Wednesday, January 21, 2009

Numbers not Napkins

Dave McClure, Master of 500 Hats, spoke the SDForum Business Intelligence SIG January meeting on "Numbers not Napkins: Simple Metrics & Business Models for Startups". This is an adult version of a talk that he has given several times in different places on "Startup Metrics for Pirates". The presentation is available online at SlideShare, one of several companies that Dave advises.

The back story is that Web 2.0 start-ups need good metrics to see how well they are doing and to identify the things that they need to improve. Dave groups metrics into 5 buckets: Acquisition, Activation, Retention, Referral and Revenue; or AARRR hence Metrics for Pirates. On the web, once you have decided what you want to know, it is easy to collect good data. So the issue how do you decide what you want to know?

Dave proposes that you can do all this with 3 simple one page documents. The first document is a one page business plan. The plan is a table with columns for each type of visitor to the web site and a row for actions that they take to use the web site. A good plan will have at most 2 or 3 different types of users and 3 to 5 rows drawn from the {
acquisition, activation, retention, referral, revenue} set. Over time the business plan will evolve. For example, at the very beginning acquisition and activation may dominate while later on revenue will take a bigger part of the picture. Dave spent some time discussing business plans and giving examples from companies that he is involved in.

The one page business plan leads into the second document, a set of metrics that measure "conversions", that is the number of visitors who perform an action described in the business plan. Also important to measure is how the visitor got there. This leads to understanding the channels that bring visitors to your web site and defines the third one page document, the marketing plan. For each channel, you want to measure at a minimum the volume, cost and conversion rate of visitors.

Dave's has three mantras that he repeated throughout his talk. Firstly, keep it simple so that you can understand what is going on and quickly react to the things that your metrics tell you. Secondly, keep the data actionable so that you can act on what you find out. Thirdly, keep iterating, test new ideas, optimize based on the insight from your tests.

All in all it was a great talk, that got much of its weight from the many examples that Dave could discuss with first hand knowledge.

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