Depreciation + Amortization
Customer Lifetime Value
CLV is the key metric to assess how much a company needs to invest in acquiring new customers or retaining existing customers while maintaining profits by estimating average sales, transactions, and the average duration of the relationship with the customer.
Customer Lifetime Value = (Average Revenue per Customer per Year x Gross Margin per Year) / (Customer Churn Rate + Discount Rate — Customer Churn Rate x Discount Rate)
CAC Payback
CAC payback is the period that it takes a company to recover from the cost of acquiring new customers. It represents the number of months it takes for a customer to generate enough revenue to cover the cost of acquiring that customer.
CAC Payback = Cost of Customer Acquisition / Monthly Recurring Revenue per Customer
Net Revenue Retention
NRR is used to measure the growth and flow of revenue. The company’s process to retain customers and the expansion of monthly customer expenses.
Net Revenue Retention = (Revenue at the End of the Period + Expansion — Revenue from Churned Customers) / Revenue at the Beginning of the Period) *100
To better understand data-driven decision-making using key metrics, let’s dive into the following section.
How to Use Relevant Data Using Key Metrics to Inform Business Decisions?
Data-driven decision-making is a process that involves using relevant data to inform business decisions. One key aspect of data-driven decision-making is identifying and tracking key metrics that are most relevant to your business goals.
For example, if you’re managing an e-commerce platform, metrics such as average order value, customer acquisition cost, and conversion rate are critical to track. By analyzing these metrics, you can identify opportunities to increase revenue, optimize marketing spend, and improve the user experience.
Similarly, if you’re managing a mobile app that offers a subscription-based service, key metrics such as user acquisition, user retention, monthly recurring revenue, and customer lifetime value are critical to track. By monitoring these metrics, you can make informed decisions about optimizing user acquisition and retention strategies, pricing, and product features.
As a product manager, it’s essential to be knowledgeable about key business facts that can impact your product’s success. For instance, if you’re managing a Fitness Product app that operates on a Subscription Business Model, understanding key metrics such as Total Members, Recurring, New, and Drop-outs can help you make informed decisions.
By analyzing these metrics, you can identify opportunities to optimize user acquisition and retention strategies, adjust pricing, and improve product features. For example, if you observe a decline in new member sign-ups, you can evaluate the user acquisition funnel and make adjustments accordingly.
To illustrate this point, let’s consider the following scenario: a Fitness Product app that charges an annual membership cost of USD 2000 and a monthly membership cost of USD 200. By referring to a monthly membership graph that tracks Total Members, Recurring, New, and Drop-outs, you can calculate the Sales Revenue. By leveraging these key metrics, you can make data-driven decisions that improve the app’s performance and drive revenue growth.
Monthly Subscription Cost = USD 200
Annual Subscription Cost = USD 2000
Income from Sales(Jan) = Total Members * Monthly Membership
Income from Sales(Jan) = 1000*200 = USD 200000
Returned Sales (Jan) = Drop-out * Monthly Membership
Returned Sales (Jan) = 100 * 200 = USD 2000
Sales Revenue for January = Income from Sales(Jan) - Returned Sales (Jan)
Sales Revenue for January = USD 200000 - USD 2000 = USD 180000
By analyzing monthly membership data, such as Total Members, Recurring, New, and Drop-outs, and using the subscription costs, we can calculate the Sales Revenue for a particular month like January. By deducting returned sales from income generated from sales, we can determine the net Sales Revenue for a specific period. This analysis can be extended to evaluate monthly, quarterly, or yearly sales revenue.
The product manager is responsible for identifying the crucial final metrics for the company and ensuring they are periodically reviewed to assess the success or failure of the product, raise risk levels, and determine the most effective immediate course of action.
Ultimately, by focusing on key metrics that are most relevant to your business goals, you can make data-driven decisions that are more likely to lead to successful outcomes.
“Watch the product life cycle; but, more important, watch the market life cycle” — Philip Kotler
It is essential to identify the problem to develop effective solutions that will improve the overall success and efficiency of the company.
The initial emphasis is to have incremental features in a product, but the priority should be on increasing revenue and profits, targeting customer satisfaction and loyalty, and good engagement with customers to maintain recurring revenue.
The key drivers offer a holistic approach to product managers to assess and evaluate the business models to track the end-to-end lifecycle of the product, retain, and maintain above-average growth, evolve with respect to customers, quality service, market-oriented and financial viability in a dynamic approach.
In addition to the metrics mentioned in the article, other business metrics can assist your business growth; however, you should select the metrics/KPIs that are most important based on your goals as the needs and priorities of business change over time.
Summing up
In conclusion, measuring and analyzing the right business model metrics is crucial for the success of any business. Your metrics need to align with your business goals and provide insight into how well your strategies are working. Your business can be more profitably and sustainably run by monitoring these metrics regularly, identifying areas for improvement, and making data-driven decisions.
The metrics you track must be holistic to provide a complete picture of your business performance. No single metric can tell the whole story, so a comprehensive approach is necessary. Your business can thrive in today’s competitive markets when it combines the right metrics with a commitment to continuous improvement.
To learn more about business models, please refer to the Understanding Business Models For a Robust Product Built article.
