The practical guide to early stage startup metrics

startup_metricsA lot of people have asked me lately how exactly I’m managing our various startup metrics at Informly so in this post I will go through it in detail and how early stage startups can measure their progress.

Actionable vs vanity metrics

You will hear a lot about the need to measure actionable metrics vs vanity metrics (check out my chat with Neil Patel about this).  I’m happily measuring both at Informly. Here is how I define them.

Actionable metrics

Actionable metrics are those that will directly and immediately influence the decisions your need to make right now and therefore your behaviour.

One example would be I’m measuring the conversion rate from various traffic sources. Strategies that drive traffic with low conversion rates are dropped, and those that drive high converting traffic are expanded. You can check out my practical guide to actionable analytics for some ways to do this in Google Analytics.

Vanity metrics

Vanity metrics are those that make you feel good (assuming they are going up). They may contain very interesting information but it generally won’t help you make the decisions you need to make right now. One example is traffic volume.

The chart below shows the traffic volume to Informly since launching. It makes me warm and fuzzy to look at it and I plan on continuing to look at it – perhaps several times a day. But I won’t change anything I do as a result – at least not any time soon.

traffic_trend_640

Build measure learn

Image courtesy of Lean.st

Image courtesy of Lean.st

One of the huge takeaways from The Lean Startup was the approach of forming a hypothesis about something, developing it, testing it and learning.

The message here is that whatever stage you are at in your business, there is probably only a few things that you really need to know before moving on to the next stage. Those are the things you should be measuring and you are measuring them for the purpose of learning and nothing else.

The way I’ve applied this to Informly  is to break the business up into 3 stages and only look at the metrics I need to look at that relate to what I need to know at the stage I’m in.

Stage 1 – Idea / Demand validation (current stage)

I am currently going through this stage for the Agency version of Informly. At this stage there will be a couple of questions to answer such as:

  • Is it a good idea?
  • Will people pay for it?
  • Can I acquire customers for near what they are worth to me long term?

I’ll go into detail further down this guide about the metrics I’m using to answer these questions.

Stage 2 –  Channel development

Once I’m sure it’s a good idea and people will pay for it and I have reasonable confidence that I can acquire customers for somewhere close to what they are worth to me I can start working on how to get them.

In this stage you’d be asking yourself the questions:

  • What traffic source drives the most amount of targeted traffic?
  • Which traffic sources convert the highest?
  • What is the cheapest and most scalable way to acquire customers?

A few things you might do at this stage include:

  • advanced_segments_150Testing many different traffic sources.
  • Making sure you have goals set up in Analytics and you are tracking conversions from the various sources.
  • Ensuring you are measuring behaviour of your customers and retention etc to continually refine your estimate of Lifetime Customer Value.
  • Using Google Analytics Advanced Segments to see clearly where your best traffic is coming from.
  • Based on that you’d build out a full traffic strategy that enabled you to get the most amount of ideal long term customers for the lowest amount of time / money.
  • I would also be using Kiss Metrics at this stage to track the original source of my paying customers and their behaviour within the app.

3.  Optimization

Optimization is where a lot of people spend their time however at least for a startup, there is a lot of work to do before you get to that point.

The question to answer at this stage is:

What parts of the business can I optimize to improve our overall metrics. 

Examples could include:

  • Split testing headlines to increase the conversion of visitors to customers on your site.
  • Running through a full Conversion rate optimization process to optimise your site.
  • Measuring customer satisfaction with something like a Net Promotor Score to make improvements in your service.
  • For a SAAS (Software As A Service) business like Informly I might be looking at ways to increase the free to active user conversion or the average logins per user per week.

Ongoing stage – product / service development

In addition to the 3 main stages I’m considering ‘product development’ to be an overall stage that goes on endlessly and is constantly monitored.

Depending on your business you might measure different things here but some example of what I’m measuring are shown below (from Kiss Metrics).

kiss_metrics_640

Most of these metrics tell me how the product is being used and how well it’s being received but in addition to this you might track:

  • Qualitative feedback from users
  • Coverage on other sites (gives an indication of what people think of the product)

I am also tracking a lot of these stats in the early stage which I go into in more detail below.

Metrics to track at the early stage

Because I’m in the Idea / Demand Validation stage of building Informly and a lot of readers will be in the same position I’m going to focus on what metrics I’m measuring at this stage.

LCV (lifetime customer value)

This is the most important metric for a business to know. Your idea may be great but if there is no way to get it out there for less than a customer is worth to you then you don’t have a business. So by definition if you don’t know how much a customer is worth (LTV) then you won’t be able to work out whether you have a business.

This is always going to be an estimate. In some businesses at scale it may be a very accurate estimate. In others it may not be very accurate. In most cases the accuracy of the metric will increase over time so it’s a great idea to start making estimates from the day you start your business.

agency_metrics

Analytics software can help with some of the calculations but usually you’ll need a good old spreadsheet to pull the estimates together. On the right  you can see my current estimates for the Informly Agency Plan. At this stage they are all very rough estimates. Here’s a description:

  • The average plan value is how much I think the average agency user will spend each month (plans will range from $30 to $80) – $49 on average.
  • Fixed costs are any direct costs that relate to that $49 including payment gateway fees etc and other costs that will occur for each new customer. I’ve made a rough estimate of $9.
  • The ROI period is how long you want before you get your money. It’s called lifetime value but in reality I’m not prepared to wait for my lifetime to get a return. 2 years is reasonable (here’s a great interview with Jason Cohen on this topic).
  • Retention or churn is an estimate around how many paid customers will leave before the 2 years is up. I’m estimating 10%.
  • Trial to paid conversion is an assumption I am making about how many people who sign up to try the agency plan will go on to continue using it after the 30 day trial expires and therefore become a paid customer. I’m estimating this at 5% for now but as I get enough users I’ll be able to get more confidence around this estimate.
  • Customer value is a calculation of the monthly plan value minus the fixed costs (i.e. $40) multiplied by 24 months minus the churn. In my case I’m estimating it at $864. Here’s the exact calculation

=(Average plan value-Fixed costs)*ROI period*(1-Retention)

  • The signup value takes it a step further and estimates the value of each person who signs up to a trial (estimating that 95% of them will not go ahead and pay for the app). This is simply the customer value multiplied by the Trial to paid conversion. For Informly my estimate comes to $43.20.

So with this estimate I have a rough idea of how much a customer or a signup is worth to me long term.

Cost per acquisition (CPA) 

To work out whether there is any chance I can build a decent, scalable business I need to know whether I can acquire customers for anywhere near what they are worth to me. The reason I don’t say ‘Acquire customers for less than they are worth’ is because there can be huge gains through optimization later on. But for now I want to make sure the numbers aren’t way off.

For example let’s say it costs me $5 for a visitor and I spend $5,000 to get 1,000 visitors. If I convert 2% of visitors to a trial that’s 20 trial users. Then if I convert 5% of trial users to a paid user that leaves me with 1 customer.  So the CPA is $5,000. The exact calculation is

=1/(Visitor to trial conversion rate*trial to paid user conversion rate)*CPC

or with my examples above:

=1/(.02*.05)*5 = $5,000

Since my Lifetime Customer Value estimate is $864 this is either a horrible traffic strategy or a horrible business model.

segments_300For this reason I’m testing a whole bunch of different traffic strategies (at a relative small scale) early on to figure out some rough guesses around my costs to acquire a customer.

Informly enables me to see my various strategies side by side to work out the variations in conversions from one to the next. If I can work out a traffic source that is somewhere near $864 then I know there’s a good chance I can build a business out of it (given enough money to put in). Note the chart on the right is using Advanced Segments to show a bunch of different strategies and how they are converting.

Conversion rate

I mentioned conversion rate above.  Depending on your business you might have a few different conversion rates you will look at. For my agency plan I am interested in:

  • Conversion of website visitor to trial user (measured through Analytics or Kiss Metrics)
  • Conversion of trial user to paid user (since I don’t have a paid plan yet, I’m estimating this but I will be measuring it through Kiss Metrics)

Note I’m not trying everything I can to improve the conversion rate. That will happen in the optimization phase. For now I just want a rough idea of what it is so I can work out the acquisition cost above.

The conversion rate will also give you an idea of what people think of the concept. If you are only getting 2% of people who visit your site sign up for a free app then it’s not looking good. If you are getting 10% or more you are probably onto something (although this obviously depends on a lot of things the price point and business model being a major factor).

I like to look at the ‘new user’ advanced segment in Google Analytics to see what the average conversion rate is for new users or the conversion rate I have set up in Kiss Metrics.

Qualitative feedback from users

At the early stage of any business even before you start you should be talking to people and getting feedback on the idea and the business. As you develop the product / service this shouldn’t stop and I’m continuing to keep a Google Drive text document with comments from users, tweets, help requests etc that help me understand whether I have a good idea / business.

Natural coverage

I also think what sort of coverage you are getting is a decent benchmark of how good your idea is. If you’ve reached out to journalists like I have and they have played with the app, I would want to see that tech sites are talking about it. So every time there is a new tech site reviewing the app or a new blog mentioning it I record this down as well. Here are a couple of sites that have covered Informly so far:

Tools

Here are some of the tools I’m using to understand these numbers.

analyticsGoogle Analytics is the bare minimum and an awesome tool particularly for tracking conversions from various traffic sources. I’m tracking most of the metrics mentioned in this article on Actionable Google Analytics as well as using it to compare my traffic with Advanced Segments.

kissmetricsKiss Metrics allows me to track in detail who users are and what they are doing in the app. The main difference is I know exactly who the users are and exactly what they do within the app (defined by me). This can create some powerful metrics early on and even more powerful ones down the track as I get to refining the product.

googledriveI use Google Drive spreadsheets to pull together the calculations mentioned above & Google Drive docs to record the qualitative stuff

If your funnel is more complicated then your task is even harder. For example:

  • You have users sign up to your email list first before converting them, or
  • You have users contact you and you manage the rest of the process offline

In this case you’ll need another system, perhaps a CRM or a sophisticated email marketing system depending on your strategy to be able to tell you the parts of the equation that can’t be tracked online.

But remember none of this is an exact science. No matter your business you will have to estimate these metrics  but in some businesses the estimates will be easier to come by and more accurate. My suggestion is regardless of your business you make an ongoing attempt at measuring the metrics that can inform the decisions you need to make at the time.

What metrics are you tracking?

I’d love to know what metrics other people are tracking and any thoughts on what I’m doing at Informly. Please comment below and we can chat about it.

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About

Dan Norris is a co-founder at WP Curve and a passionate entrepreneur with an obsession for content marketing.

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