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Episode 80: Dangerous Metrics - Finding a Better Way to Measure Business Success

by Hannah Rose | Feb 7, 2024 10:00:00 AM

Season 2 is kicking off strong with a focus on dangerous metrics. Many companies are looking to public companies and SaaS companies to find what they should be tracking, but that shouldn’t be what determines success for your business. In reality, there are a few general metrics that you can use to get a good sense of how you’re performing, but the metrics your company finds important all depend on your goals and the job you’re looking for your metrics to do.



Additional Resources:

Show Notes:

Note from the Editor: There is an episode in Season 1 that goes along with this episode. If you haven't already, listen to Episode 26: What (Almost) Everyone is Getting Wrong with Data & Metrics before you listen to this one!

Pre-Show Banter: 

  • It’s a new year and a new season! Doug was very sad during the break, not having a RevOps Show to look forward to every week. It was a much needed break, though. 
  • It’s a big day because Steamboat Willie is now in the public domain. Jess is concerned that people will now only use the character in terrible Mickey Mouse horror movies. For fun, we included Steamboat Willie into the RevOps Show logo. [insert logo] 
  • Doug is almost to his fitness goal of breaking Cal Ripken Jr.’s streak of 2,632 games.

Reporting serves two functions: 

  1. Providing insights and identifying areas for improvement.
  2. Making sure you have the numbers you need to report up to a board.

Reporting to a board or private equity is much different than providing insights for continuous improvement. It is important to understand the purpose of the metrics you’re looking to track when designing dashboards because the job to be done will influence the metrics you choose.

The SaaS industry is often seen as a benchmark for metrics in every industry. It seems like public SaaS companies often introduce new metrics that become widely followed all the time, yet it feels like there’s a Ponzi element to this. These widely followed metrics “sell at artificially low prices to drive valuation.” The underlying profitability models of SaaS companies are often flawed due to their focus on high growth, and these flawed models are causing problems now as companies struggle to maintain profitability. 

Doug explains the use of metrics with a metaphor: the map is not the territory; the model is not reality. What does he mean by this? We often confuse the simplified models and data with the complex reality of a situation.

For example, net revenue retention (NRR) if often used as a metric to measure success, but it may not provide a complete picture of a company’s performance. 

Success can lead to complacency and a focus on defending what has been achieved, rather than continuing to innovate. It can move a company from value exploration to value exploitation.

In the early days of the internet, companies like pets.com focused on monetizing eyeballs rather than acquiring customers. This started a trend of having a free business model, raising the question of how companies could make money if their product was free. Then revenue growth became the main metric for measuring company success, however, it became clear that sustainable growth required a balance between customer growth and revenue growth. Today, metrics like NRR, customer acquisition cost, and customer lifetime value are commonly used to measure SaaS company performance. Churn rates were a big concern of the past, and now the focus is on increasing the lifetime value of customers.

To continue promising growth, SaaS companies are focusing on revenue growth and operating margins. 

Where the problem lies with using metrics is when they are easily manipulated and do not tell the whole story. Metrics can be dangerous when they are used to drive negative behaviors or when they are used as the sole indicator of success. Examples include:

  • Focusing on quantity over quality
  • Setting unrealistic goals
  • Using vanity metrics

The impact of dangerous metrics is they can lead to a loss of trust and engagement as well as poor decision-making.

The solution is to have a deep understanding of the data being used and to align it with the goals and objectives of the organization. It’s important to consider the context and intentions behind the metrics and to be aware of the limitations and biases that may be present.

The traditional approach to data analysis is flawed because it relies on static models that don’t account for dynamic changes in the business environment. To overcome this, businesses need to build non-correlating analyses that look at different aspects of their business in different ways.

Doug likes to use three specific metrics for measuring the success of a business: 

  1. Largest Cheque (not to be confused with largest check)
  2. Revenue per Customer
  3. Revenue per Employee

These metrics help assess the financial performance and efficiency of a business.

Jess’s Takeaways: 

  • Understand where the weakness is in the data. We’re always looking for the answers in the data and not looking for where our blind spots and holes are.
  • Non-correlating analysis. People frequently want everything to correlate and connect to each other. Having a broader picture is going to eliminate blind spots.

Next Steps: