How to get humbled, guided and finally win with the right metrics.
As an investor and advisor, I get to meet a lot of startups on a regular basis. I get to see their numbers and presentations, often a big stack of information such as pageviews, social media followers, total downloads, running total of customers etc. What I call “ego-metrics”.
My first question to them is: Can these metrics lead to a course of action or inform a business decision?
There is a concept called “Innovation Accounting” in lean startup, and it also applies to traditional companies. Metrics should guide rather than “please” and here are some guidelines to use metrics fairly in order to determine the health of a business:
- Organization should not use more than 10 metrics, more than that will lead to confusion and it’s impractical. Founders only need a dashboard to see the macro view of the company performance.
- Any single metric chosen must describe the reality and suggest related business decisions.
- Metrics should be trackable and provide data to be compared over a period of time, in order to make necessary forecast.
Startups are like growing organisms. In the initial stage, business models have big and steep changes and this is known as PIVOTING. Smaller pivots happen in many organizations too and this constant steering and adjusting are the only ways to navigate and survive in world of digital Darwinism.
So, what every founder should do:
Growth – Measured by metric (maximum 10 metrics that can suggest business decisions) – Timely Adjustments – More growth!
Startups usually don’t have much history and tractions. Innovation accounting implies selecting those key metrics to measure the data needed to guide the company. The three important dimensions of innovation accounting are: User engagement, testing assumption for market fit and present product value.
This is also applicable to traditional business in today’s disruption environment because many tradition businesses are embracing a digital pivot or full transformation.
The three dimensions on innovation accounting:
Key metrics related to customers should measure:
- Conversion rates: How many customers have converted and tried the product
- Per customer Turnover: how much are users paying for the product
- Customer feedback: how many clients give product feedback
These metrics are useful to keep an alignment between business development and customers, to understand needs and analyse feedbacks in order to fine tune the offer. The first users or “a la Seth Godin” adopters are those to really investigate, x-ray and get the best out of the metrics.
2. Testing the market
All startups begin their journeys with a the gigantic assumption: the offer I am bringing to the market will find a demand. Or put it in a more heroic way, “Do my crusade will have apostles and followers. The key here is to test market response and adjust our strategies in the shortest possible time.
Will the market value and adopt the products/services?
How fast will the demand propagate?
Testing the market with beta versions and fine tuning the offer to meet market response are key learning exercises to guide the offer development.
Metrics to test the market adoptions are:
- Willingness to pay for the product
- Referral rates
- Retention rates
- Repeated Purchases
For Growth, the right metrics will be:
- The rate/ability of investing a single customer revenue into the acquisition of another other customer
- Ability to recruit new customers caused by repeated usage
- Word of mouth referrals
Once the products are proven the right fit for the market, then founders are ready to scale the business and take it to the next level.
2. Forecasting the present value
The present value is the forecast of future incomes actualized based on the value of today, at a rate that is higher or lower according to risk factors that your market is subject to. The higher the risk, the higher the rate, the lower the present valuation.
Metrics to forecast based on the net present value (NPV) calculation:
- Percentage of visitors that become users
- Percentage of users that choose to pay for the product (e.g. where there is a choice of freemium or paid versions available)
- Average price paid by each user
This set of metrics wants us to focus on financial performance and as a consequence, capability of giving a price tag to the business. As a natural need to scale fast: calling new investors and having money to grow.
To grow a business, we need to look beyond the pageviews, social media followers, downloads, etc and focus on the revenue that comes into your account at the end of each month. Don’t use ego-metrics to attract investors, put that effort into developing your business, earn from actual customers and embrace realism!