CEOs: are you using the right metric to run your business?

The Lean Startup revolution has brought the measuring of metrics into mass startup consciousness, but 90% of the startups our fund meets don’t prioritise the right metric for their business. This might just be the leading distinguishing factor between good CEOs and bad CEOs. Given the limited amount of resources available to a startup, it is critical that you optimise for the one metric (at any time) that will allow you to build a large, sustainable business most efficiently. If you are not doing this, you are basically just transferring $$ from yourself/angel/VC fund or other shareholders to your customers/employees and vendors.

In our weekly @khoslaimpact newsletter, we last wrote about the “Build, Test, Measure” cycle being followed by Kopo Kopo and what they learnt as result. But before you measure, make sure you are measuring the right metric. For most new age startups, their top metric is somewhat new age too – Net Promoter Score, Net Channel Contribution, % Asset Utilisation, Repeat Usage, Installation cost… the things you need to get right BEFORE you invest in growth. So how do you make sure you are picking the right ones?

There are three lenses you can employ to identify the right metric and use it to make good decisions: profitability, resource allocation, and incentives:

1. LONG-TERM PROFITABILITY – CAN YOU MAKE REAL MONEY?
2. Many teams worry about when they can ignore profitability (not profit) to build momentum. But “buying” momentum is like signing a death warrant. Measuring either revenue or profit does not help you make the right decision there. You need to consider customer lifetime value. What one measurable metric in your business gives you a sense of customer lifetime value? The best example to illustrate this is in viral businesses. Businesses that fail/succeed based on the degree of virality they enjoy measure Net Promoter Score (i.e. customer satisfaction). If their NPS is low, having millions of users only tells them how many customers they are going to lose very soon. Scary thought, isn't it?
3. RESOURCE ALLOCATION – CAN YOU STOP GROWING LINEARLY?
4. Can your top metric help you allocate resources effectively? Something tells me “revenue” does not do that too well. Does it drive your budgeting decisions? No? Then you are looking at the WRONG metric. For instance, if you have 3 different sales channels with different pricing or costs, measuring total business revenue doesn't allow you to quickly decide how much to invest in growing each channel. What you need to measure is the net cash contribution of each channel per unit resource. Now maximise that and grow the right channels. Kill the wrong channels. A second example - instead of growing # merchants on your platform, look at # active, transacting merchants in the last 7 days and maximise that, independent of total merchants. This small nuance will make you allocate resources differently and get better at your business.
5. INCENTIVES AND OPERATIONS – CAN YOU GET YOUR TEAM ALIGNED?
6. Is your top metric an effective driver of incentives for your top management? Is there room today for unhealthy decisions? Are departments or VPs eating up your budget really contributing to your future growth? Incentivising management on top line encourages over-investment, and on profits encourages under-investment. What does your business need to maximise today might be different from tomorrow. Be open to changing management incentives to suit your focus metric.

Data is the only truth, but if you are looking at the wrong metrics or not really basing your decision-making on any data whatsoever, you are in denial. As our own CEOs, this applies to all our lives as well. If you have a good story about finding out your top metric, write in!