by Esther Gons, Founder & CEO of GroundControl and author of “Innovation Accounting: A Practical Guide For Measuring Your Innovation Ecosystem’s Performance“
Why do you measure things in the first place? Most of the time, it is an answer to the question, “How are we doing?” Of course, your investor wants to know this, but you and your team also want to know this.
Because if you want to do better, you need to understand how to improve your product. For that, you need to understand who your customer is and what they are trying to achieve.
Metrics that can only go up and to the right do not help you achieve this goal. These are what we call vanity metrics. It is pretty easy to spot a vanity metric. Is your graph going up and to the right? You can be reasonably sure it is a vanity metric. Think about total number of page views since launch or likes on your Instagram posts. They are there to make you, or your investor, feel good. Instead, you need metrics that uncover problems that need fixing so that you can do better and grow.
What makes a good metric?
First of all, your metric needs to be comparable. If you cannot compare metrics with metrics from past users or across verticals, you cannot make decisions from them. Vanity metrics are, for example, not comparable. They are often a total number that does not tell you anything.
Secondly, a metric should enable behavior change. It needs to help you reach your business goals. It needs to help you improve your solution. Therefore, it needs to help you change the way you run your business.
How to learn more about your customer by looking at metrics?
The secret lies in understanding where the pain is to dig deeper. Focus on a metric that tells you something about your customer’s behavior. Are they doing what you expect them to do? Do they keep using your solution? You zoom in on the numbers to understand the pain. Your total number of users may be growing, but what happens if you look at your users in terms of activity per week?
To address the pain, you need to understand the why behind this behavior. For example, if people come into your product but then leave without doing anything, you have no way of fixing this if you do not know why. So go out and talk to these people! Only when you have learned why you can iterate on this. The next step is to prove that this iteration performs better by comparing the data before and after the iteration.
Focus on one metric at the time
Focus is essential for Startups; the same goes for metrics for Startups.
To effectively grow and improve your solution, it is important to focus on one (or just a few) at a time. Then, once you have improved on that metric, you can move to the next.
In growth teams, a lot of focus is on metrics like LTV and CAC. But I have news for you! These are not relevant at all for early-stage startups. Why not? Because if you have a solution that is not optimized enough for your customer yet, their LTV is irrelevant. You do not even know if your Startup will survive after the next six months, so why calculate that for your customers. The CAC is just as irrelevant in an early stage. If you are unsure what makes your customer a happy customer, it doesn’t matter how much you pay her to get into your service. If that customer does not stick around or wants to pay for your service, marketing to get customers into your service is like throwing away money. So, what can we focus on instead?
What metrics? Pirate Metrics!
One of the most practical frameworks for Startup analytics is the pirate metric framework by Dave McClure. Pirate metrics, you ask? Yes, not because of illegal activities, but rather the combined first letters that spell AARRR. Acquisition, Activation, Retention, Referral, Revenue. These are the basics of a customer journey:
- You want to understand how to reach your customer and get them in front of your solution.
- Once they do, you want them to engage with your solution.
- You want them to like it and come back to do it again,
- and if they are happy about it, tell that to others.
- It would be really nice if they liked it so much, they would pay for it.
The specific metric to measure this with is different for every business model or solution. It needs to be an action that shows that people behave the way you want them to in each framework step.
For Acquisition, this could mean scanning a QR code to reach a site, excepting a call, or downloading an app.
Activation indicators need to reflect the key action that people need to do to interact with your solution (for the first time). For example, it could be writing a blog post or adding a picture.
Retention metrics should show if users are returning to perform the key activity again. Start looking at your user to see she returns to perform the basic action again. This could be weekly or daily, depending on your model.
Referral metrics should show the actions of people spreading the word to others. Some business models rely more on Referral than others. But mostly, the metrics are around sharing and virality.
Revenue is a pretty straightforward metric. You want to see if money is being spent or if users place a monetary value on your core proposition.
Think about metrics like paying users or conversion rates. Or if you rely on advertising, click-through rates.
It all starts with happy customers.
Where do you start? You want to focus on customers who are happy with your product first. Happy customers are customers that come back. That are willing to pay and talk about your solution to others. Therefore, Retention is the formula to user happiness.
Dig deeper, understand why people are doing -or NOT doing- things, and iterate and measure again to see the difference. Of course, you need some users to start testing with, but the cost is not something that matters yet. The goal is to get people in to test the Retention with, iterate, and get new people in to test again.
Make sure you take a good look at what Retention means for your solution. Retention means that a user keeps performing your key activity, indicating she likes your product. It is the easiest way to measure customer happiness. Therefore, your key activity is something that you need to understand well to measure this. Do not make it too simple. If your metric does not tell you anything, dig deeper!
Cohort analysis can usually help you understand returning users better. It groups users by the time they signed up and tracks them over time to make it easier to see their return behavior based on the basic action.
Once you have improved on Retention enough, you can move towards other metrics. Activating users, for instance, or Revenue depending on the kind of business model you have. Acquisition is the last metric to improve upon. Only when your customers are happy, pay, and come back does it make sense to look at optimizing. When every euro you spend converts to more than that euro in Revenue, you are ready for scale.
Esther Gons is founder and CEO of GroundControl, innovation software that focuses on innovation accounting and helps corporate startup teams with the development of new business models. Gons is an international speaker on topics of corporate innovation, innovation accounting, portfolio management and startups. Esther is co-author of “Innovation Accounting: A Practical Guide For Measuring Your Innovation Ecosystem’s Performance“.