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2015-03-03

Why business metrics are important for startups

Success of a startup is not in executing a plan well, but in adjusting plans efficiently, appropriately and effectively.

In the context of startups, metrics are parameters used for quantitative assessment of performance and progress of a venture. If goals are about where to go and strategy is about how to go there, metrics are about tracking progress of your journey.

Startup phase is about discovering what works and what does not. Scale up phase is about replicating what worked. For companies, especially startups and early-stage companies, metrics help founders identify what is working and what is not.

Importance of metrics for startups

They are important because in your entrepreneurial journey, you dont want to discover at a very late stage that you progressed well, but in a different direction; or were going in the right direction, but at a different pace than estimated.

The journey of a startup is about making certain assumptions about what will happen once you launch your product or service in the market, and doing several experiments to ascertain if those assumptions are valid, and what is working and what is not working around the assumptions.

For example, If you assume that 1.5 per cent of all registered customers will buy, you first need to track if that is indeeed the case in the market. And whaterver the outcome i.e. whether 0.5 per cent registered users buy or 3 per cent users buy, what you need to know are the reasons for the outcomes so that you can avoid what did not work and replicate what works.

Success of a startup is NOT in executing a plan well, but in adjusting plans efficiently, appropriately and effectively, in order to go in the direction the venture was intended to. Metrics provide early warning signs - whether good or bad. It helps you adjust your plans based on quantifiable data on what impacts the outcome. Metrics help you make better-informed decisions in making adjustments in your plan.

Some myths about metics – It’s not always about improving your metrics

1) Performance does not improve with scale. For example:

• It’s easier to grow faster when smaller. Startups can have typically faster growth than growth-stage companies.
• Early customer acquisition costs may not hold good over time. It costs more than current CAC (Customer Acquisition Cost) to acquire more customers.

2) Some initial aspects that impact metrics cannot scale. For example:

• Founders selling to the concept to enterprise customers can have a very different result than sales teams.
• PR efforts and e-mail marketing does not scale beyond a point.
• Organically acquired, early customers through connections cannot scale.
• SEM (Search Engine Marketing), ASO (App Store Optimisation) do not scale beyond a point.

3) Early customer engagement may not hold good at scale. For example: 

• Early customers may have chosen your product because they desperately wanted that solution. Later adopters may be less enthusiastic users.

4) ARPU (Average Revenue Per Use) may decline over time.

Spend time to think about metrics that are important. Examples of what to track:

Basics

Parameters This Month Last Month TSM (trailing 6 months) Growth Rate Goal Deviation from Goal
Number of users          
Revenue per transaction           
Items purchased          
CAC          
Active vs. Non-active Users          

 

Source of Business (indicative examples)

• What channels are customers coming from
• Segregate by user profile segments
• What was the source of triggering the action
• What days of the week are registrations more
• What time of the day are registrations more

Engagement

• Churn rate
• Time spent on site
• Number of pages visited
• Features used
• Cart abandoned
• Support query raised

Prioritise on ‘differ metrics’ at different stages of the venture

Concept Stage

• Discover insights about the problem you want to go after.
• Discover who is the right customer for that problem.
• Understand the right solution of that problem for that customer.
• In POC (Proof of Concept) or product development phase focus on metrics that help validate product-market fit.
• Feedback from customers.
• Customer churn.
• DAU (Daily Active Users)/MAU (Monthly Active Users) i.e., focus on ascertaining that people love your product.

Pilot/Beta Stage

• Registrations
• Referrals
• Customer engagement
• Traffic sources / channels
• Communication mediums and messaging
• Pricing
• Test your hypothesis and assumptions on the ‘business' i.e., focus on discovering what makes more people buy/use your product.

Post successful pilot, focus on performance improvement on these parameters

• Acquiring customers
• Engagement - Retention, Usage, Volumes, Periodicity, Value
• Revenue
• Business case
• Efficiency

Metrics Differ by Business Type

• DAU will be very relevant for a wearable fitness device, not so much for an eCommerce site, and certainly not relevant for a OTA.
• Vertical eCommerce businesses will have different matrices than horizontal marketplaces.
• SaaS (Softeare as a Service) ventures may have different metrics than software products.
• A business that depends on ad revenues will have different metrics than a business that depends on subscription, even if the product is the same.

Some points to remember

• Metrics are a map, not the vehicle. It can tell you where you are, but cannot take you there. Measuring is one thing, acting on it is more important. Put a plan to measure and then act on it. As yourself ‘What does this data mean for the business and what should I do about it?”.
• Some metrics need to be seen every day, some every week, some every month. Make time for it.
• Focus on what’s important and what can give you actionable insights. Not just feel good factor. Increasing number of Facebook likes is useless, unless you have a plan to leverage them meaningfully.
• Drill down on red flags. For example, If registrations or conversions are lower than expected, check what is the cause i.e., is it beacuse the:

a) Product sucks
b) Price-point is high
c) Value proposition is not meaningful
d) Communication does not clearly state the value proposition
e) Medium is not right
f) Target audience was not correct
g) Brand personality or UI (User Interface) was not good enough
h) Any other reason(s)

• Drill down on green flags. For example, if something is working well, don’t just celebrate. Analyse what worked, so that you can replicate it.
• At startup stage, share relevant metrics with entire team. Let them know how well/bad you are doing, and what you are doing about it. 

Prajakt Raut is an entrepreneur and entrepreneurship evangelist. He is the founder of The Hub for Startups, a resource centre for start-ups and early-stage companies, and Co-founder of Applyifi, a platform to connect startups to investors. 

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