Cheat sheet #2: Key Metrics to track for Consumer Apps and Networks
By: Stephanie Chan
Tags: Digital Platforms, Kpi, Data Driven Decisions, Metrics, Network Effect

1. Acquisition — how much and what quality is your traffic?

Number of downloads (#)

Ironically, number of downloads (or registered users) is still the first metric on the list even though there is so much more that is better! That’s because it is the headline for total volume of traffic. Although it is often a ‘vanity’ metric, sometimes it can be useful at very early stages to gauge size. However, at later stages, number of active users (below) would be a better measure for the size of your network because it measures your effective user base.

% organic vs paid channels

This metric looks at the % of total traffic split between organic channels (e.g. direct to website) vs. paid channels (e.g. paid ads). It indicates your ability to leverage customer love to bring free traffic, a higher % of organic traffic indicates not just power of your brand but potentially also higher intention of the users.

% Conversion rate, by channel (CVR)

This metric looks at the % of traffic (e.g. downloads or website views) that convert into paying customers, which can be calculated per channel. It indicates the efficiency of each channel at converting traffic. Lower conversion rates may suggest a lack of clarity when messaging your value proposition or friction in the user experience.

Cost per acquisition, by channel (CPA, €)

Calculated as the marketing cost per channel divided by the number of new acquisitions through that channel in a given period. ‘Acquisitions’ does not necessarily refer to paying customers here but rather the pipeline stages leading up to it, such as user registrations, trials or leads. Instead, the cost to acquire a paying customer is reflected in CAC (below). Why do we distinguish this? CPA is usually channel specific and is intended to assess their efficiency at acquiring leads. CPAs are thus leading indicators for CAC and by themselves, are not a holistic cost of acquiring a customer. Using a freemium platform as an example — CPA would show the cost of acquiring all user sign-ups (including free users) for each channel, CAC would show the overall cost of acquiring customers i.e. those on the paid plan only.

Customer Acquisition Cost (CAC, €)

Calculated as the total sales and marketing cost divided by number of new customers in a given month. Typically, the cost includes the fully loaded salaries of your sales team, marketing expenses and customer service. CAC is distinguished from CPA because it measures the holistic cost of a paying customer, taken across all channels. It is a key metric that is also used to calculate unit economics later on e.g. to calculate payback periods and compare against customer lifetime value (LTV) — more on this below!

2. Engagement — how much do users interact on your platform?

Number of active users (#)

Number of active users is the size of your effective user base and also indicates the level of engagement, when compared with total users. This can be tracked at different frequencies i.e. Daily active users (DAUs), Weekly active users (WAUs) and Monthly active users (MAUs). The right frequency to track depends on the type of interaction on your platform e.g. instant messaging platforms may measure active users daily while travel booking platforms may measure weekly. How you define ‘active’ will also depend on your platform or type of engagement you want to measure e.g. logins for mobile apps, likes or comments for social networks.

DAU / MAU ratio (%)

While DAUs, WAUs and MAUs indicate the size of your active user base, they don’t show how active your user base is. DAU/MAU ratio addresses this by showing the % of your active user base who are intense users — i.e. it shows the stickiness of your user base. Depending on the nature of your platform, different standards for the DAU / MAU ratio apply e.g. instant messaging platforms should expect more than 80% ratio while this would be much lower for travel booking platforms.

Daily average number of sessions per DAU (#, daily, weekly or monthly)

By itself, average number of sessions (typically measured as opens or logins) is a high level metric for engagement because it shows how many users (not necessarily unique) interact with your platform on a typical day, week or month. However, it becomes even more useful when viewed on a per user basis to show the depth of engagement — i.e. daily average number of sessions divided by DAU shows how frequently each active user interacts with your platform on a given day.

An alternative is to look at daily average length of session per DAU, which may be more relevant depending on the nature of your platform. E.g. Daily frequency of sessions for instant messaging platforms vs daily length of sessions for yoga class platforms.

3. Retention — how much do users stay on your platform?

% of users who return by cohort

% of users who return is the proportion of users who come back to interact on your platform at a point in their lifetime (e.g. in their second month, sixth month, etc). This should be measured by cohort so that their behaviour can be isolated based on when they were acquired, e.g. users acquired in 2019 vs 2020 behave on different timelines. You can then calculate a weighted average across all cohorts to get a holistic view of retention on your platform. Cohorts are especially insightful for consumer platforms, especially mobile platforms, as user base can be further segmented to understand retention e.g. power users, paid users

To help out with this one, we’ve got a whole separate post on cohort analysis — including a handy template!

Churn rate (%)

Churn is the opposite of retention — it can also be viewed on a cohort basis by simply calculating 1 minus the % of users who return (above). However, instead of running a whole cohort analysis, churn rate is often expressed at a snapshot in time to show an overall % of users ‘lost’ from the platform. This simplified version is calculated as the % of total users who have not engaged at all in the last month.

4. Monetisation — how much are users willing to pay?

Average Revenue per User (ARPU, €)

Calculated as total revenue divided by total number of active users in a given period, this metric simply measures the average revenue each user generates on your platform. Revenue can come in many forms, such as orders, in-app purchases or paid subscriptions. This is important to calculate LTV below!

% Conversion from trial to purchase

Consumer platforms often offer a free trial or free version, so measuring the conversion rate from non-paying user to paying customer is a great way to show your customer love and their willingness to pay. This can be calculated in two ways — (1) for freemiums, it is % of users who convert from the free to paid version and (2) for free trial models, it is % of users who convert to paying at the end of the free trial. This metric is extra useful when testing different price points for your product — you can see which price point causes conversion rate to drop off a cliff and that’s how you know your ceiling!

5. Unit Economics — how healthy is your platform as a business?

Here we go — the holy grail of all metrics. Don’t worry, we know unit economics are hard to grasp because it is a function of all the metrics above. However, they are critical to understand and useful as a way to ‘temperature check’ your business.

Lifetime Value (LTV)

LTV measures how much value you can extract from each user over their lifetime on the platform: it is calculated as the total contribution margin I per user over a time period, say 24 or 36 months. It is calculated as ARPU per month x contribution margin 1 (%) x average # of months in lifetime. The trickiest part is knowing average lifetime — while the most accurate estimation is using cohort analysis (above) to find average time before churn, a quick proxy is to use 12 months. This conservatively assumes customers churn after a year.

CAC payback period (# months)

CAC payback period is the time required for a user to ‘pay back’ the cost to acquire them — the break even point — calculated as CAC divided by (ARPU per month x contribution margin 1). This is a quick way to gauge the dynamics of your platform and set limits on your CAC — how does the payback period compare to your average lifetime? If you’ve assumed 12 months, has CAC been paid back yet?

LTV/CAC ratio

LTV/CAC measures the ROI per user on your platform and is critical to assess the health of your business — LTV should be greater than CAC by 3x as a rule of thumb. It takes time to achieve this, but we think it’s important for Founders to think about their platform in such terms so they can strive to improve it every day.