Are you tracking what matters?
October 8, 2022 2023-04-23 20:55Are you tracking what matters?
This week’s flagship article is a post by Sajith Pai on how to figure out what metrics you should focus on.
📄 Article/s of the week
a. The Revenue Equation, KPIs, and Controllable Input Metrics by Sajith Pai
During my podcast conversation with Sajith, he had spoken about the importance of picking the right metric to track and optimise. In this detailed post, he expands on that topic.
This post is crucial, because often the metrics we choose to track are driven by:
- What is easily available/convenient, or
- What has been tracked historically
Doing so could result in leaders missing critical business drivers or getting distracted by non-relevant numbers.
Instead, it would be useful to do the exercise that Sajith recommends – craft your revenue equation and break it down into its component parts till you arrive at the right ‘CIMs – Controllable Input Metrics’.
Every business can be defined as a revenue equation.
Any startup’s business offering can be distilled into a ‘revenue equation’, for example, an e-commerce business’ revenue equation at the surface level can be defined as [Items Sold * Average Selling Price or ASP * take rate].We can drill down into each variable till you get a base variable or atomic variable that cannot be broken down further.
For the above ecommerce equation, we can say:
– [Items sold = Site visitors * Conversion]
– In turn [Site visitors = New visitors + Returning visitors]
– In turn [New visitors = People seeing campaign * Conversion rate of ad]
– And [Old visitors = Past site traffic * Return rate]
From this, by digging further, Sajith opines that we can arrive at the ‘Atomic Equation’
And hence we have a drilled down revenue equation of:
– [(((People seeing campaign * conversion rate of ad) * conversion rate of new visitors) * ASP of new visitors * take rate) + (((Past Site Traffic * return rate) * conversion rate) * ASP of old visitors * take rate)]
We can break the above equation down even further. ASP is a function of merchandising and site display and offers; Conversion rate is a function of campaign spend for offers, and performance marketing / remarketing in general etc. At some point you will arrive at an equation that can’t be broken down further. This is the Atomic or Base revenue equation. Every variable (or operand) in the action is an atomic variable (it cannot be broken down further).
At this stage, you will be left with a lot of variables to monitor. How do you prioritise among them? Using a simple 2×2 matrix:
Each variable in the equation can be ranked based on extent of influence or degree of control, and degree of leverage. Degree of control is how much you can influence the variable and drive its change. Degree of leverage is how significant the variable is in terms of its impact on the business equation.
Among the metrics, it is important to distinguish between outcome and input metrics:
When selecting a metric / KPI, it should ideally be what is called a Controllable Input Metric (CIM) – one which is an indicator of your activity, e.g., mails sent requesting demo meetings is a CIM or controllable input metric, while demo meetings booked (which results from mails sent) is an outcome metric.
Finally, a key point Sajith makes is that for a founder, the CIM is more important than even a North Star outcome metric like revenue:
I contend that the most important metric for a founder is not the North Star metric but the controllable input metric(s) that influences the North Star Metric the most. North Star metric is typically an output or outcome metric that indicates progress on revenue or customer traffic or engagement. What the founder / CEO needs to focus on is the controllable input metric (CIMs) influencing the North Star metric the most, e.g., for a top-down motion-led enterprise-focused SaaS co, your North Star Metric could be ARR, check metric is churn, but the key metric may be the number of mails sent to ICPs (Ideal Customer Persona) which lead to demos that convert to sales.
This post is required reading for anyone who presents or evaluates performance during business review meetings.
Also do read the comments below the post – there are some good questions for which Sajith has given thoughtful answers.
🎧 Podcast episode/s of the week
In the previous edition of ‘ Story Rules on Saturday’, I had profiled an excellent episode where Srinath Raghavan was interviewed on the 1947 podcast. I was curious for more history gyaan from Srinath and came across this fascinating episode.
In a 2-hour plus conversation (short by Amit Varma standards), Srinath dives into the geopolitics of the 1971 War for Bangladesh’s independence. It is a fascinating tale involving all the major geopolitical powers of the time – the US, the Soviet Union and China apart from India, Pakistan and Bangladesh. Srinath is a meticulous, talented historian and is articulate in sharing his thoughts about the period.
What stood out for me were a couple of quotes from the episode:
“Before it happens every revolution seems impossible, after it happens it seems inevitable.”
And this Soviet saying, which Srinath quotes:
(in a crisis situation) The heart should be warm, but the head should be cool.
🐦 Tweet/s of the week
‘The Cultural Tutor’ is a cool handle for history/architecture themed content.
This tweet thread is a quick overview of Indian civilisation’s 5,000+ years old history.
This tweet – while an exaggeration – definitely captures the thought well. Success is very context and luck dependent – and what works for one person may not work for someone else.
Men will be men!
💬 Quote of the week
“What’s measured improves.”
– Peter Drucker
📹 Video of the week
a. The BeReal sketch by SNL(2:31)
SNL is venerated as an institution for comedy writing. You get a sense why when you watch this sketch.
A couple of bank robbers are in the midst of a heist, when an alarm pings in the phone of one of the customers lying on the floor. It’s from a new disruptive social media app called BeReal. And it has a compelling message.
Hilarious!
That’s it folks: my recommended reads, listens and views for the week.
Take care and stay safe.
Photo by Ryan Stone on Unsplash
