The Start-Up Theory: Create & prioritize objectives like a pro
Entrepreneur is a synonym for “adventurer”; and by no means is that a coincidence. So the fourth chapter of our Start-Up Theory series unfolds around a few best practices that should make your entrepreneurial life a whole lot easier — smoothen out your journey a little. We’ll be looking at:
- The One Metric That Matters (OMTM)
- How to establish your main objectives
- How to create a hypothesis
- How to prioritize
Being a startup means leaping into the unknown, hence the adventure comparison. Will your product stand a chance in the market, will your target audience respond as hoped for — and last but not least, will revenue keep you going forward or hold you back?
There is no other way of getting answers to these questions, than to take the leap. And like Seth Godin once said, “waiting for perfect is never as smart as making progress.” Usually, people are good at the building part. They give it their all in order to make it as close to perfect as possible. But it’s when the product hits the market and, as smart entrepreneurs, they recognize the need for measuring the product’s success, that they get lost.
Knowing what to measure and when to do so is essential for keeping the learning process going. It’ll make a world of difference to know:
- what metric will get you forward and when exactly it makes sense to track it,
- how to set SMART objectives,
- how to improve your business decision by working with hypotheses, and
- how to prioritize your day-to-day decisions efficiently.
Let’s dive into it.
OMTM aka the one metric you should keep your eyes on
After you’ve defined a business model for your startup, you’ve implicitly discovered where your risk areas are and you probably have an idea of how to manage them (or you will soon enough). To further derisk the way you conduct your business, you should definitely lay down the metrics that need improvement, in order to positively boost the overall outcome of your work.
But how are you to pick the right metrics out of the pile of data available to you? First of all, it’s important to remember that in no way are we referring to vanity metrics here. They’re giving you an overall picture of the comings and goings of people in relations to your business, but they don’t hold much value apart from that.
What we’re saying is that you have to pick the metrics that suit your startup: the field you’re working in, the stage of growth your startup is at and its target audience. You have to measure the data that gives you valuable insight into what has and hasn’t worked in the past, and what could work even better in the future for your venture, precisely.
There is however a general rule when it comes to metrics: they’re ever-changing. Don’t make the mistake of thinking you’ll be focusing on the one metric for the rest of your working days. Time and time again you’ll have to look at the data from different angles. The point is to optimize where needed and to always stay on top of the path you’re venture is on.
We’re gonna look at the two general criteria for choosing the right metrics to measure next:
Ask yourself: what business are you in?
You have to know what the main goal of your company is, in order to define your objectives and know the metrics you ought to measure. Most business model KPIs (Key Performance Indicators) for online businesses are: transactional, collaborative, SaaS-based, media, game or app-centric. You might or you might not be in between those lines. Key is to know what you’re after.
Take us for example. We’re a full-stack mobile development studio — meaning we’re into developing apps and making them look real’ pretty. Hence, we fall under the app-centric KPIs category. We’ve built the app and we’ve set it free in the specific app store. What will we be looking at is: number of users, percentage of users to load the latest version, number of uninstalls, sideloading-versus-appstore, ratings, reviews, and so on. But we won’t be doing it all at once. We’ll pick one KPI that makes the most sense at the moment, and handle the rest in the near future, according to the business’ needs.
As we’ve said before, you won’t stick with the one metric forever. You have to always be on the lookout for the OMTM of the now, in order to fuel your chances of success. Consider the phase of your product — what does it need to evolve?
Let’s stick to the app developer scenario. At first we’ll want as many users as possible — so we’ll set our sights on the app-centric KPIs mentioned above. Soon enough though, we’ll be looking at some game KPIs as well, since we’ll start focusing on retaining users.
There are some metrics applicable to any company out there, regardless of business domain or growth stage the venture is in. We like Dave McClure’s Pirate Metrics — aka AARRR — not only for the funny name, but for the simplicity and efficiency of the model. It holds the basic five stages you want your customers to go through, in order to create traction for your business:
- Acquisition — how do users find you?
- Activation — do users have a great first experience?
- Retention — do users come back?
- Revenue — how do you make money?
- Referral — do users tell others?
This customer acquisition model is a great way not only of monitoring where you might need improvement and measuring progress, but also a great way of detecting hot spots in your customer’s lifecycle. Put yourself in his shoes — how would you go through the five stages?
Ask yourself: what stage are you at?
You’ve just started out. Your product is an MVP and you have little to no data to compile metrics from. Like we’ve discussed in the previous chapters, you need to establish what the goals of your startup are; this way you’ll know the right metrics to use.
Set a hero metric to measure. It’s the one metric that’ll show you the value of your offer to your customers and the growth process of your business. Having limited resources, it’s a lot easier (and wiser) to focus on the one metric that’ll help you optimize efficiently. You should also keep an eye on the burn rate of your company: the rate at which you’re spending your funds, per month.
Things are moving forward. Your business has gained traction, revenue is flowing in and there’s an overall growth of figures — of data as well. It is crucial for you to track the metrics that’ll illustrate your situation best.
Pick the metrics that’ll best show the critical points of your business plan, of the customer acquisition flow, of the purchase decision process of your customers and so on. Choose the metrics that’ll help you see and solve emerging problems in time.
It’s a lot about your funds at this point. You need to look at the conversion rate you’re working with, see if there’s any way for you to improve that (not that you’ll ever stop looking at this metric). Then you need to take a close look at your financial situation, using these metrics:
- Burn rate
- Cash zero date
- COGS — the cost of your sold goods
- Churn — customers lost in a month per customers at the beginning of the month
- MRR — monthly recurring revenue
Be precise and objective in your estimations. Base your assessments on the data you’ve gathered, not on your hopes and dreams.
As your company grows, so does the workload, the volume of data — so does the amount of metrics you need to keep track of. You’ve reached the point where your business is on the role: your product and your team are built, you’ve told your story and people have embraced it, you’ve proven that your offer is viable in the chosen market.
What you’ll want to do now is raise investments in order to keep things going as good as they have been. So it’s important to monitor the metrics that’ll help you catch problems head on, in order to prove the financial viability of your startup.
Besides the metrics you’ve been analyzing before in your take-off stage, take a look at these:
- CAC — cost of acquiring a new customer
- ARPU — average revenue per user
- LTV — lifetime value of a customer in respect to the cost you’re looking at for the acquisition of a customer
Make sure that you’re investing the right amount, considering the revenue your customers bring your business. Make sure you invest in the right customers.
What makes a good OMTM?
The very best metric is the one that best suits your business model and the growth stage of your startup, as we’ve previously discussed. There are, however, 5 criteria this metric should meet, in order to be the very best it can be. We’ll name and discuss all five of them next:
- A rate or ratio is better than an absolute number, since these tend to fall under the vanity metrics category. It may be nice to look at the total number of users, but it’s a lot more actionable and efficient to know the users you’ve gathered in a day. This way, you might be able to establish what attracted these users and set a guideline for future reference.
- Metrics should be comparative to other time periods, sites or segments. A certain percentage of increase from last week is again a lot more useful than an overall value of increase. The more precise you go with the measure of your metrics, the more learning material you’ll have — and that is something you definitely want, my friend. Consider cohort analysis as well. Track the same metrics for different segments of users, over different periods of time. This will give you valuable info about the right tactics to use with your audience.
- A good metric is easy to understand and discuss. Period.
- A good “accounting” metric is one that makes your predictions accurate and spot on. Select the metrics fitting to your business, and measure them properly. Be objective when analyzing the data and make your predictions accordingly. Stay true to yourself and your business; it’s the only way you’ll make good investments.
- A good “experimental” metric — the one you apply when considering changes to the product, pricing or market — choose something that’ll definitely drive a significant change. If it won’t make you see a whole new perspective of your venture, it’s not worth investing time in. Don’t be afraid of having to rethink your entire approach; be afraid of staying put with the same, inefficient approach.
How to establish your main objectives
Setting up a business model for your startup — like the lean canvas we’ve presented here — is a most efficient way of knowing what your business is all about. Not only is it a great display of what characterizes your offer, your target audience and what sets you apart from the competition, but it also shows the challenges you’re dealing with.
Of course, you won’t be handling all of your risk areas at once — you’ll take it one at a time, in order to assure you do it right, without wasting any of your resources and overworking your team.
Again, depending on the business you’re in and the stage your startup’s at, you’ll have a risk that needs handling right away. In order to have a plan for doing so, go through these three steps:
- Write down the risk area and the exact risk you’re dealing with
- How will you manage this risk? In other words, what are the exact actions you ought to undertake? Figuring these out, you’ll also know the metrics you ought to measure.
- What are your main goals regarding the risk you’re dealing with? Knowing what metrics you’re measuring, your goal is practically handed to you.
To make sure we’re all on the same page here, let’s do a little imagination exercise.
Say your startup’s at the very beginning. What’s your main problem? Probably the fact that no one has any idea who you are and what you’re offering. You need traction for your business, you need some cash flowing in and most of all, you want to see how your product’s handling the market. What metrics do you want to set for dealing with this problem? Of course you’ll have your eyes set on the conversion rates for a while, see how many users you can convert into real customers, using different tactics. So what is the main goal here? You’ve guessed it: your main focus is converting as many users into buying customers.
Your challenges dictate the measures you have to take. But there are a few criteria for setting your objectives, in order to work as efficient as possible. They’re captured under the acronym SMART — chances are you’ve heard of this before, but a memory refresh is never a bad idea.
SMART goals should be:
- Specific. No vagaries and platitudes — tell your team exactly what you’re after. They have to know what’s expected of them, what the outcome has to look like, why it’s important, which attributes are a must, who is involved and where it’s going to happen.
- Measurable. The objective has to be quantifiable. Not only will it be obvious if and when the objective is completed, but it will also help the team to stay on track and respect the timetable. It will also add to the sense of fulfillment and delight, having completed the task.
- Achievable. Your business goals should be realistic and attainable. Although they might stretch out the team a little, they should never be out of reach or above the performance level of the moment.
- Relevant. The goals you set out to reach should matter to your team and the overall aim of your business.
- Time-bound. The fifth and last criterion is about setting up your goals in specific time frames. Having your team committed to a deadline will help them focus on achieving the goal. It’s intended to install a sense of urgency, not letting usual day-to-day urgencies take up more of the team’s time and efforts as necessary.
Hypotheses and prioritization
How to hypothesize efficiently
If we’re staying for dessert, then I’ll have strawberries and cream, because that’s my favorite dessert. The hypotheses model is as simple as the sentence before. Of course, dessert and strawberries and cream will be exchanged for business data crucial for the wellbeing of your startup. We’ll get to that right away.
Formulating a hypothesis to base a campaign or test on is an excellent way of combining raw data with human creativity for a better optimization process. Working like this, there are more gains in it for you:
- Improve your brainstorming process by constantly working in this mindframe
- Formulate a reliable and consistent understanding of your business and your customer base
- Drive the direction of your marketing pitch
Working with hypotheses will help you organize the data you’re gathering, especially when it comes to the different segments of customers you’re working with. Whether confirmed or denied, a hypothesis is still a great means of learning. Hypotheses generate new insights for future research, helping you to optimize easily.
Now let’s dive into what the hypothesis model entails and how it works. A hypothesis consists of three parts:
- The variable (IF), that you modify according to the situation
- The result (THEN), that represents the outcome of that change
- And the rationale (BECAUSE), that connects said outcome to your theory about the user experience
When thinking about the variable — what you’re set out to test with your hypothesis — think of where you could make the biggest business impact. Consider your leading indicators, high-traffic pages and most relevant flows. Think of the changes that would bring you one step closer to solving your startups most pressing challenges and build your hypothesis around that.
The result you predict for the given variable connects you to your key business metrics. Depending on the data gathered through the analysis of said metrics, you should be able to lay down fairly realistic predictions. We suggest you predict a range for loss or lift (for example, a 10–15% reduction in bounce rate).
The rationale is the core of your hypothesis and it’s where the human touch we mentioned earlier comes in. What is your theory about the customer’s experience in regards to your business? It’s time to see how well you understand your target audience. The good news is that, if you were wrong about them, testing your hypothesis will teach you a thing or two about your customers.
How to prioritize like a pro
In order to really stay on top of the works of your business venture, you need to learn how to prioritize. Without an effective manner of setting priorities when it comes to day-to-day decisions, you’ll be left with a bunch of stuff to take care of and no idea where to start.
Luckily for you and I, someone who had their priorities straight thought of a prioritization tool to help us all out. It’s called ICE, yet again an acronym, that stands for the three factors that should be considered in all business matters: impact, cost and effort. We’ll take them one at a time:
- Impact should be anything that benefits your company, be it sales or customer base growth, any kind of cost savings, product or customer service quality improvement. When assessing this aspect, we’re thinking of a relatively short time frame in which the change we’re rooting for should take place.
- Cost is a critical part of any business operation. Therefore, a company must choose wisely between the alternatives available.
- Effort must be viewed in terms of resources available to you and the amount of time required to complete the task successfully. The correct allocation of human and financial resources is critical to any company out there.
Now let’s see how this thing works.
The ICE prioritization tool uses a matrix format, where the three factors described above are column headings. Now there are a lot of ways people assign a certain value to each of these factors. We recommend you simply pick a value frame — say from 0 to 10 — and rate the three factors accordingly. Base your assumptions on the data you’ve gathered, research the internet for more information where needed; don’t assign values based solely on a hunch.
Let’s do another imagination exercise. We’re a coffee & sweets shop and for our summer menu, we’re thinking of adding strawberries and cream to the menu. Let’s see how this would play out using the ICE prioritization tool.
Considering impact, the idea gets 10 out of 0 points — because we’ve seen other coffee shops doing this successfully, so we know our clients will appreciate it. Considering costs, we’ll assign 3 points — we’ll need fresh strawberries brought in every day and we’ll need some more ingredients for preparing the cream ourselves, making sure the dessert is really yummy. Considering the effort we’ll have to put in, we’ll assign another 4 points — we have to consider the extra work we have to put in to prepare the cream, and we have to consider dealing with the strawberries (making sure they’re delivered on time, making sure the quality’s right, handling the strawberries we don’t use up in a day and so on).
Summing all of this up, this idea gets a total of 17 points. You can make things even easier, by calculating an average for the final value and rounding it up. In our case, this means the idea has a final value of 6 points. So how does this sit in our initial value frame of 0 to 10? Somewhere in between a really bad idea (0 points) and a really good one (10 points). In other words we should really think this idea through, see if it’s worth doing.
Another way this prioritization tool is super useful, is working up more hypotheses using the same model. This way, you’ll not only have a clear, weighted value for each of your ideas, but you’ll be able to compare them to each other and see which one ranks best.
What we’ve discussed today are tools and guidelines that have proved very useful to a lot of entrepreneurs all over the world. Take them one by one and learn how to work with them yourself, implementing them in your thinking process. They’ll make for more efficient business decisions, trust us.
Originally published by tapptitude, July 20 2016.