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Writer's pictureNabeel Ansar

Key Indicators for Product Monetization

Below are some of the terms I normally used when working on Product Monetisation,


Revenue

Revenue is the income from the sale of goods and services to customers.


Recurring Revenue


Recurring revenue is the part of a company’s income that they expect to earn on a regular basis into the future.


Cost of Goods Sold (CoGS)

Expenses incurred in the sale of a single unit of the product or service


Gross Profit

Gross profit is the revenue from sales less CoGS.

  • Gross Profit = Revenue - CoGS


Gross Margin

Gross margin is the gross profit expressed as a percentage of revenue

  • Gross Margin % = Gross Profit / Revenue


Cost per Acquisition (CpA)

CpA is the cost of acquiring a user or a lead. It includes all costs associated with all stages of the journey right up to becoming a paying customer.


Customer Acquisition Cost (CAC)

Cost of acquiring a paying customer


Operating Profit

Operating profit is the profit remaining after subtracting operating expenses from gross profit.

  • Operating Expense = CpA + Cost of Supporting Leads + Cost of Supporting Paid Customers

  • Operating Profit = Gross Profit - CAC

Operating Margin

Operating margin is operating profit expressed as a percentage of top line revenue.

  • Operating Margin % = Operating Profit / Revenue

Payback Period

The amount of time it takes for the profits to pay back the cost of acquiring customers.

  • Payback period = Customer Acquisition Cost / Gross Profit

Lifetime Value (LTV)

Cumulative profits generated by a customer over their lifetime, net of expenses such as CoGS, CAC, and other operating expenses.


LTV : CAC ratio

The ratio of LTV to CAC informs the ease with which a company can acquire customers while remaining profitable.


Customer Churn

Customer churn, or more commonly churn, is the rate at which paying customers cancel their subscriptions.

  • Customer Churn (T) = Number of paying customers in period T-1 that cancel their subscription in period T / Number of paying customers at the end of period T-1

Active User Churn

The rate at which active users stop performing the key activity.

  • Active User Churn (T) = Number of active users in period T-1 that are not active in period T / Number of active users at the end of period T-1

Contraction Revenue

Revenue lost due to existing paying customers reducing their spend e.g downgrade plan, downgrade term, removing recurring add-ons.

  • Contraction Revenue (T) = Amount of revenue lost due to paying customers in period T-1 reducing their spend in period T

Expansion Revenue

Revenue gained due to existing paying customers increasing their spend e.g upgrade plan, upgrade term, purchase recurring add-ons.

  • Expansion Revenue (T) = Amount of revenue gained due to paying customers in period T-1 increasing their spend in period T

Net Dollar Retention

The percentage of revenue retained from existing customers after accounting for customer churn, contraction and expansion.

  • NDR (T) = (Revenue (T-1) + Expansion Revenue (T) - Contraction Revenue (T) - Revenue lost due to Customer Churn (T)) / Revenue (T-1)


That is it for this article. I hope you found this article useful, if you need any help please email me at info@nabeelansar.com


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