[SOUND] I'm Tom Parkinson,

welcome to Entrepreneurship II, Practices and Approaches.

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Up to now we've been focused on getting our startup company off the ground.

Confirming that we a product market fit and a viable business model,

building a startup team, and raising the capital that we need to go forward.

In this lesson we're going to start focusing on growth.

Specifically, I'm going to talk about some of the metrics or

key performance indicators that you'll have to put in place.

And constantly monitor to help you manage growth and

keep the company on the right track.

By now you should definitely understand the value of planning for

your startup company.

Putting in place a road map to describe how you'll achieve your business and

financial goals, and reach the destination that you have defined for yourself.

It doesn't really matter what that destination is.

You could be trying to build a lifestyle business that will provide a good living

for you and your employees for many years.

You could be building a high flying,

market dominating company with Fortune 500 potential.

It's important for you to put in place a strategic plan,

that if your assumptions are correct, will get you from where you are now,

to the destination you're trying to reach.

But stuff happens, markets change, technologies change,

customer needs change, competitors change.

The strategy that worked for you at the start, may not continue to be the correct

strategy as your business grows and evolves.

You don't want these changes to catch you by surprise.

As your business grows, you should be constantly monitoring your progress and

asking tough but important questions.

Are we still pursuing the right markets and customers?

Should I change my price, my revenue model or

my product, to respond to changes in the environment?

Is my customer acquisition strategy still working the way I need it to?

Do I have the strategic partners I need to succeed, or do I need to find new ones?

Is it time to raise additional capital?

Growth can both create problems for a business and it can also cover them up.

Rapid sales growth, if not carefully managed, can lead to cash flow problems.

This is especially true for businesses that have to carry inventory,

manage the collection of accounts receivable, or

invest heavily in customer service or support infrastructure.

And while managers may think the company is succeeding because its

sales are growing.

If they're not looking under the hood, they may not see that the factors that

are causing that growth may not be sustainable.

Here's an example, I'm on the board of directors of one of the leading real

estate photography businesses in the country.

We understand that there are always two factors that drive the company's

sales growth.

One of these is the effectiveness of our companies sales and marketing initiatives.

The other is the growth in the number of houses that are listed for

sale from time to time.

The first of these is something we can control and the second is not,

and unfortunately it's cyclical.

If we only look at the company's top line sales numbers we might think the business

is doing well.

We could be in for

a nasty surprise if there is a downturn in the housing market next quarter.

Markets aren't the only things that change, your priorities for

the business will change over time as the company becomes more mature.

At the start, your top priority might be to land some early adopter customers to

demonstrate that there is a demand for your product or

service, and validate your business model.

The priorities are going to be very different as the business evolves

from a startup to a growth company.

Maybe your number one priority is year over year sales growth.

Maybe it's gaining market share, maybe it's achieving break even or

profitability.

It might be reducing customer acquisition costs, or

increasing customer lifetime value.

It might even be something non-financial, like quality, or customer satisfaction.

As the business priorities change, management will need to develop metrics

that can be used to asses whether the team is making the right moves.

Where should the team focus its attention to ensure that its objectives can be

achieved?

What obstacles are in the way and must be overcome?

Strategy development starts with a goal and

a hypothesis about how that goal can be achieved.

If we do x, then y will happen, this is your hypothesis.

If we hire more sales people, then we will close more sales.

If we generate better leads for

our sales team, their sales closing rate will increase.

If we add a new feature, more new customers will buy our product.

If we offer discounts for repeat purchases,

our customers retention rates will improve.

Let's drill down on this a bit more.

A hypothesis like, if we spend more money on search engine marketing,

then more people will visit our website, is probably not specific enough.

How about this?

If we spend $10,000 to buy specific Google AdWords,

then an additional 50 customer prospects will visit our website this month.

Now that's a hypothesis that you can test.

Your strategy must describe how you are going to test your hypothesis.

We will monitor the number of unique visitors to our website this month that

we can qualify as prospects based on their URL.

So website visits by qualified prospects is the key metric or

key performance indicator, or KPI, that you will use to determine whether your

hypothesis about search engine marketing is correct.

Well managed entrepreneurial companies are likely to have dozens of KPIs that they're

tracking at any point in time.

It's a good idea to develop a dashboard.

Which is a one page report that tracks the most important KPIs, so that managers and

other stake holders, like your board of directors.

Can readily see which of the teams initiatives are bearing fruit, and

where there may need to be a change in strategy.

Your dashboard can also track markets statistics,

like the number of homes that are listed for sale.

To help managers see whether their KPIs are being influenced by events that

are outside of management's control.

As you're identifying your KPIs and building your dashboard,

beware of vanity metrics.

These are metrics that might seem like they're important, but

they really don't matter to the company.

This could be because there's no real correlation or cause and

effect relationship between these metrics and the company's real objectives.

Or it could be because they are outside of management's control.

An example of what I am talking about might be page views on your company's

website.

This might seem like a worthwhile statistic and for

some businesses it might be.

After all, you probably spent a lot of money developing your website.

And the amount of time that visitors spend on it, and the number of pages they look

at might be a good indicator of its attractiveness or functionality.

However, if your real goal is to convert visitors to your website into

paying customers,

the number of pages that visitors look at may not really be all that important.

You'd just as soon have them click on the Buy Now button if you have one,

conversion is probably more important than page views.

An example of a metric that you really can't influence might be

the market growth rate.

This is akin to the rate of growth of listings of homes that are for sale for

my real estate photography company.

It may very well have a big compact on how the company does that month, but

there's really nothing that the company can do to move the needle.

Market share, the percentage of new listings that the company actually

photographed is a more useful metric.

So how do you identify the metrics that really matter?

Here are some guidelines.

They should be tied to some specific business goals or objectives and

they must be truly relevant.

If we change x, then we will achieve y.

Remember, that you're goals and objectives are likely to change over time so

your metrics will also have to change.

At first, you may be focussed on building awareness of your company or

your products and your target market.

After that, you'll be trying to validate your product-market fit and

then working to convert prospects into customers.

As you move more into the growth phase for the business, you may be more focused on

things like customer retention and churn reduction, or business model optimization.

You'll be better off if you can keep your metrics or KPIs, objective,

simple to monitor, and easy to understand.

Here are some pretty standard customer metrics,

some of which may go by different names based on the nature of the business.

In particular, whether it's doing most of its business online or offline.

Marketing response rate, this is the percentage of prospects that the company

touches in some way with its marketing efforts, emails, advertisements,

and so on.

That actually respond to that contact by clicking through to the website,

requesting a demonstration, or downloading a trial version of the product.

Sales conversation rate, that's the percentage of

qualified prospects that actually choose to purchase.

Customer acquisition cost, we've discussed this one before.

This is the total amount that the company spends on sales, or sales and

marketing divided by the number of new customers.

Your average purchase price, this one is pretty simple.

And your contribution margin, that's the average price paid

by the customer minus the direct costs associated with that sale.

If you're running a shoe store and you sell a pair of shoes for $100,

which you had to pay $60 to buy them from the manufacturer,

then the contribution margin is $40.

Repeat purchase rate, what percentage of your new customers come back to make

a repeat purchase, and how often do they come back?

Your customer churn rate, how long do customers remain loyal to your business?

What percentage of them stops being customers each month or year?

And the lifetime value of a customer, this is a measure of

the total amount of profits that a typical customer can be expected to generate for

the business over time.

Taking into account, the contribution margin on each purchase,

the frequency of repeat purchases, and the customer churn rate.

This is a very short list, I'm sure you can come up with many more.

There are plenty of experts out there that will tell you that there are really only

two metrics that matters for most entrepreneurial companies,

customer acquisition cost and the life time value of a customer.

When investors ask you about your unit economics, this is what they mean.

Are your unit economics such that you're able to make money on every new sale?

How much money are you able to make on each new sale?

If it's less than your customer acquisition cost,

then you probably won't have a business at all for very long.

Still, most entrepreneurial companies track many more KPIs than just customer

acquisition cost and customer lifetime value.

This is because both of these metrics have a lot of moving parts.

And management's goal should always be to understand why these metrics are what they

are, and to improve the ratio between them.

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Growth Metrics

Entrepreneurship II: Practices and Approaches

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