This article talks about the importance of identifying your business's key business metrics and how to measure them. The entire content of the article can be summarized through the following two famous quotes:
➤ “If you can't measure it, you can't improve it” (What you can't measure, you can't improve).
➤ “Measure what matters” (Measure what matters).
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WHAT YOU CAN'T MEASURE, YOU CAN'T IMPROVE
This is a famous quote from Peter Drucker, the father of modern Business Administration.
The importance of measuring a business's business metrics is clearly demonstrated in the above quote. To explain more specifically, we have the following reasons:
➤ Define success: Determining what are important indicators helps you define the success of your business. For you, is success about increasing revenue, or increasing users, or increasing retention rate?
Say “Our company needs to grow” is meaningless. If you do not define what growth is, your business will fall into a state of uncertainty, not knowing what to do next or what strategy to implement. Instead, talk “We need to increase revenue by x% in the next y months”, you will know better what to do next.
➤ Unify the direction of the whole team: There is one (or some important index) will help the whole team clearly understand what the company is aiming for, and then, each activity and strategy of the departments and divisions will be able to synchronize according to that goal. This helps the whole team know whether to do A or B, avoiding endless debates and fruitless activities.
For example, if you determine your goal is to increase users and clearly communicate this goal to the whole company, the product team will understand and orientate to build the product so that users can easily get used to and use the product, instead of spending time developing new features; The marketing team will propose referral and discount strategies for new users, instead of implementing loyalty programs, etc.
➤ Measurable effectiveness: Without metrics and measuring them regularly, you won't be able to determine how effective what you're doing is achieving your company's goals. Identifying and continuously measuring indicators helps you know whether the whole company is doing well or not, and if not doing well, you can promptly recognize and adjust the strategy.
For example, if you don't measure marketing costs and revenue/new customers, you won't know whether that marketing strategy brings new users or whether revenue increases or not. If marketing costs are too high and new users are not increasing, you will want to stop that campaign and look for new, more effective marketing methods.
➤ Motivate the team: Business metrics give the entire company something to aim for. Everything you and your members do, everyone will be more motivated if they have a specific goal to try to achieve.
“Visions and results create motivation!” (Vision and results create motivation!). People are inspired by the big goals you set for the company, and are motivated by seeing daily and weekly business metrics grow.
An organization with motivation (momentum) Cao can do many magical things, so always take care of keeping your members motivated (This is actually a very important concept in business administration that every manager should understand).
➤ Necessary for the capital raising process: Business indicators are factors that investors are especially interested in, and will definitely be on the list of investors' questions when you go to raise capital.
Funds want to put money into startups with strong growth potential, so you need to clearly understand your business model, what does "strong growth" mean? Can you prove that you will grow strongly in the future? It's all about the business metrics you've achieved in the past.
A founder who doesn't know what his company should measure will never receive money from investors.
MEASURE WHAT IS IMPORTANT
“Measure what matters” is a famous book by John Doerr about OKR, a famous goal management method in which organizations set General goal (Objective) for a period of time, along with these Main results (Key Results) to achieve that goal.
Measure what?
To measure business metrics, you need to know what you are going to measure. Every organization has dozens, even hundreds of different metrics, will you measure them all? Or will it only measure a few indicators?
The answer is “Measure what matters”.
The metrics you will measure should be derived from your organization's goals. You don't randomly choose a few metrics to measure, or build a system to measure all kinds of metrics just to create the feeling that you have a lot of data, that your company is "really data-driven". However, having too many indicators will distract your observations, and sometimes the effort to build a system to measure the indicators you care about is not small. So with startups, choose wisely what you should measure.
Here are some notes for choosing business indicators:
➤ Going from the company's goals: If you want to increase revenue, measure revenue accurately, along with a few metrics that you think will help you make the right decisions to increase revenue. (such as number of users, retention rate, customer lifetime value,...).
➤ Focus on 1 main index, and a few secondary indexes: This primary index is also known as “North-star metric” (temporary translation: “Landmark”) of business. This is the index that you determine will determine the company's success/failure, and many times the North-star metric is not the company's revenue or profit.
A true North-star metric is an index that represents your business model, reflecting value for both customers and the company, meaning that if that index increases, it must mean the value that customers and the company receive also increases.
Facebook's North-star metric is Monthly Active User, Quora's is the number of questions answered, Netflix's is the number of minutes watching videos.
No matter what they do, what companies care about most is increasing their North-star metric, there are many other metrics (retention rate, number of posts on Facebook, number of movies on Netflix,...) Acts as a secondary index providing insight to help businesses take appropriate actions. Sub-indexes can increase or decrease, but as long as the North-star metric must increase.
➤ The selected index needs to have rapid fluctuations: It is an index that can fluctuate daily, weekly, or monthly (like active users, number of interactions,...). The reason is because the short period of fluctuation will help the company quickly evaluate whether it is doing well or not, thereby being able to adjust the strategy early if necessary. An index that fluctuates every 6 months or 1 year means it takes you that long to evaluate business performance, and that is too slow.
➤ Measure growth rates instead of totals: If the metric you are interested in is a graph of the total number of users, you will often see that it is an ever-increasing graph, and it is easy to create the “illusion of success”. However, if you look at the growth rate graph, you will likely notice that there are times when the company grows slower than expected. This is an extremely important insight that helps you recognize your company's problems so they can be promptly corrected.
Especially for startups, high growth rate is a mandatory factor. So pay more attention to the growth rate than the total, this will help you stay focused on growth. (and also necessary for the company).
➤ Measure Active users and Churn rate: Besides growth rate, active and churn rates are also very important, because it helps you know what kind of experience your product is giving customers. If the rate of new users and active users is high, you can be confident that your marketing and customer onboarding are okay. But if the churn rate is also high, you need to understand that you are not doing a good job at customer retention: Maybe the product is lacking engagement-boosting activities? Or does the value of the product decrease over time?
Besides, costs of attracting new customers (CAC - Customer Acquisition Cost) is always higher than the cost of retaining old customers, and old customers always bring in the majority of revenue for the company. Through churn rate, you will know how much resources you need to focus on customer retention so that their revenue can offset CAC and customer retention costs.
➤ Measure conversion rates through conversion funnels: Identifying conversion funnels (eg: Download app → Register → Log in → Use → Pay) and measuring the rate of customers converted through each stage in the funnel helps you have an overview of whether each stage in your customer conversion process is working well or not. If a certain stage has a lower conversion rate than expected, you will know that there is a problem with that stage and find a way to fix it soon.
* Learn more about important indicators in startups in the series of articles: 12 business indicators every startup needs to pay attention to.
How to measure effectiveness?
Here are some notes about the company's process for measuring important metrics:
➤ Build a simple dashboard: Indicators need to be presented in a way that is intuitive and easy to understand for everyone in the company. Because not everyone in the company specializes in data or is sensitive to spreadsheets with hundreds of numbers. What you need is not the numbers themselves, but the messages drawn from those numbers, so make the dashboard simple so everyone can understand.
The dashboard should clearly display some important information including:
- General goals you want to achieve. For example: Position your app as the most popular app on the market.
- North-star metric that you choose to achieve the above goal along with the expectations for that metric. For example: Double Monthly Active Users.
- A few secondary indicators to assist you in the process of increasing North-star metrics. For example: Number of new users, Retention rate, Number of posts posted (for example with Facebook).
➤ Identify the person in charge of each indicator: Each index should have a main person in charge, ensuring monitoring and planning the necessary strategies to increase that index. In the beginning, the CEO should be the person in charge of the North-star metric.
➤ Continuously evaluate and adjust indicators if necessary: Every week and every month, join the team in evaluating the set indicators to adjust the strategy if necessary.
Sometimes, you will need to change the metrics you measure when the company, especially startups, has a new direction, or adjusts the product/business model. At that time, the North-star metric and sub-indices are often changed to better suit the new goals.
➤ Measure, but don't rely 100% on metrics: The metrics you measure are extremely important, but always remember that they are a tool to help you make more confident decisions, not a truth. Numbers do not fully reflect qualitative factors such as the user's emotions when using the product, the team's spirit in implementing upcoming plans, cultural factors, or "out of the box" ideas that you have never thought of before,... So balance between quantitative reasoning and qualitative feelings when making decisions for the company.
SUMMARY
Remember the 2 statements below:
➤ “If you can't measure it, you can't improve it” (What you can't measure, you can't improve).
➤ “Measure what matters” (Measure what matters).
and start choosing indicators for your company!