Denice R. Preston
It would help if you found the KPIs that are core to increasing company value before you can unlock growth. To gain a better understanding of growth, you need to dig deeper into the characteristics of “the perfect client,” trends among user cohorts, and the tipping points that will solidify retention and Engagement.
How do we unbundle growth components?
We co-founded Firstrock Capital with my partners to help startups grow. Together, we work to overcome any challenges they may face. Over time, it became clear that the best way to achieve this goal was to help them understand and manipulate the drivers of startup success. Many of our companies have achieved great things, including raising capital, developing stunning technologies, and attracting media attention. But when it came to the question of “What defines our growth?” and whether we were growing in the right manner with the right users week after week, the conversation became uncertain.
We began formalizing tools and processes to help our portfolio companies so we could focus as quickly as possible on the most important matters. We began to use them, and our conversations shifted from “The engine is working, but the car isn’t moving” to “Here is what’s going on; let’s fix it.”
The article below outlines some of the most useful tools and techniques we’ve found. It is meant to serve as a guide for further discussion and refinement. My partners and I discovered that when we parsed growth data into its key drivers, such as Retention, Core Action, and defining the characteristics of best users, cohorts, and groups, it was almost always a revelation to all parties.
Define the Metric that Captures True Growth in Company Value
It is so obvious that it is often overlooked, but the first step in mastering startup growth measures is to define what you want to grow. The founders should choose one key performance indicator (KPI) based on the problem they are solving and the actions their clients are taking to receive the solution.
Total active users are the best option if all users similarly use the platform, and value is derived from how many users there are.
Suppose customers are more valuable to a company than others because of factors like repeat use and higher revenue from larger ticket items (e.g., marketplaces). In that case, the most appropriate KPI may be the total actions taken.
A given situation can be categorized into a range of conditions. For example, an app for professional networking may track the number of prospective employers and professionals who are using it. Then, they would need to define “active” based either on the hypothesis that a user will perform the relevant actions or by using frequency analysis to determine how frequently users are acting on average.
This KPI is correct if the business model relies on analytics or advertising based on user behavior. If the business model is based on a percentage-based commission, the KPI would be the dollar value of contracts that are executed through the platform. It is important to understand how the value is created and what your business model is for receiving a share of that value.
This metric allows for success to be defined in the chaos of a young company, and it aligns everyone towards its vision and strategic goals. Some of the CEOs in my portfolio have found it helpful to display the KPI goal for the month and the progress made to date in dashboards, ranging from whiteboards to internal platforms. They then ask for ideas on how they would help to achieve that goal. This allows them to stay focused and also anchors their creativity.
Revenue is not the primary KPI of an early-stage business. Revenue is important for startups and will become more so as they scale, but it represents value capture, not value creation. In the early stages, exponential growth of your KPI is more valuable than revenue. This will also validate your business model via monetization.
Set a growth target and measure its main drivers
The founders can use the levers to drive the continuous growth of the KPI once it has been chosen. The top-line metrics of change can be broken into sub-drivers that can be tested to attract more users and maximize Engagement and value for those already in place.
Breaking down growth metrics into user cohorts
First, the growth metrics need to be broken down by user cohorts in order to determine retention over time. This will help the company understand the true value of its users and the extent to which it is dependent on attracting new ones. Data can be used to determine the profiles of users who engage most with the product, as well as key factors that differentiate the strongest cohorts from the weakest ones. This will help the company better target its messaging and efforts.
Find the core action most related to Engagement
This Engagement relates to the statistical profiling of the best users or cohorts. The core actions are then found to be most closely correlated with user engagement over the long term and the sequences of events leading to the completion. This allows more rigorous statistical testing to be done on the impact and longevity of the various growth initiatives of the company. I’ve seen the analyses of these factors completely transform companies’ understandings of their clients, their engagement, and Engagementuct vision.
Primary sources of growth
In reality, any user or strategy can combine more than one driver. Startups offer clients incentives to refer new clients. This can be an effective strategy as long as they target clients most likely to stay engaged. Paypal is a great example of a company that uses a referral program to grow.
eCommerce companies, on the other hand, can take a risk by offering extreme discounts and a wide range of products to users who are essentially purchasing them without validating hypotheses or establishing the conditions for sustaining engagement. ClarEngagementrget profile and plan the sustainability of your strategy.
Incentives based on providing a more premium version of your products are preferred to cash rewards and discounts, as they tend to increase engagement by the engagement. They also tend to be cheaper (assuming a reasonable marginal cost for the additional service).
Examine your data points carefully. For example, many startups host and participate in events that drive interest in their target customers–hackathons, meetups, conferences for commercial or industry, or social or networking outings. Analyzing subsequent user growth within the target geography and demographics of the event can be crucial. Causation must always be viewed with caution. However, if you become a member and shortly after, other “close” people become members without any further development, then this could provide enough information for an experiment.
Analyzing the data can help differentiate between the three growth drivers. The “paid users” who are referred by specific articles or events have an irregular growth pattern characterized by spikes and, unfortunately, sometimes reversals. Organic external users, on the other hand, tend to grow in a smooth, linear fashion.
