Welcome to module four of entrepreneurship, preparing for launch. Up to now, I've been focusing mainly on strategies for getting a start up company off the ground, which include confirming that there's product market fit and a viable business model, building a startup team and raising the capital that's needed to go forward. In this lesson, I'm going to to start focusing on growth. Specifically, I'm going to to describe some of the metrics or KPIs that you should monitor to help manage growth and keep the company on the right track. Our word, cloud for this lesson is once again focused on customers. That's because the primary growth metrics that I'll be discussing can be used to tell if your strategy for acquiring profitable customers is working. By now, you should understand the value of planning for a start up company, creating a roadmap that you and your team can follow to achieve your goals and reach the destination that you have in mind for the business. 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. Or you could be building a high flying, market dominating company with fortune 500 potential. If your assumptions are correct, your strategic plan should help 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. I'm reminded of a famous quote from Mike Tyson. Everybody has a plan until they get punched in the mouth. You need to be on the lookout for changes like the ones I just mentioned so that you can be prepared to deal with and respond to them. Strategic planning is not something you do once and then forget about. As your business grows it's important to constantly monitor your progress and ask some tough but important questions. Here are some of the questions you should be asking. Are we still pursuing the right markets and customers? Should we change the price or the revenue model to make the business more scalable or profitable? Should we make changes to our products or services to better meet our customers needs? Is our customer acquisition strategy still working the way we need it to? Do we have the strategic partners we need to succeed or do we need to find new ones? Is it time to raise additional capital? Growth can create problems for a business and it can also cover them up. Rapid sales growth in particular can lead to cash flow problems and possible insolvency. This is especially true for businesses that have to carry inventory, collect accounts receivable or invest heavily in customer service or support infrastructure. While managers may think the company is succeeding because its sales are increasing. If they're not looking closely, they may not see that the factors that are leading to that growth may be unsustainable. Here's another example from the real estate photography business I've told you about before. We understand that there are always two factors that drive the company's sales growth. One of these is the effectiveness of our company's sales and marketing initiatives. The other is the growth in the number of houses that are being listed for sale from time to time. The first of these is something that we can control, the second is not. If we only look at our top line sales numbers, we might think that the business is doing well. We could be in for a nasty surprise if there's 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 matures, at the start, your top priority is probably to land some early adopter customers so that you can show that there's a demand for your solution and validate your business model. Your priorities are likely to be very different as the business evolves from a start up to a growth company. Instead of finding a product market fit your number one priority, maybe year over year sales growth, maybe it's increasing your market share, maybe it's achieving break even or profitability. It might be reducing customer acquisition cost or increasing customer lifetime value. It might even be something non financial like improving product quality or increasing customer satisfaction. As these priorities change, you'll need to have metrics that you can use to see if your team is making the right moves. Strategy development starts with a goal and an if then hypothesis about how that goal can be achieved. If we do X, then Y will happen. This is your hypothesis. Here are some examples. If we hire more salespeople then we'll 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 are customer retention rate will improve. Or if we spend more money on search engine marketing, we'll get more website traffic. How can you tell if your hypothesis is correct? Hypothesis like if we spend more money on search engine marketing, then more people will visit our website is probably not specific enough. It's not as quantifiable as it should be. Let's change it to this. If we spend $10,000 to buy Adwords then 50 more customer prospects will visit our website this month. That's a hypothesis that you can test so that you can tell whether it's true or false. Now you have to describe how you're going to test your hypothesis will monitor the number of unique visitors to our website this month that we can qualify as prospects based on their URL. Unique monthly website visits by qualified prospects is the key performance indicator or KPI that will be used to determine whether the hypothesis about spending money on search engine marketing is correct or not. Ideally, you should identify KPs like this to monitor your company's progress and confirm that the other hypotheses that you're basing your strategy on our correct. Well managed entrepreneurial companies are likely to be tracking dozens of KPIs at any point in time. This can get complex. So it's a good idea to create a dashboard, which is a one-page report that tracks the most important KPIs so that managers and other stakeholders, like the board of directors can quickly see which of the team strategies are working and where they might need to make some changes. A dashboard can also track market statistics, like the number of homes being listed for sale for my real estate photography company to help managers see whether they're KPIs are being influenced by events that are outside of their control. As you're identifying important 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 you or 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're outside of management's control. For example, let's look at page views on a business website. This might seem like a worthwhile statistic to track to tell whether your marketing efforts are working for some businesses this might be true. After all, you probably spend 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 its functionality. However, if your real goal is to convert website visitors into paying customers, the number of pages that they look at may not really be all that important. You just as soon have them click on your Buy now button right away, 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 similar to the rate of growth of listings of homes that are for sale for my real estate photography company. It probably does have a big impact on how the company performs that month, but there's really nothing that the company can do to affect it. That doesn't mean you should ignore it, but market share, the percentage of the new listings that the company actually photographed is probably a better metric to use to tell if the company's sales and marketing strategy is really working. So how do you identify metrics that really do matter? Here are some guidelines. They should be tied to specific business goals or objectives and they must be truly relevant. This will help us tell if our hypothesis. If we change X, then Y will happen is accurate. Remember that your goals and objectives are likely to change over time, so your metrics will also have to change. At first, you may be focused on building awareness of your company or products in 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 or turn reduction or business model optimization. Ideally your KPI should be objective, simple to monitor and easy to understand. Here is some pretty standard customer related metrics. Some of these may go by different names based on the nature of the business, such as whether it is 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 who respond to that contact by clicking through to the website, requesting a demonstration, downloading a trial version of the product etcetera. Sales conversion rate. This is 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 and marketing divided by the number of new customers that are acquired during that time period. Average transaction size, this one's self explanatory. If a customer purchases one product from you at a time, it's the price. Contribution margin, that's the average transaction size minus the direct costs associated with each sale. If you're running a shoe store and you sell a pair of shoes for $100 but you had to pay $60 to buy them from the manufacturer, the contribution margin is $40. Repeat purchase rate. That's the percentage of new customers that come back to make one or more repeat purchases. Churn rate, this is the number of customers that don't come back or choose not to renew their subscriptions. 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. I've talked about customer acquisition cost and customer lifetime value before and for good reason, there are plenty of experts will tell you that these are the only two metrics that matter for most entrepreneurial companies. When investors ask you about your unit economics, this is what they really want to know. Are your unit economics such that you can reliably forecast that you can make a profit on every new sale? How big is that profit likely to be? For investors, this is the difference between investing in companies that are playing offense versus defense. A defensive financing is one that is needed to keep the business afloat. An offensive financing is one that will be used to accelerate its growth. Here's a quote about CAC and CLTV from Troy Henikoff a venture capitalist, entrepreneurship instructor, former managing director of Techstars, Chicago and the author of levers the framework for building repeatability into your business. If your customer lifetime value is greater than your customer acquisition cost, you have a viable business, if it's a lot greater than you probably have an attractive and scalable business. On the other hand, if your customer lifetime value is less than your customer acquisition cost, you may not have a business at all for very long. Most entrepreneurial companies track more than just CAC and CLTV on their dashboards. That's because both metrics have a lot of moving parts, and other KPIs can tell you why your CAC and CLTV are what they are and help you come up with strategies for improving both.
