Up to now, we've been focused on getting our startup company off the ground. Confirming that we have a product-market fit and a viable business model, building a startup team, and raising the capital we need to go forward. In this lesson, we're going to start focusing on growth. Specifically, I'm going to talk about some of the metrics, or key performance indicators, that you have to put in place and consistently monitor to help you manage growth and keep the company on the right track. Our word cloud for this lesson is focused on customers. Growth metrics are indicators that you can monitor to tell if your strategy for acquiring customers is working. By now, you should definitely understand the value of planning for your startup company, putting in place a roadmap to describe how you'll achieve your business and financial goals and reach the destination that you've defined for yourself. It really doesn't matter what that destination is, you could be trying to build a lifestyle business that will provide a good living for you and your employees for many years. You could be building a high-flying market-dominating company with Fortune 500 potential. It's important for you to put in place a strategic plan that, if your assumptions are correct, will get you from where you are now to the destination you're trying to reach. But stuff happens, markets change, technologies change, customer needs change, competitors change. The strategy that worked for you at the start may not continue to be the correct strategy as your business grows and evolves. You don't want these changes to catch you by surprise. As your business grows, you should be constantly monitoring your progress and asking tough but important questions: Are we still pursuing the right markets and customers? Should I change my price, my revenue model, or my product to respond to changes in the environment? Is my customer acquisition strategy still working the way I need it to? Do I have the strategic partners I need to succeed, or do I need to find new ones? Is it time to raise additional capital? Growth can both create problems for a business and it can also cover them up. Rapid sales growth, if not carefully managed, can lead to cash flow problems. This is especially true for businesses that have to carry inventory, manage the collection of accounts receivable, or invest heavily in customer service or support infrastructure. While managers may think the company is succeeding because its sales are growing, if they're not looking under the hood they may not see that the factors that are causing that growth may not be sustainable. Here's another example from the real estate photography business I've told you about before. We understand that there are always two factors that drive the company's sales growth. One of these is the effectiveness of our company's sales and marketing initiatives. The other is the growth in the number of houses that are listed for sale from time to time. The first of these is something we can control and the second is not. Unfortunately, it's cyclical. If we only look at the company's top-line sales numbers, we might think the business is doing well. We could be in for a nasty surprise if there's a downturn in the housing market next quarter. Markets aren't the only things that change, your priorities for the business will change over time as the company becomes more mature. At the start, your top priority might be to land some early adopter customers to demonstrate that there's a demand for your product or service and validate your business model. The priorities are going to be very different as the business evolves from a startup to a growth company. Maybe your number one priority is year-over-year sales growth, maybe it's gaining market share, maybe it's achieving break-even or profitability. It might be reducing customer acquisition cost or increasing customer lifetime value. It might even be something non-financial, like quality or customer satisfaction. As the business priorities change, management will need to develop metrics that can be used to assess whether the team is making the right moves. Where should the team focus its attention to ensure that its objectives can be achieved? What obstacles are in the way and must be overcome? Strategy development starts with a goal and a hypothesis about how that goal can be achieved. If we do X, then Y will happen. This is your hypothesis. If we hire more salespeople, then we'll close more sales. If we generate better leads for our sales team, their sales closing rate will increase. If we add a new feature, more new customers will buy our product. If we offer discounts for repeat purchases, our customer retention rates will improve. If we spend money on search engine marketing, we'll get more website traffic. Let's drill down on this a bit more. A hypothesis like, if we spend more money on search engine marketing, then more people will visit our website, is probably not specific enough. How about this? If we spend $10,000 to buy a specific Google AdWords, then an additional 50 customer prospects will visit our website this month. Now, that's a hypothesis that you can test. Your strategy must describe how you're going to test your hypothesis. We will monitor the number of unique visitors to our website this month that we can qualify as prospects based on their URL. So, monthly website visits by unique qualified prospects is the key metric, or key performance indicator, or KPI, that you'll use to determine whether your hypothesis about search engine marketing is correct. Well-managed entrepreneurial companies are likely to have dozens of KPIs that they're tracking at any point in time. It's a good idea to develop a dashboard which is a 1-page report that tracks the most important KPIs, so that managers and other stakeholders, like the board of directors, can readily see which of the teams' initiatives are bearing fruit and where there may need to be a change in strategy. Your dashboard can also track market statistics, like the number of houses that are listed for sale, to help managers see whether their KPIs are being influenced by events that are outside of management's control. As you're identifying your KPIs and building your dashboard, beware of vanity metrics. These are metrics that might seem like they're important, but they really don't matter to the company. This could be because there's no real correlation, or cause and effect relationship, between these metrics and the company's real objectives, or it could be because they're outside of management's control. An example of what I'm talking about here might be page views on your company's website. This might seem like a worthwhile statistic and for some businesses, it might be. After all, you probably spent a lot of money developing your website than the amount of time that visitors spend on it and the number of pages they look at might be a good indicator of its attractiveness or functionality. However, if your real goal is to convert visitors to your website into paying customers, the number of pages that visitors look at may not really be all that important. You just as soon have them click on the buy now button right away if you have one. Conversion is probably more important than page views. An example of a metric that you really can't influence might be market growth rate. This is akin to the rate of growth of listings of homes that are for sale for my real estate photography company. It may very well have a big impact on how the company does that month, but there's really nothing that the company can do to move that needle. Market share, the percentage of the new listings that the company actually photographed, is a more useful metric. So, how do you identify the metrics that really matter? Here are some guidelines. They should be tied to specific business goals or objectives and they must be truly relevant. If we change X, then we will achieve Y. Remember that your goals and objectives are likely to change over time, so your metrics will also have to change. At first, you may be focused on building awareness of your company or your products in your target market. After that, you'd be trying to validate your product-market fit and then working to convert prospects into customers. As you move more into the growth phase for the business, you may be more focused on things like customer retention and churn reduction or business model optimization. You'll be better off if you can keep your KPIs objective, simple to monitor, and easy to understand. Here's some pretty standard customer metrics, some of which may go by different names based on the nature of the business. In particular, whether it's doing most of its business online or offline. Marketing response rate. This is the percentage of prospects that the company touches in some way with its marketing efforts, emails, advertisements, and so on that actually respond to that contact by clicking through to the website, requesting a demonstration, or downloading a trial version of the product, et cetera. Sales conversion rate. This is the percentage of qualified prospects that actually choose to purchase. Customer acquisition costs, we've discussed this one before. This is the total amount that the company spends on sales or sales and marketing divided by the number of new customers. Average transaction size, this one should be self-explanatory. If a customer purchases one product from you at a time, it's your price. Contribution margin. That's the average transaction size minus the direct costs associated with each sale. If you're running a shoe store and you sell a pair of shoes for $100 but you had to pay $60 to buy them from the manufacturer, then the contribution margin is $40. Repeat purchase rate. What percentage of your new customers come back to make a repeat purchase and how often do they come back? Customer churn rate. How long do customers remain loyal to your business? What percentage of them stop being customers each month or year? Lifetime value of a customer. This is a measure of the total amount of profits that a typical customer can be expected to generate for the business over time, taking into account the contribution margin on each purchase, the frequency of repeat purchases, and the customer churn rate. There are plenty of experts out there that will tell you that there are really only two metrics that matter for most entrepreneurial companies: customer acquisition cost and customer lifetime value. When investors ask you about your unit economics, this is what they want to know. Are your unit economic such that you're able to make profits on every new sale? If so, how much? If your customer lifetime value is greater than your customer acquisition cost, you have a viable business. If it is a lot greater, then you probably have an attractive and scalable business, you can increase your spending to acquire more customers and every new customer will create more value. If your customer lifetime value is greater than your customer acquisition cost, you have a viable business. If it is a lot greater, then you probably have an attractive and scalable business, you can increase your spending to acquire more customers and every new customer will create more value for the business. If your customer lifetime value is less than your customer acquisition cost, then you probably won't have a business at all for very long. Still, most entrepreneurial companies track many more KPIs than just customer acquisition cost and customer lifetime value. This is because both of these metrics have a lot of moving parts and management's goal should always be to understand why their CAC and CLTV are what they are and to improve the ratio between them.
