Shipping a new feature or product without analytics is like flying a plane without a dashboard. Without proper instrumentation, it’s hard to know if everything you’re building is working as you had planned. But a fancy dashboard can’t help you if it’s reporting the wrong information.
Accurate data is an obvious but critical step on the road to business intelligence. So too is analyzing the right kinds of information. As your company grows, your needs will evolve. We’ve found that teams tend to switch their focus between qualitative and quantitative metrics as they reach different milestones. In this article, we’ll explore some of the most important questions that startup teams can ask themselves, and how to set goals based on those questions.
Qualitative feedback is imperative, especially when you’re just getting started.
When you’re small, you don’t have enough users or data to make quantitative analysis or A/B tests statistically significant. Answering qualitative questions is the beginning of validated learning and an essential first step in building a product people actually want.
Asking customers questions and observing their interaction with your product is the best way to identify key customer events. These interactions will shed light on which features matter, how your product is used, and how valuable it really is.
- Is this product useful?
- How would you use it?
- How much would you pay for it?
- How would you describe this product to a friend?
- Would you recommend this product to a friend or colleague?
- How valuable is this product to your business?
These questions might feel a little squishy, but you can overlay a quantifiable metric on them for something more tangible. For example, you may decide to abandon an idea (pivot) if, after a few prototypes, less than 50% of the people you ask say the product would be useful.
When your product is in its infancy, you need a continuous feedback loop. Of course, nothing beats human interaction and observation, but there are a lot of tools to help you find product/market fit. Some of our favorites are Wootric, Qualaroo, Full Story, Crazy Egg, Intercom, and Olark.
How to know if you’ve found product/market fit.
Henry Ford said, “If I had asked people what they wanted, they would have said faster horses.” He knew people wanted faster transportation, but he also realized it didn’t have to be on a horse.
Collecting qualitative and behavioral data is just the beginning. Your job is to synthesize these inputs with other data to create a product users will love.
- How would you feel if you could no longer use this product or service?
Sean Ellis asserts that if 40% of people respond “very disappointed” when you ask them that question, then you have achieved the elusive product/market fit milestone in business. The 40% rule is one way to demonstrate product/market fit. But you’ll know it when you find it; suddenly, people will stick around and they’ll share your product.
Congratulations, you’re a business!
As you gain more customers, you will have even more opportunities to collect data and mine it for insights to improve the end-to-end experience. Once you finally find signal, it’s time to get serious.
When building a sustainable business, you have to answer very practical questions like:
- How much does it cost to acquire new customers?
A simple way to calculate your Customer Acquisition Cost (CAC) is to add up your Sales and Marketing Costs including media spend, salaries, and bonuses then divide that total by your Number of New Customers. CAC illustrates how much your company is spending per new customer acquired. Generally, the lower your CAC, the better. An increase in CAC means that you are spending comparatively more for each new customer, which implies there’s a problem with your sales or marketing efficiency.
- How long does it take to become profitable after acquiring a new customer?
Most businesses aim to make each new customer profitable in less than a year. The less time it takes to pay back your CAC, the sooner you can start making money off of your new customers. Strategic finance is one way to influence this. The graph below is showing cash balance over time (based on 17% mo/mo growth in revenue, and 8.5% mo/mo growth in spending). Notice what happens to the company accepting monthly payments. That’s why it’s important to understand your time to payback.
Image from Peter Reinhardt’s “Startup Finance for Founders — Part II, Strategic Finance”.
- What is the ROI of each customer?
The total lifetime value (LTV) of a customer is important to any business and subscription-based businesses (like SaaS companies) rely on those loyal customers to help drive profitability. Comparing LTV to CAC is a great way to understand how much return your company is seeing from marketing and sales efforts. The higher the ratio, the greater the ROI of each and every customer you acquire; 3:1 is a pretty common benchmark for this.
Image from David Skok’s “Startup Killer: the Cost of Customer Acquisition”.
As they say, it takes money to make money. By understanding your CAC, LTV, and payback times allows you to create models to anticipate how your venture could play out. Available cash is actually a wonderful constraint that can fuel creativity, innovation, and all around hustle, especially when you’re bootstrapped.
At some point, almost every business relies on a ridiculous number of spreadsheets to report key metrics. Spreadsheets, while incredibly flexible, also have limitations.
Establishing business intelligence.
As companies grow, questions about growth become increasingly complex. By the time you’ve achieved product-market fit, you will likely have deployed an array of different tools for advertising, marketing automation, payments, support, etc.
Each of these systems and every employee who interacts with your customers is contributing to the customer experience, raising questions such as:
- How do interactions with our support team affect revenue?
- How many emails does a user receive over the course of 1 year from us?
- Which channels refer the best customers, the worst customers?
- How valuable is a lead from each of our channels?
- Which features contribute most to engagement, revenue, and churn?
By routing this data to a data warehouse, analysts can conduct deep analyses and unlock new levels of insights to help your business grow.
Evolve your questions, get them answered. And grow.
Early stage businesses should spend time talking to customers and prospects to determine if a new product idea is even worth pursuing. Mid-stage businesses must learn how to acquire to customers, what the lifetime value of those customers is, and how to accelerate their growth. As companies move into later stages, their most important questions may be about retention of key customers and employees, and other details about their operating environment.
Many of today’s most successful companies are finding innovative ways to elicit customer feedback and fine tune the experience to drive longer, happier relationships with customers.
Focus on the metrics that matter to you at your stage and make sure you are collecting the data necessary to answer them. Make sure that data is easily accessible to the teams around you and you won’t ever find yourself flying blind.