HOW TO GET STARTED WITH METRICS IN 5 STEPS
So, you’ve decided to work with metrics, congratulations! You will be rewarded! Now the hard work starts, and where do you begin? Here follow a couple of steps that should help you on the way.
1. Define your Strategic Objectives
It might be very difficult, but it is really where you need to start since your metrics should be an extension of your strategic objectives. I like to divide objectives into financial objectives and long-term objectives.
Let’s start by considering financials which is clearly the easiest. I assume that you’re running a startup, which means that you’re running an organization that starts from zero and then your financial objective is probably to maximize revenues, without burning through too much cash. In the case that you’re running a more mature organization, your objective might be to reach profitability or increase your profitability. In case you have not yet started monetizing, your financial objective could be something that in the future will be closely connected to your revenue stream, such as maximizing the number of active users while keeping your costs down.
It gets trickier to set long-term objectives, but to simplify it, you might think of it as your company’s vision or mission. It might be how you will help your customers, solve a problem or create value. For example, at Facebook, they have two objectives: connecting the world and bringing the world closer together. It should also be a vision that is viable in the long term and will help you stay focused during the lifetime of your company. Try to keep the number of long-term objectives low, two is a good number and don’t go over three if you’re an early stage startup.
To decide on your objectives, make sure that you sit down with your core team (founding/executive team and/or board of directors) and talk it through. If your objectives are concretely written down, there is a higher chance that you are all on the same page. That is crucial to reach the long-term objectives, as the whole team needs to push in the same direction. Don’t hesitate to change or update your objectives, as you might learn new things about your market and move between different life cycle stages of your business.
The whole team needs to push in the same direction
2. Break it down
Your next challenge will be to break down your objectives into smaller milestones in the form of metrics. By doing this, you’ll be able to define concretely what your objectives are and what performance that you are daily working on improving. The individual metrics will inspire to ideas that can improve them but in a structured and focused way.
The financial objective is very straightforward to break down, so let’s start by explaining that. How it is broken down depends completely on your business model, but what you need to do is to take your revenue apart, piece by piece. For example, if you’re a SaaS company charging your customers a monthly subscription fee, your first layer of metrics will be the number of paying customers and monthly fee. That is since:
Number of Customers * Monthly Fee = MRR (Monthly Recurring Revenue)
Your next layer of metrics under the number of customers will be, new, retained and churned customers. That is since:
New + Retained — Churn = Number of Customers.
This breakdown can be done all the way down to the beginning of your funnel, with site visitors converting to trial users, and trial users converting to new paying customers.
To see an example of a fictional SaaS business, you can see the picture here below. In the different columns, you see the absolute number, the percentage of total customers and the change from last month. By doing this exercise, the team gets a very good understanding of how your revenue is built up and how all numbers are connected to your monthly performance.
To stay in control of your costs, you can also add a revenue over cost ratio. This means that you’re taking the net revenue generated by the average customer, in other words, your Customer Lifetime Value (LTV), and divide it by your different cost groups. For example, if you’re paying for customer acquisition you should calculate your Customer Acquisition Cost (CAC). You then calculate LTV/CAC to get your ratio that helps you stay on top of your most important variable cost, this ratio should preferably be at least 3 or 4. If it’s lower, it often means that you are not yet approaching your customers in the right (cost-efficient) way or that your customers don’t get hooked on the product and therefore churn.
To break down the long-term objectives, your challenge will be to define concretely what they are about. It demands some creativity to come up with ratios and percentages that will help you to identify if you’ve achieved your long-term objective or not.
If we take Facebook’s example again, you could decide that a ratio to determine the success of their ability to connect the world is to look at the percentages of interactions between users over borders, versus inside borders. If your long-term objective is to help customers manage their finances, you might instead look at engagement and how eager they are to recommend the app to their friends. A customer would neither be very engaged nor recommend the app to friends if she wouldn’t feel that the service helps her.
As you’re running a startup, your team consistently add new functions and correct bugs of your product. That means that depending on when your user arrived, she sees a different product. This means that it is worth to study the user behavior metrics by grouping them depending on when they arrived. This is done through cohorts as you can see an example of below.
What you want to see from a cohorts table is that every new group of customers perform better than the previous one. As an example, if the three-month retention was 41 % for the customers that downloaded your app in January, you want the three-month retention to be better for the ones who joined in February. So in the figure above, you would want the numbers to increase in the direction of the arrows.
When looking at the difference of your metrics from the previous month, magic can really happen. You can then connect your metrics to the different actions you’ve taken during the month to see the direct effect of these on your growth. In turn, it will get your feedback loop started and your results will help you plan for the upcoming month’s action. Generally speaking, it’s all about getting into the heads of your customers and see how your actions affect their decision-making and behavior.
To ensure that your new metrics driven habits stick, make sure that they are simplified. That means that your metrics should be simple and fast to update and you have a dashboard that is straightforward and clear.
A dashboard should always tell you a story without anyone needing to explain it. The person seeing a dashboard should directly think “Oh, I see that the new function we added had a very positive effect on engagement, but it didn’t help us to decrease our churn rate. Hm, I wonder what other things we could do to decrease that churn?”.
To achieve this, use conditional formatting that automatically marks if something has improved, decreased or stayed the same. If you want to be very clear and add a little bit of effort from your side, it’s a good idea to add red and green circles and maybe one or two short comments.
You brush your teeth twice a day, you work out three times a week and you eat 500 gr of greens every day. Tracking your metrics should also be a healthy habit, to stay on top of your company’s health. Update your metrics dashboard regularly (at least monthly) and stick to the habit. Try and automate the process as much as possible, use for example services as RJ Metrics or Geckoboard. If you’re not in a position to invest in an analytics software, Zapier, for example, can help you automate your Google Sheets.
Everyone who works in your organization should understand what the metrics in your dashboard do. You should all know why they are there and how they improve your startup’s performance. It should be a priority to sit down with every new employee and train them to use the system. Finally, your efforts should lead to an innovative and sustainable company where employees can be motivated and better understand where the company stands. That makes it easier for team members to take their own initiatives and faster make decisions without heavy bureaucracy.
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