I have been reading the book, Lean Startup, by Eric Ries. Though it is focused on tech startups, it is useful for small business as well. Particularly, Ries’ focus on metrics is applicable. He highlights the difference between Vanity Metrics and Actionable Metrics. It turns out those concepts also apply to the small business world.
Using our common analogy that large corporations are like aircraft carriers, we can see why traditional metrics are helpful for them. As a large corporation, they know their business model. They know what works and they know their business is sustainable. So their focus is on how to do things more efficiently. An aircraft carrier is a behemoth that can carry more than 75 aircraft, be nearly 20 stories tall, and carry nearly 5,000 people. For a ship that size, it’s not about finding new ways to do things; it is about finding ways to improve. Maybe they can find a way to increase energy efficiency by 1% or they are able to launch aircraft a few seconds faster. These incremental improvements would lead to better results. For a ship or company that large, better results, even just incremental, have a big impact.
Small businesses are like speed boats
When thinking about small businesses and comparing them to speed boats, a 1% increase in fuel efficiency for a speed boat would not have much impact, if at all. There a lot of things aircraft carriers measure that simply would not apply to a speed boat. For example, people may be working on how to optimize the space used in the kitchen’s refrigerator. Optimizing that space means they could hold more food before needing to restock. Since speed boats do not have kitchens, this metric serves no purpose. While this may seem like a glaringly obvious example, think about what metrics you think you are supposed to be monitoring that simply would not apply to your particular business. We understand the idea of metrics and Key Performance Indicators from big, traditional businesses. However, they may serve no purpose to us small business owners.
Are you successful?
As a small business owner, especially when you are starting out, people often ask how things are going. Many of us feel compelled to say things are going great. Because, so we think, if we share our struggles openly, people may get too nervous about signing on or referring new clients. This response also feeds the desire to use Vanity Metrics. We may use vanity metrics to show our supporters, advisers, investors, and even ourselves how well we are doing. Ries calls this “success theater.” In reality, those metrics may actually be deluding us. Ries points out we really should be looking at metrics that answer the question we are asking in our business. In the case of a tech startup, that question is the hypothesis around what makes your business idea sustainable. For a small business, that question centers around how you define success.
Vanity Metrics Defined
Vanity Metrics could be described as what others think are important. They are showy and shiny, but may not be a true measure of how your business is doing. See some examples below:
- Top Line Revenue
- A law firm making $1M a year might seem successful. But if they have 3 highly paid attorneys who make $300K each, their real revenue may only be $100K. But if a law firm makes $500K a year and only has one attorney, their real revenue is $200K, double that of a seemingly successful and bigger law firm.
- Number of New Clients
- If your customer acquisition cost is high, new clients may not be as profitable as a client who stays on for a long period of time.
- I once had a coach who wanted me to be proud when I first broke $100K in revenue. I struggled with that because we were a temp agency whose rates were not high enough. So even though we broke $100K pretty quickly, we were not profitable and were struggling to even make payroll. She wanted me to be proud of a vanity metric, but something did not feel right.
The Alternative: Actionable Metrics
Ries states, “Energy invested in success theater is energy that could have been used to help build a sustainable business.” You must figure out what is a really important measure for your business. How do you define success? How can you measure that within your business? Is it real revenue? Is it the number of new clients? Is it how long a client stays with you? Some examples include:
- Real Revenue. The amount you make after you’ve taken care of the costs for subcontractors and materials.
- Lifetime value of a client
- How much you make from a client over the entire time they’re with you.
- Client balance
- % of clients in each service you offer or % of each type of product you sell. For example, a business owner may have individual clients, workshops, and corporate clients. If they prefer to have more corporate clients, they need to monitor the makeup of their clients to ensure they are targeting the right ones.
- At Freedom Makers, we measure the number of hours sold. Because hours are prepaid and never expire, hours worked is not necessarily a good measure. I also do not like to measure real revenue because as we have changed our prices over time (especially while getting started), our revenue change is not entirely due to growth.
My challenge to you: determine one actionable metric you’ll track this year.
Time and energy are a limited resource. If you even have the time to review metrics, are you using that time wisely? If you have not been tracking, now you can do it in a way that does not waste your time.
Check out www.Freedom-Makers.com for more helpful small business tips.