When it comes to understanding mathematical jargon, it can be easy to get lost in all the technical terms. But, one thing that you should definitely know is the difference between basis points and percent. They may sound similar, but they are not interchangeable and have different implications for what they represent.
What is a basis point?
First things first, a basis point is equal to 0.01%. So, if the adoption rate on a product increases from 2% to 2.25%, that’s a 25 basis point increase. It may not seem like a lot, but it can have a big impact on the value of a large user base.
On the other hand, a percent is equal to 100 basis points (bps). So, if adoption increase by 1%, that’s the same as a 100 basis point increase. This is a much bigger deal and could result in some serious losses or gains for investors and traders.
One of the main differences between the two is how they are used in product management and the financial world. Basis points are often used to express small changes, while percent is used for bigger changes. For example, at Shopify if we’re looking to increase user retention we would talk about basis points because a 50 basis point improvement (0.50%) would mean changing the behaviour of thousands of shops. The reason we use basis points are because they’re more precise and allow for a more detailed analysis of the metric you’re looking at.
How are they more precise?
Basis points are used to express changes in relative terms.
Percents are used to express changes in absolute terms.
For example, you want to measure user adoption of your new product. You have 100 users total, here’s how many are active each day:
Between Day 1 and Day 2, your active users go from 5/100 (5%) to 10/100 (10%).
1 bps = 0.01%, so that means from Day 1 to Day 2, your active users grew by:
5% * 1bps/0.01% = 500 basis points
Here’s where it gets tricky:
Your active users grew from 5% to 10%. Does that mean they grew by 5%?
Or does that mean they grew by 100% because 10% is 100% more than 5%.
In this case, the total usage increased by 5%, while the active users grew 100%.
It’s this ambiguity around percent that causes us to often avoid using them in practice.
In short, basis points and percent may not be the most exciting topic, but they are important to understand when it comes to making smart product decisions and setting your key metrics. Knowing the difference between the two, and when to use them, will reduce any ambiguity and ensure that your entire team is on the same page when talking about user growth, retention, adoption, and more.