Machines & Phases

There are so many different ways to measure a startup it’s easy to drown in metrics. How do we know what we should focus on? How do we separate the signal from the noise?

I like to divide and conquer this problem using a 3x3 matrix…

Three machines

The columns of the matrix cover the people working on the team and the different responsibilities they have:¹

1. Product - developing, maintaining and operating the product or service;
2. Customer - marketing, selling, on-boarding and supporting customers to use the product or service; and
3. Company - recruiting, retaining, running and (not least) funding the team that makes everything else possible.

Three phases

The rows of the matrix cover the phases that we progress through en route, from early-stage to successful mature business:²

1. Build - developing a product that solves a real and valuable problem and attracting some initial customers;
2. Grow - overcoming obscurity and promoting and selling the product to more and more customers; and
3. Profit - doing all those things efficiently and ensuring that the amount we spend on each customer is relative to the amount we earn.

Nine intersections

This model lets us consider the progress for each area of the business separately, and focus on the important measures of success at each stage.

Product

The first job is to develop a product or service that solves a problem. We might stumble across that immediately, but more likely will need to work hard while customer numbers are small to understand if people are actually using what we’re building in the way we anticipated, and adjust accordingly. A common trap at this stage is to be overly influenced by what potential customers say they will do, only to later discover they don’t do that at all once we’ve built what they said they wanted. As the number of customers grows we can start to segment, and understand what is attracting our best customers and also what the gaps are for customers we don’t retain. Later, as we get beyond early adopters we need to pay more attention to things like customer churn and the cost of servicing each customer, so we can invest in the right areas.

We progress from measuring active users to measuring delighted users to finally measuring loyal customers.

Customer

In the early stages we’re looking for customers who are willing to use the product right away, even though it’s only half built. We need to understand how customers move through our sales funnel from a prospective lead to a paying customer and finally to a devoted user. To move beyond one-by-one sales we need to experiment with the different sales channels that are available and understand the costs associated with each. We need to learn what generates growth. Perhaps existing customers spread the word for us, but more likely we need to buy it. There may also be opportunities to increase the revenue we earn from existing customers. Later, with the benefit of time, we can track the lifetime value of different customer cohorts and use that detail to tune our sales process.

We progress from measuring sales conversions to measuring sales margins to finally measuring sales efficiency.

Company team

At the beginning cash is typically the most critical constraint. Either we need to ensure that the amount we’re spending is relative to the initial revenue we’re generating, or we need to raise external capital to fund the difference. As the team grows, we need to focus on team culture to make sure we’re attracting the right kind of people to the different roles and keep them engaged and happy. Eventually we also need to consider how people who have invested time and money to create the business will get a return.

We progress from measuring cash flow to measuring team engagement to measuring shareholder returns.

Walk → Run → Fly

We can also work across each row in this framework to quickly identify the basket of metrics that are likely to be most important at each stage of the business.

In the beginning we measure user activity, our sales funnel and cash flows. As growth accelerates we measure customer sentiment, net new revenue and cost-to-acquire, plus team engagement. As the business matures we measure customer retention and churn, lifetime value (or, perhaps more usefully, average contract value) and return on investment.

We don’t need to drown. We can use this matrix to narrow our focus on the metrics relevant to our current age and stage. This lets us keep our heads above water and mature our approach over time.

Related Essays