In the startup world, analyzing metrics and unit economics has become a common and necessary practice for measuring a venture’s performance. However, it’s important to understand that not all metrics are created equal, and that you should focus on the ones that truly matter. This content for founders discusses the importance of focusing on conversion metrics rather than vanity metrics, which can be misleading and provide little valuable information. It also covers the importance of understanding how metrics evolve in companies, how to apply them to the Customer Factory model, and the most important metrics for any investor considering investing in a startup.
All businesses and ventures generate data, but if you don’t look for meaning or direction in the data they produce, it won’t add any value to the business. On the other hand, adding information and meaning to that data will allow us to make informed, data-driven decisions.
In other words, the data will tell us the story of how the venture evolves, like a movie.
Follow along to learn more about the following topics:
- Vanity metrics
- What traction is
- North Star Metric
- Startup business models
- Churn
- Customer Factory
- Retention
- CAC
- LTV
What are vanity metrics?
Vanity metrics are metrics that may seem important and exciting but don’t necessarily indicate a company’s success or real growth. These metrics are often superficial and don’t directly affect the company’s revenue or profitability, but they can be used to inflate perceptions of success.
Examples of vanity metrics:
- Total number of social media followers
- Total number of app downloads
- Number of website visitors, without considering how many of them convert into customers.
Instead of focusing on these vanity metrics, companies should focus on metrics that are more important and relevant to their business model. Generally, thinking in terms of conversion rates over a given period is a good way to start measuring correctly.
“Analyzing data means having a culture of productivity.” Andres Cano, 2021
From the example above, we can conclude that choosing chart A means choosing a vanity metric, since the total number of registrations accumulated over time will never decrease. In contrast, chart B will help us ask what drove the increases or decreases in certain months so we can focus on those factors.
What is traction?
In the context of a startup, traction refers to the speed at which the company generates monetizable value—that is, how quickly it acquires new customers and turns them into active users who generate revenue.
This metric is important for measuring the company’s growth and its ability to turn its product or service into a sustainable source of revenue. To measure traction, you need to analyze conversions and the process from acquiring new customers to making sales and retaining them.
What is the Customer Factory and what is it for?
Also known as the Customer Factory, this methodology helps you understand the five most important metrics a startup should focus on. These metrics effectively measure a company’s growth while also being simple and actionable.
The Customer Factory process is divided into the following steps and answers the following questions:
- Acquisition - Where are strangers seeing us?
- Activation - How and where do I turn these strangers into people we know?
- Revenue - Where does my revenue come from? How can I increase it?
- Referrals - How can we turn our customers into promoters?
- Retention - How many of our customers are we retaining, and why are we losing them?
What is the North Star Metric?
The North Star Metric is a traction metric that serves as a guide for moving your business toward scaling. It will become your business’s primary metric, and all your activities will contribute to it.
Startup business models
To understand which metrics apply to your startup and how to measure them, it’s important to understand the archetypes of business models. Remember that other business models branch off from these 3 archetypes.
Direct
A model in which the company interacts directly with the customer, without intermediaries, and offers clear, direct value. This type of model can apply to both digital and traditional companies.
In this type of model, the traction metric is determined by the rate at which the company creates customers, and its key or North Star metric is tied to the key activity that drives this.
Multi-sided
In this type of model, users are an asset that enables the monetization of customers. In other words, users aren’t sold anything directly; instead, the company acquires customers who pay to access or be presented to the company’s users.
Facebook is an example of this model: it has free users on one side and customers who pay to show them ads on the other.
Marketplace
Marketplaces are a special case of multi-sided models in which there are 2 participants, but instead of users and customers, there are buyers and sellers.
In this model, value is created for buyers and sellers when they make a transaction. One of the most common reasons this type of business fails is having one of the 2 sides of the marketplace overloaded.
Metrics every startup should know
- The customer lifetime value (CLV) is the amount of revenue generated by a customer over their lifetime as a customer of the company.
- Customer acquisition cost (CAC) is the amount of money a company spends to acquire customers. This includes the cost of marketing, sales, meetings, dinners, or any other activity needed to turn a lead into a customer.
- Churn or churn rate is the opposite of retention: the loss of customers, measured as a percentage on a monthly or annual basis.
Conclusions
Instead of building a financial model that will take a lot of time and effort and will probably change in the short term, focus on having actionable metrics that explain how the company is evolving.
Remember that these metrics should communicate your business’s potential to prospective investors and tell the story of how you have monetized the value your startup generates.