Thursday, October 8, 2009

Startup Metrics

A post by Fred Wilson pointed me to Dave McClure's Startup Metrics presentation. This is a great presentation and one that I'm going to point out to startup / early stage company CEOs.

Normally, when I am talking to the founder of any startup trying to figure out what they need to do, one of the things I always try to do is understand their business at its core. In many cases, I can break it down into:

  • Customer Acquisition Cost – how will you reach prospects, how will you convert them and how much will it cost to convert them
  • Customer Lifetime Value – how much will you make off of each converted customer

This very simple model works for a surprising number of business models. This kind of a simple model also helps:

  • Define the early proof points for the company. Often, what we are trying to do initially is show exactly how these numbers play out. You only build what you need to prove that model. If these numbers work out, then often scaling is more a question of capital. In fact, this often becomes the mantra that we live by.
  • Define what you need from a metrics and reporting standpoint. We'll need to look at different customer acquisition channels, figure out how they are converting, and the expected lifetime value of customers acquired through those channels, and apply cost to those channels. We need to make sure we have these numbers. Quite often the goal is to get them into an excel spreadsheet in a form that allows people to easily play with them.

What Dave McClure's presentation does is point to some additional metrics that are useful to think about and consider:

  • A: Acquisition - where / what channels do users come from?
  • A: Activation - what % have a "happy" initial experience?
  • R: Retention - do they come back & re-visit over time?
  • R: Referral - do they like it enough to tell their friends?
  • R: Revenue - can you monetize any of this behavior?

These are captured fairly well by his slide:

StartupMetricsModels

The beauty of what he's defined is the relationship between retention and referral efforts and lifetime value. Often, what you find in simple, first cut models are a very simple pipeline. His picture provides a much richer understanding of what will be going on, but still in an understandable and measurable way.

I'm not quite sure I believe the way he exactly models the value from each of these points as is shown in the following graphic, but a similar kind of model can certainly be developed.

startup-conversion-metrics

The other thing that I think he's really done well is his look at value of different marketing channels.

Marketing-Channels-Startup-Metrics

A couple other great things – wow – I'm going to have a lot to come back to and comment on:

  • Progress is not equal to features (Less is More)
  • Focus on User Experience
  • Measure Conversion; Compare 2+ Options
  • Fast, Frequent Iteration + Feedback Loop
  • Keep it Simple and Actionable

What's my business model?

  • Get Users (= Acquisition, Referral)
  • Drive Usage (= Activation, Retention)
  • Make Money (= Monetize)

Startups have problems in 3 key areas:

  • Management: Setting priorities, defining key metrics, reporting progress
  • Product: Build the right features, getting product out quickly, testing for conversion/adoption
  • Marketing: Accessing "web 2.0" channels (search, social, viral, new media), cost-efficient distribution

He also points a fair bit to Eric Ries – The lean startup.

Great stuff. I'm sure I'll be coming back to this and pointing people to it.

2 comments:

Dave said...

thx for the kind words Tony... hope the fonts didn't make your eyes bleed ;)

definitely checkout Eric Ries site (http://startuplessonslearned.com), also Sean Ellis (http://startup-marketing.com), and Steve Blank (http://SteveBlank.com)

all good references for startup strategy & concepts.

if you have any suggestions or feedback on how I can improve my deck (aside from the fonts) pls let me know.

regards,

Tony Karrer said...

Dave - thanks for the pointers. I was familiar with Eric's blog, but haven't been reading the other two. Thanks for the pointers.

I will be diving into more detail on this topic, e.g., how social media interacts with the metrics over time. Also, the LA CTO Forum is going to be doing this as a topic.

I'll definitely let you know if I have any specific thoughts or suggestions.