Strong Fundamentals

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How to pick the right metrics

Louise Rix

Investor

Goodhart's law is an adage named after the economist Charles Goodhart, which states that ‘when a measure becomes a target, it ceases to be a good measure’.

Metrics are key to understanding and making good decisions in business but when it becomes ‘achieve ‘X’ at all costs’, it leads founders to make suboptimal decisions. Choosing the right metrics and remembering to take a more holistic view will help you avoid falling foul of this.

The thing to avoid

Here’s an example: a startup founder of a consumer app believes they need to be growing 15% MoM to achieve their seed round in 12 months. Essentially, they are using total user numbers as evidence of product-market fit. However when aiming for these figures, the founder loses sight of other important elements of the business and it becomes ‘growth’ at all costs.

In this example, too much emphasis is placed on the acquisition of users at the top of the funnel - which in turn may be at the expense of the rest of the funnel thereafter. Acquiring a steady stream of new users is all well and good, but if churn is high and the product struggles to retain users the growth means very little. Any investor worth their salt will spot this a mile off.

Companies sometimes do the same with even with revenues - focusing on topline money in, but fail to understand the quality of that revenue, their profit margins or even the quality of the experience of the product.

Focus on actionable metrics, not vanity metrics

We tend to forget that an actionable metric is one that ties specific and repeatable actions to observed results. So rather than focus on a vanity metric (usually ones that goes up and to the right), focus on metrics that can inform meaningful action. A focus on conversion or revenue is much more likely to engage a founder and her team in the context and motivation of their users and how they use the product or service.

If we take our example above, the total number of users is more of an ‘up and to the right’ metric when contrasted with increasing funnel conversion for monthly cohorts - and arguably more indicative of product-market fit too. This piece offers some great reading on how and why you should be using cohort analysis.

Look at the bigger picture

Total number of users and user growth are elements of a sub-funnel that make up the larger macro metric that matters, such as acquisition and activation. By focusing on this one element of the funnel you may miss other leaky parts of the funnel that will have a big impact on overall conversion. Make sure you look at the customer lifecycle and fix the leakiest parts of the funnel first.

Metrics are people too

"Metrics are people too" is a phrase coined by Eric Ries, author of The Lean Startup, to help people remember that on the other end of metrics are actual humans with human thoughts, feelings, and motivations. Although metrics can help you identify where things are going wrong, they can’t tell you why they are going wrong. You need to talk to people to know that.

Especially in the early stages, you can’t expect your users to come to you. Customers won’t be invested enough in your solution to go to the trouble of reporting bugs as soon as one is found. Far more likely is that motivation will drop off and you’ll lose the customer without ever knowing why.

Getting feedback from users via surveys, calls, or emails means you can quickly identify problems and learn from them. This added focus on the context and motivation of the people using your product will help you solve their problems more effectively and avoid falling into the trap of ‘KPIs as end goals’.

In summary

  • Consider KPIs as a performance indicator not as an end goal

  • Avoid fixating on any one metric and keep the overall health of the business in mind

  • Replace ‘up and to the right’ metrics for actionable metrics

  • Remember that ‘metrics are people too’

Useful links:

Actionable metrics VS vanity metrics, blog by Eric Ries

Product/Market Fit: What it really means, How to Measure it, and Where to find it, blog by Evergreen

Entrepreneurs beware of vanity metrics, Harvard Business Review


 

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