Saturday, June 16, 2012

Metrics to understand cause and effects (aka "impact")

As Eric Ries pointed out: only those metrics that help you in making decision matter; the others are "vanity" metrics.
Actionable metrics help you to understand the progress of your business. In particular they help you in understanding the impact of your decisions, being design or marketing decisions.
In order to do so in a systematic way, you need to first understand the dynamics of the customer behavior, also known as the customer life cycle. Many examples are given for eCommerce since metrics are easily implementable through Web Analytics. However, also in other types of business this can be done effectively.
I would like to provide here an example which is different than eCommerce and that I am trying to experiment myself.
As a consultant, I provide an stretegic advisory service to startups so that they can successfully implement the Lean Startup approach for boostrapping their business or introduce new products. I provide them with an "external" perspective to their business so that they can start validating their business model's hypotheses right from the beginning and not when it is too late.

What are my Business Model hypotheses?
1. Startup's founder need a different approach to business development;
2. Even if they know about Lean Startup they need someone who guide them through the process;
3. They are willing to pay a relatively small fee to get a "one-man advisory board".

Of course, it is not possible to validate this kind of hypothesis with Web Analytics. Moreover, I need to turn qualitative feedback into quantitiatve performance indicators.
In order to test hypothesis 1, I started talking to individual startup founders in order to understand where they were struggling in business development. Actually, a recurrent pattern was that they are not able to plan on the long term and be able to convince investor in financing their ideas. Therefore, if they want to persevere, they need to find a way to self-sustain and rapidly start sellign something. In that respect, I am gathering evidences that the standard approach, i.e. the Business Plan, is perceived as an "unavoidable evil" that founders have to do in order to be considered by incubators, advisors, early investors, etc. In other words, they don't see a value in doing it but just a perfect waste of time.
In testing hypotehsis 2,  I discovered that Lean Startup idea is gaining field over mainstream approaches to business development. In the same way as it happens in software development with Agile methods, Lean Startup is seen as "common sense" for business development. People believe that the principles of Lean Startup are very reasonable, but they ask questions about how they can implement them. Following the analogy with Agile SW development, I believe that a "Master of ceremonies" (e.g. as a SCRUM master) is essential. In Lean Startup, startups need someone who help them keeping on track by avoiding falling into their own "reality distortion field". Founders believe they are right until they launch their product and realize they weren't. And this often happens too late to recover.  Founders need to change their mindset and attitude towards failure and experimentation. So far, the recurrent pattern is that often consultant are hired to confirm the company's strategy and if the consultants provide negative feedback they are probably fired.  As an advisor, I am supposed to challenge the founders and their business models so that unvalidated hypotheses will emerge very early in the process. The question is, am I able to change the founders' mindset and move them out of their comfort zone? This is exactly the hypothesis I am trying to validate.
Finally, in order to test hypothesis 3, I figure out one possible approach. In consulting/advising, the most appreciate currency is referral. Once people start appraising your skills, you will get customers in no time. Therefore, I considered useless to start charging money for my MVP and I proposed my first 10 customers a win-win deal: I will provide my service for 4 weeks provided that you will accept to write a public endorsement in case of satisfaction. After the 4 weeks, they will decide if they want to continue or not on a subscription basis and for a price which will be established according to their perceived value. I don't know if this approach will work or not. After all the MVP is not just the Lean Startup Model, but also my skills as an adviser. I consider this as a very explorative metric where I am trying to figure out the "real" value I can offer to my customers. On its results, I will be able to decide if a price and a marketing strategy, or even to target a different market segment.
In summary, for a metric to be actionable one needs to:
1. Gather insights on the customers needs and wants and in particular select the "must to have" features from "nice to have" features.
2. Understand the impact of your decision in the development of your business. Not only in cases where it is going to work, but also in the (very probable) cases where it doesn't.
3. Realize what is the perceived value of your product/service. In one market segment, customers might consider your product as a "must to have" but only for a specific price range, while it could be completely different story for another market segment.
These elements can be elicited, in my opinion, for any type of busines, product and market. In that sense, I believe that the Lean Startup model is a universal model. My long-term objective is to provide an empirical proof of this universality.
      Vincenzo Pallotta, Strategic Adviser at LeanStart, Geneva, Switzerland.

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