2 Metrics That Will Lead Your Startup to Success

 Source: Danny Kennedy Fitness

Source: Danny Kennedy Fitness

All good startups have these two things in common: 

  1. they have a growing list of things to do

  2. they don’t have enough people to complete the list of things in #1

As your team grows, it becomes increasingly difficult to get everyone to focus on the same goals. This makes it critical to establish metrics for everyone to use to determine which tasks to focus on.

"People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are." by Steve Jobs, Co-founder of Apple

Depending on the stage of your business, your team needs to focus on different metrics but this is a guide to help you pick the metrics that matter most to you:

1) Your North Star Metric

At the early stages of your startup, being pulled in all directions makes it difficult for your team to prioritize between 2 equally important tasks. The simplest way to align your team is to give them a single metric to focus on (also known as the "North Star Metric" or "One Metric That Matters") and measure that metric repeatedly daily, weekly and so on. Doing so enables team members to ask the question, "how does this benefit the North Star metric we're focusing on?" every time he/she is working on a new task and it will help him/her avoid working hard without noticeable results.

Don't Pick Revenue!

As founders, we often pick our North Star from the easiest metrics to measure (like Revenue or Churn). Unfortunately, this usually means we're measuring a lagging indicator of success and that it's too late to affect the outcome. Your revenue is the result of increasing the number of Product Demos, Customer Integrations, etc.

Leading vs Lagging Indicators

Startup founders MUST be aware of the difference between leading and lagging indicators:

  • Lagging Indicator: past efforts influence your lagging indicators. e.g. If your lagging indicator is April's revenue, this might be the result of January's marketing efforts to increase the number of product installations.

  • Leading Indicator: measures the efforts which improve a lagging indicator that you're tracking. e.g. an increase in the number of Product Demos (leading indicator) causes an increase in Product Purchases (lagging indicator).

Leading-vs-lagging-metrics-for-SaaS.png

"Revenue is vital to any business but it's a lagging indicator of success." - Chris Tan, founder of Founder Knowledge

Picking Your North Star Metric

Every startup differs and goes through multiple North Stars until they find what works best for the lagging metric they wish to increase. It's hard to generalize which metric you'll use, but I've listed some of the top metrics founders measure below.

Leading indicators strongly correlated to lagging indicators include:

  • Daily Active Users

  • Number of app integrations

  • Total time using app

  • Number of product demos

  • Number of bookings per user

  • Number of users that entered Credit Card information

  • Viral coefficient (i.e. number of referrals per user)

  • Number of app installations

Other indicators also include:

  • Number of ad clicks

  • Average number of calls with each prospect

  • Number of customers that reply to emails

  • Number of subscribers

  • Number of leads captured

  • Customer Support response time

Top Companies' Leading Indicators

Here are some examples of "North Star Metrics" from familiar companies:

  • Facebook: DAU (Daily Active Users)

  • WhatsApp: Messages Sent

  • YouTube: "Watch Time" (i.e. Total Minutes Watched)

  • Quora: Questions Answered

  • AirBnB: Nights Booked

 AirBnB really cares about their nights booked metric!

AirBnB really cares about their nights booked metric!

2) Add A Counterbalance

 A counterbalance. statisticshowto.com

A counterbalance. statisticshowto.com

Although teams follow the company's North Star Metric, often, it's possible for teammates to "game the system" while improving your desired metrics. For example, in the case of AirBnB, to increase the number of nights booked, marketing could acquire users that use the product only once (and never come back).

To prevent this, companies typically add a counterbalancing metric to ensure desired user behavior. For example, in the case of AirBnB's scenario above, the number of nights booked could be the main metric with an additional counterbalancing metric like number of return visits. If the company focuses on increasing these simultaneously, it will always benefit the business in a positive way! 

Avoid Vanity Metrics

"Vanity metrics: good for feeling awesome, bad for action." - Eric Ries, Author of Lean Startup and co-founder of IMVU

Vanity metrics are dangerous because they could be a big number without offering clear guidance for what to do. Consider using Google Analytics on your site and doing a viral press release. This results in 50x the regular number of visitors, sessions and page views for your site for the week. What would you do with that knowledge? How does that help you if none of those customers converted on the site? 

(If you haven't already, I highly recommend reading Lean Startup since the author was the person who originally proposed the lean startup methodology before everyone adopted it.) 

Thoughts

It's a well known fact that startups live and die quickly. If a startup has sales cycles that take 3 months and only have 12 months of runway left, they can't afford to waste time waiting to measure lagging indicators like revenue. In intensive programs like accelerators and YC's Startup School, each startup has less than 3 months to prove the viability of their business so it's imperative to immediately identify, measure and improve the leading indicator metrics.

What is the leading indicator you've chosen for your startup?