The 1 Thing Lean Analytics Doesn't Tell You About Leading Indicators
So, you’ve been bitten by the business bug and want to establish your very first start up.
Consider this though - some insects are poisonous. That bite that kickstarted your motivation may also spell doom for your fledgling company.
Thankfully, analysing data is the antidote to the delusion that often accompanies passion. Make sure you get a dose.
The wildly successful book Lean Startup outlined how to structure progress. Lean Analytics is geared more towards measuring progress and learning from the data. Think of it as “how to build a data-centric startup for dummies”.
You’re taught how to identify the most important metrics for your company’s business model, a focus that changes depending on which stage of business development you’re up to. Each metric has a baseline, with specific and tailored protocols and methods to boost that particular metric.
DATA DRIVEN VS DATA INFORMED:
It’s easy to get bogged down in the numbers and become data driven. This may be fine for some, but for most of us who didn’t take advanced statistics in school and university, it’s all Dutch.
When it comes to a company, data is the vital numerical information that will describe your business. Gaining and accumulating metrics will create thousands of data points – which are for the most part useless unless you learn some basics about how to extract what you need from the horde of information at your fingertips.
Use no data, and you’ll be lying to yourself about how well or poorly you think you’re business is running. Getting caught up in the data will drag your attention and focus away from other areas that need it. Identifying leading indicators, and then picking out the ones that really matter to your company’s growth and success, is a much more efficient use of your time and effort.
Lead indicators are the performance metrics that are directly influenceable and predict future success – they measure change. Not to be confused with lagging indicators, which are generally facts and figures that measure past performance. Think customer satisfaction levels, versus the gross revenue made last quarter.
What your business looks like and how it functions will affect the lead indicators you’ll be focusing on, what you establish as a baseline, and how you go about pumping those rookie numbers up quickly to become a pro in no time.
THE ONE METRIC THAT MATTERS TO YOU
Lean Analytics constantly mentions OMTM or The One Metric That Matters to You – and for good reason. Focusing on a single goal at a time drastically improves its chances of being achieved.
Pick a lead indicator to be your key metric. Then throw a substantial chunk of resources at it and watch your business benefit.
THE RIGHT THING AT THE RIGHT TIME
The OMTM will be different depending on what your company does. It’ll also shift as you change into a different phase of business growth. What needed to be focused on in the first 6 months of operation will look wildly different to what needs your attention 5 years down the track.
Here are some common start-up businesses and an examples of lead indicators to focus on – note how much they vary from business to business, and between stages of development.
The annual re-purchase rate is the big one here. Out of last year’s sales, what percentage of customers are likely to buy again this year?
If this number is under 40%, you’re still in the acquisition phase, and therefore still trying to increase customer reach and build a clientele base. 40-60%, and you’re in a hybrid or transitory phase where you’re still trying to find new buyers, but there are a decent chunk of them who are happy enough with your product or service to take another bite of the cherry. Over 60%, and you have a loyal customer base. The focus shifts here from market reach and advertising, to keeping these customer’s money in your business.
A fresh start-up may narrow down the parameters and look at the 90 day repurchase rates. Here, anything under 15% is acquisition, 15-30% is hybrid, and over 30% is loyalty. The big takeaway here is by knowing where the money is coming from, you can tailor your focus towards where the most revenue is coming from.
SOFTWARE AS A SERVICE (SAAS)
In this space, engagement describes when the customer sees value in your SaaS. The more time goes by, the more likely they are to keep using it less and less until finally they cancel subscription – this is churn.
By closely monitoring engagement and churn on a daily, weekly, monthly, quarterly, and annual basis, you can find out where the disconnect is and how to keep subscribed customers on your payroll.
FREEMIUM MOBILE APPS
Ah, the true unsung heroes of the business world – not. For these guys, it’s all about revenue per user, revenue per microtransaction paying user, and customer acquisition costs.
Whales are the people who spend a ton of money on the app, so logic would dictate it be tailored to keep these heavy investors engaged as long as possible.
In case you’ve been living under a rock for the past decade, it’s common knowledge that people who offer something for nothing on the internet need an alternative stream of revenue – nobody works for free.
By reading an article or blog, you’re unwittingly exposed to a myriad of marketing and advertising content. Ads, affiliate links, pay-per-click banners – if you happen to click on a link, the website gets paid X amount.
There are a few lead indicators here that all bunch together to form one OMTM that doesn’t really ever change. Audience, site traffic, ad rates, click through rates, and content/advertisement visual balance are things that need to be focused on just as much as the content in order to keep cash rolling in.
Ever heard of the old causality dilemma question “what came first – the chicken or the egg?” You could also phrase it as who comes first – buyers or sellers.
Marketplaces like Craigslist and eBay tend to favour buyers. They create artificial supply first to attract these buyers, and once they’re spending, the sellers will follow suit with their own money from advertising costs and selling commissions.
At the start the OMTM is pretty much just buyer and seller growth. As the business matures, inventory growth, search effectiveness, and enquiry to sale conversion rates become more important. Once it’s in high gear and there is a community of buyers and sellers, quality of life indicators like signs of fraud, scalping or price gouging become important to maintain the reputation and integrity of the marketplace itself.
Whether you’re selling a product or a service that you make or supply yourself, there is one huge OMTM – the engagement funnel. You need to encourage past users to come to your business again, so things like emails, phone alerts, and getting promotional content out to your user base is paramount. Go as hard as you can without becoming annoying.
THE RIGHT QUESTIONS
So, this brings us to the main point. You have to learn how to ask the right questions, relative to your own company – find your lead indicators and OMTM as a matter of urgency.
Start from the top, and build a snapshot or profile of what your company does, how it does it, what a typical customer looks like, and what you’d have to do in order for them to be deemed satisfied.
From there, employ systems that capture data that reflects how your business in performing, relevant to how you want it to perform. Sort the data into lagging indicators that show past performance, and lead indicators that can effect change in the future success of your business.
Out of all these lead indicators, decide on what metric would really drive your business in its current phase of growth and operation. Get together with your management team and discuss it as a group – after all, two heads are better than one, and the more the merrier.
Here’s where investing in some business coaching by a professional or mentor now will pay huge dividends down the road. If you’re just starting out, you’d be prone to making simple errors in judgement based on the fact that you’ve never gone into business before, and a lack of knowledge may be hugely detrimental to the future success of your company.
Forking out the dollars for a guiding hand, and getting a game plan together as to how the OMTM changes as you move through to the next phases in your business, is such an underrated investment and arguably one of the most important.
To sum it all up, the devil is in the details. Become data informed, without getting caught up in the tiny details. Use this data to determine your lead indicators, and then quantify your company in its current state to find out which metric should be your focus and OMTM.
If you’re unable to do any of these things yourself, seek out the advice of a professional or an experienced entrepreneur so that you build the right foundations for your startup company now, and know what OMTM to re-focus on as your company shifts into the next gear.
FOLLOW US ON SOCIAL MEDIA
Scaling 4 Success
YouTube Channel: http://bit.ly/S4S-YT-Channel
Scaling For Success: www.scalinggrp.com
Facebook Page: http://bit.ly/S4S-FB-Page
LinkedIn Page: http://bit.ly/S4S-LKI-Page