How to use traction metrics to grow & measure your start-up business better
A growing business needs to be closely and carefully managed to aid the success of the new start-up, although how this is measured varies and has changed over the past decades. As many entrepreneurs find that as their business grows, they feel more under pressure to incorporate more and more metrics or go the other way and fail to use any metrics at all, therefore, leading their business up a blind alley.
Putting performance measurement systems in place can be an important way of keeping track of the progress of your business. It gives you vital information about what’s happening now, and it also provides the starting point for a system of target-setting that will help you implement your strategies for growth.
Performance measurement and target-setting are important to the growth process. While many small businesses can run themselves quite comfortably without much formal measurement or target-setting, for growing start-ups the control processes can be indispensable.
Knowing how your business is performing is valuable information, but a good measurement system will also let you examine the triggers for any changes in performance. This puts you in a better position to manage your performance proactively. One of the key challenges with performance management is selecting what to measure. The priority here is to focus on quantifiable factors that are linked to the drivers of success in your business.
Strategic visions can be difficult to communicate, but by breaking your top-level objectives down into smaller concrete targets you’ll make it easier to manage the process of delivering them. In this way, targets form a crucial link between strategy and day-to-day operations.
The traditional manner of performance measurement involved identifying the areas of your business to focus on and then deciding how best to measure your performance in those areas. Measurement metrics would be focused around revenue or profit, which although these are important to measure, these are lagging indicators of key user actions in the past and do not necessarily convert to the future growth of your start-up. Other metrics that are used tend to focus on none critical elements which are called vanity metrics.
Vanity metrics are things you can measure that doesn’t matter. They’re easily changed or manipulated, and they don’t bear a direct correlation with numbers that speak to business success.
People use vanity metrics because they don’t know that these numbers don’t count, or because vanity metrics can make you feel like you’re getting results — even though they don’t tell you anything about your business health or growth. We all use vanity metrics in our daily life and when interacting with customers. Examples of vanity metrics would be elements which can be manipulated to improve the observable performance of the business. Page likes on your website would be a good example of this or leads in your sales funnels which can you invented to create the illusion of a growing business are common tactics.
The opposite of vanity metrics is actionable metrics is one that ties specific and repeatable actions to observed results (Maurya, 2012). Good examples of actionable metrics are conversion rates of users, customer lifetime values and analysis by cohort. Therefore, we need to be very clear about what’s important and what is just noise.
A new way to measure a working business model
In the old world, we measured progress in terms of outputs like hitting our budget or execution of a plan. But is executing a flawed plan that results in a product no one wants on time and budget progress or are we still using vanity metrics to run our business? This is fundamental and we need to ask an important question, how do potential investors such as banks, angels or other stakeholders judge a business? They focus on growth or traction.
Picture the scene, you have a new start-up with no clients, a great business plan and all the enthusiasm in the world. You wear your best suit, polish your shoes and head to an important meeting with an investor. You open your slides and outline pages and pages of assumptions and then display your growth projection. Looks great on paper, but then the awkward question is asked:
“How many customers have you currently got on board for this idea?”
You turn red and mumble your words something about you plan to get them on board, but you currently have none and then before you know it you are in the local coffee shop trying to understand where it went wrong.
In an alternative scenario, you walk into the investor meeting, pitch the same business plan but then bring up a graph of your current and projected growth. This gains the attention of the investor as your idea is no longer in thought land (Savoia. A, 2011). Thought land is the place where ideas are and haven’t been tested using real data from your target customers to gain your own data (Savoia. A, 2011). The right way you have the attention of the investor who now wants to understand your business model.
This is because traction is the best measure of a working business model, the inflection point (Mcgrath, 2019) of the hockey-stick curve, where it starts trending upwards quickly, signals that good things are happening. It’s much easier to ask for investment when you have the beginnings of traction than without as this clearly outlines that you have real, actionable data and are not operating using vanity metrics.
Traction is the way to move an idea forward, although it can mean a lot of different things therefore it’s important to be very clear on the actual meaning of the term. It is not enough to simply pick any metric for the y-axis of your hockey-stick curve, one that conveniently happens to be going up and to the right, and pass it off as traction (Maurya, 2012). Instead, you need to identify a metric that is robust, reliable and meaningful to outline your business growth.
As outlined at the start of this article, it appealing to measure a working business model in terms of revenue or profit. Although they inform us that the business model is working in the past, it fails to provide the why of how to grow in the future using this model. A better method is to focus on leading indicators that help us to predict future business growth (Maurya, 2012). As Ash Maurya states “Future business model growth comes from past customer actions”. You can see the logic of the statement from our earlier definition of the business model as to how a business creates, delivers, and captures value from customers a. To capture value, you have to first create value. In other words, the right value creation activity causes value capture. Therefore, traction is the rate at which a business captures monetizable value from its customers.
The monetizable value here isn’t the same as revenue. To better understand the difference, think of a multi-sided business model like Facebook’s. Facebook creates value for its users through its social network platform, but it captures value (get paid) from advertisers who buy attention and data (Maurya, 2012).
In this business model, users are a derivative asset and create monetizable value through their usage of the social network. Facebook can reliably use metrics like daily active usage (DAU) to predict future revenue from advertisers. These kinds of leading indicator traction metrics are more actionable than revenue.
But for now, remember that traction is the goal and all businesses in the start-up phase should be focusing on create, deliver and importantly capture revenue as a predictor of future growth from customers. Only then will you be able to focus on the right side of the hockey curve and develop into a viable business for your investors, stakeholders and employees.
In the next article, the focus turns to complete the right actions, at the right time.
Maurya, A., 2012. Running lean: iterate from plan A to a plan that works. “ O’Reilly Media, Inc.”.
Savoia, A., 2011. Pretotype it. Pobrane z: http://www. pretotyping. org/uploads/1/4/0/9/14099067/pretotype_it_2nd_pretotype_edition-2. pdf (10.12. 2017).
McGrath, R., 2019. Seeing around corners.