The Right Metrics

Let's talk about the right metrics for your growth-stage startup. There are so many - annual recurring revenue, monthly recurring revenue, signups, churn, monthly active users, daily active users. And there are so many more, right? So the question is, how do you get the right metrics? How do you think about measuring the right things so that you can make the critical decisions you need to make, and your teams can make the critical decisions they need to make on a strategic basis, but also on a daily basis in their work?

An important place to start is actually, let's get back to the customer. Now you've got a really specific customer that you're going after. You've done your go to market, your customer segmentation, really, really well.

And if you're in a two-sided or three-sided market, then you've got a couple targeted customer segments on each side. You have to really understand the customer and their context, right? What are they really struggling with in their day-to-day life? And what are you promising them? What's your value prop? How are you positioning and differentiating yourself? How are you saying that you're going to help make their lives better? And what outcome is that customer really trying to achieve?

This is an overview of jobs to be done, but the important thing is that they're trying to go from where they are today to a really better place.

And that's the promise that you're providing them. We think about metrics along that journey. If we look at it, one of the most important things, and common things to do is actually look at it as a funnel. Now, when a funnel is helpful, you've probably seen this before, it's the pirate metrics model. As we're moving left to right, there are some important things that I think we want to slow down and actually dig in and talk about.

One of those things is as we move left to right from awareness acquisition, activation them coming into your product. You achieving revenue, retaining them, and actually doing revenue expansion and upselling them through organic referral. You noticed that there's, the marketing side of the house on the left and really the core product experience on the right.

When we think about what metrics become important here, there are several. One of those that you might be familiar with is customer acquisition costs and lifetime value. The challenge here is that lifetime value is actually a very lagging indicator, and you don't actually know your lifetime value, right?

Your churn might be high now, but it's going to expand. You're going to do revenue expansion. You're going to upsell. That lifetime value takes a long time to develop. And it's a lagging indicator. The other side of the house is the acquisition cost. The acquisition cost is of course, how much you spent in to acquire that customer.

However, the relationship between these two is also important. Lifetime value and acquisition costs. There is a standard ratio in a subscription type company, at least three to one is the ratio. So you want to have at least three to one on lifetime value to acquisition costs. You should at least be three x-ing your money that you're spending on that customer.

One level deeper that's really, really important. When we think of lifetime value being a lagging indicator. Well then, what should I really focus on from a unit economic standpoint? If you're not familiar with unit economics, unit economics is looking at the economics of each individual customer. The question is, are you profitable on each individual customer? Not as a whole, not as a whole company, but on each specific individual customer, are you losing or making money per account? So when we think about this, one of the most important things you can do for a leading indicator is actually called payback period.

Payback period is the time in months to reacquire your acquisition costs. So if you're, spending $500 to acquire this customer, how fast, when they actually start paying you, does it take to recoup your $500? This is called a J curve. That $500 is when you get back to zero, when you've made that $500 back, that's called the payback period.

The question is how many months does it take to do that? If you're 12 months or more, you're going to have a cashflow problem, right? You're not recouping that revenue soon enough, that investment soon enough in that customer. So what you really want to focus on one of the best leading indicators on the acquisition and marketing side, really is shortening that payback period as tight as possible. The faster you can recoup your acquisition costs, regardless of lifetime value, the faster you can break, even on a per customer basis through all of your acquisition and sales efforts, the more growth you can have, right? You can take that money that you're recouping and actually double-down and pay for more acquisition. It's going to really accelerate your growth. If you can shorten your payback period, that becomes really important to do.

Now that you've established payback period, as one of the most important leading indicators for your acquisition efforts. Let's talk about the entire funnel. One of the things you might've heard about before is called theory of constraints. Theory of constraints, states that in any one system, there's one and only one bottleneck at any one time. And if you start to think about your company, your growth state startup as a system, then that starts to make sense.

The question becomes where's the bottleneck in your funnel. Where's the bottleneck in your pirate model. The bottleneck changes over time. For instance, it might be an activation currently. You might want to work on signups and downloads. You might want to work on early engagement in the product. Let's say you get activation figured out.

And now we have a lot more people actually in the product while the bottleneck just moves. There's always a constraint. There's always a bottleneck in your system, in the funnel. So let's say you have a bunch of more people in the product. Now we have a lot more retention issues, right? We have more people coming in, but they're not actually getting to success.

We have more churn, more monthly active users that don't come back the next month. I want you to think about where is the bottleneck? Where is the constraint currently in your funnel. You probably know intuitively, but do you have the metrics set up? Do you have the analytics set up to instrument all these different parts of the funnel so that you can know every week, every month, where is the bottleneck?

How do we go from lagging indicators that the pirate metrics model gives us to leading indicators? Leading indicators is what you and your teams really need to move the needle and make the impact. You're hoping. How do we find leading indicators? To get to leading indicators, we need to look somewhere else.

Question here is what perspective are we using right now? What view of the world, or we're using the customer's perspective or the company's perspective? 100% we're using the company's perspective. It's a funnel. We're trying to pull people through. This isn't the customer's perspective.

To get to leading indicators, we really need to get back to how does the customer view us in the market? What's going on in their lives? Let's take a look. If you think about how the customer actually purchases your product, other products. Let's walk through the steps. How does your customer look at you and look at the greater market landscape?

Well, they go through a buying cycle. Here's what the buying cycle actually looks like. Here are the stages. One is urgency. They have to have awareness that there's a problem. Or that life could be better somewhere else. They have to have urgency to act. They have to actually want to change.

That's urgency. Then they start researching and looking at different options, evaluating them, narrowing them down. Figuring out which one's a top contender, doing demos, doing evaluations, stuff like that, doing trials. Trying something out. That's selecting. That right there is the marketing side of the house, but it's really this navigating the market and the ecosystem. And again, that's why differentiation and positioning is going to be so important. It's the very first part of that journey for the customer. Your experience often starts with onboarding, showing them around, showing how to use your product, your tool, how to navigate, where things can be found and where they can find value.

Then it's repeated usage and them getting core value, using it on however frequency basis that that you'd like them to. And then when they need help, they reach out for support. These are the major phases that the customer kind of evaluates and looks at products and uses products. So the customer is going through these major phases of purchasing, evaluating, and starting to actually use your product. And while these phases are helpful for us to categorize the phases of the experience, they're not enough to give us the leading indicators that we need to be successful with our teams. We have to go deeper. Where do we go from here?

Well, we actually need to recognize that the customer doesn't go through these just major phases. The customer actually goes through these individual behaviors. Individual behaviors and behavior change is one of the most important things to realize when building products and developing and designing the right metrics.

Let's step through an example. Let's say the first step in your onboarding is - a customer has got to register, whether it's email or phone number or whatever customers got to get logged in somehow, then maybe customer will create their profile. You notice a pattern here as we're starting to use these customer will statements.

These will statements are behaviors that you expect your customer to do and perform in your product. You're trying to pull them from where they are today through your product to get through to where they want to go to get to that promised land that you've promised them to get to the value.

Will the customer actually create the profile? Will the customer actually create their first project? This could be uploading data spreadsheets, could be uploading personal health information, could be connecting and integration, whatever those first steps are. And all of these individual steps are behaviors the customers have to do in order to achieve the value.

You'll notice that there's actually a lot of steps here. And that tends to be the case is that behavior change is actually really hard. So designing a super, a wonderful and great experience for the customer becomes absolutely critical because there are so many micro steps the customer has to actually do in order to get the promise, get to the value that you're promising them.

So you really want to map out and understand what journey are we pulling our customers through? What's the experience that we're providing for them? What are those individual behaviors that we're actually expecting them to make? And then you'll find that not all behaviors are created equal. Some behaviors lead to these magic moments.

Think of the magic moments in your life. Like getting the keys to your first car, to your first home, having your first baby, your first kiss, whatever those magic moments are, right? Those have make impressions on you. You want to make magic moments. Now they're not going to be life-changing moments like the ones I just mentioned, but you want to create magic moments, excitable moments inside your product as early as possible in your journey.

A magic moment is a moment that creates joy - is a moment that gives someone an aha moment. Like, oh, I get it now. This is incredible. It's that kind of emotion we want to convey in these magic moments.

Now to get to the right metrics, you have to be able to not only identify what this journey is, what those behaviors you're expecting, but you have to be able to measure them each and individual one and set up your analytics in a way where it's simple enough to understand where people are in the journey.

Are they getting to these first two steps, and then they get stuck? Or do they get a little further and they actually have problems? How far are your target customer segments, and the personas in those customer segments, getting in these customer journeys? And you'll find that people aren't getting as far as you'd like, and the experience is either more difficult or not as smooth or not as intuitive as you'd expect.

And this is why looking at things as an individual behavior level and from the customer's perspective, not the business's perspective is so important to build the right metrics.

The next thing to realize is that you don't just have one journey. You have multiple personas, right? If you have a two-sided market, you definitely have multiple personas.

If you're B2B, you have a buyer, you have a user. Often you have multiple personas that you're targeting. Even if you're targeting just one really narrow customer segment that we suggest. Each of these different people have different contexts. And you'll find that they actually have different journeys. Let's amend to one of these customer journeys.

So we've come a long way. We started with annual recurring revenue, monthly recurring revenue. We started with these level pirate metrics funnel, which is all well and good, but it didn't give us the leading indicators that our teams need to be successful in make impact for the. What we've done here is found a leading indicator along a specific customer journey that really will unlock a ton of value.

And as we zoom in to that customer behavior, that's where we want to really make impact. The first thing to do is start measuring its effectiveness. Where is it today? Let's say that the customer behavior is that the customer views their first data visualization. That's the magic moment that gets them super excited.

Wow. This is amazing. Well, we're only getting 20% of the people to that magic moment. If we can go from 20% and increase that to 80% now we've defined a metric. That's going to be really powerful and really helpful for our product teams to be successful and actually move the needle. This is what gets teams excited.

This is what unlocks potential for you and your company when you get to this. That's how you set up the right metrics to grow your startup.