This is a post about Compass by Ramon Bez, a growth engineer at Tour Radar, a travel e-commerce company.
1. Why Benchmarking Is Important
We all make decisions about the future every day. The challenge is that so many of our decisions about the future are made under conditions of great uncertainty.
The more data we can find to support ourselves in the decision making process, the better our decisions will be. In a business context, better decisions directly translates to less waste, better results, and greater success.
For online businesses, the newly emergent ability to measure every single customer interaction has opened up unprecedented opportunities for using data to make better decisions..
But even though data are increasingly available to support decision making, this abundance of data has increased the prevalence of gut based decisions relative to data based decisions.
Cardinal Path, a renowned digital agency, published a study showing that the number of projects using marketing analytics has in fact decreased in the last couple years, from 37% (in February `12) to 29% (in February `15).
The reason for this decrease is that companies are simply overwhelmed by the abundance of data and the complexity and training required to utilize it properly. Most businesses are clueless at every step of the analytics cycle. They do not know what they should be measuring, how they should be measuring it, and how to interpret these metrics to make the decision to take one action over another.
And so data often becomes an accessory to arguments in favour of pre-established opinions, and not the basis for creative insights and strategic decisions. As a result, even in the projects where data and analytics are implemented, they are often used by those with management authority to simply back up their previously held opinions.
Greater fluency in analytics would enable businesses to mine their data for golden nuggets of insight, dramatically increasing their chances of success.
A primary cause of this lack of fluency, however, is the fact that most marketers don’t have access to an adequate framework (ie. context) from which they can base their decisions. Without proper context, data is rarely useful in providing new knowledge and, most importantly, new ideas.
At present the primary way marketers obtain context is by comparing their metrics against themselves in the past. What they are missing however, is the ability to accurately and rigorously compare themselves to other businesses who are similar to them, to understand how they stack up.
In so many other areas of society this peer based comparison is a readily available and valuable contextual metric. Students know the percentile of their performance on standardized tests like the SAT, athletes know how their statistics compare to players in the rest of their league, doctors know what normal looks like on a blood panel, yet most business have no idea what good or normal is for nearly all of their metrics.
Compass has been hard at work for many years now to build the conceptual model, analytical framework and API infrastructure needed to enable this kind of peer based context for better decision making.
Context & Benchmarks
The two most common challenges companies face when attempting to find game-changing insights from their data are:
- They don’t know what to measure to track the progress on their primary objective
- They don’t know how to interpret the data they have measured
1. What to Measure
For most companies, knowing what to measure is the first challenge in improving performance.
This is especially difficult when companies are navigating uncharted territories, as is usually the case for startups.
Without the right tools to set the right targets and correctly use data, entrepreneurs often end up with decision paralysis, or worse, “blind” or misguided practices.
Compass helps entrepreneurs and marketers overcome this difficulty by comparing their performance with companies in the same industry and of similar sizes. This provides a framework of standard metrics they can use to start measuring progress and success.
Social networking sites, for example, will probably need to place special consideration on metrics such as number of signups, page views, time on site or returning visitors. These are very different from what an e-commerce business should focus on, where conversion rate, bounce rate and average cart value will likely have a more significant impact on their success.
Even within these two verticals, however, there are several different factors that will influence the decision of what metrics need to be followed more closely than others. These factors might include variables like target market, product prices, customer lifecycle, etc. Very few things are more dangerous to a business than attempting to improve a product by optimizing for the wrong metrics.
Knowing what to measure will give entrepreneurs and marketers clarity on what they should be focusing on and prevent them from basing business decisions on pure instinct or on metrics that aren’t relevant for their businesses.
2. Not Knowing How To Interpret Data
The main difficulty that arises, once businesses have learned what their key metrics are, is not knowing how to interpret these metrics in order to make decisions that improve their business.
Understanding the specific performance indicators that are most relevant to your company is crucial because a successful growth strategy is one that focuses almost exclusively on the biggest obstacles for growth. The best performing companies channel their most precious resources (human capital) towards these important issues.
Intelligent benchmarking allows companies to uncover precious information and accordingly, adapt their behavior. For instance, let’s say you found out that your page view numbers are performing badly compared to the best companies in the industry. Now you can use this knowledge to drive your strategic decisions towards that specific goal.
This type of intelligence is normally unattainable to small and medium businesses, who have to rely on their own historical data and “hunches” to make business decisions that will have a big impact on their future.
Compass’ dashboard makes it abundantly clear to everyone in the company what should be their next biggest focus by comparing thousands of data points from companies in similar stages, industries and characteristics.
Moreover, it draws business insights from the raw data, highlighting where the company needs improvement. This gives the company a significant competitive advantage against businesses with no clear understanding of their own strengths and weaknesses.
2. How To Start Using Compass
1. Setting Up Data Sources
Using Compass is extremely easy. You start by setting up your account and then seamlessly integrating many of the software applications you already use, such as Google Analytics. Compass will securely and privately draw information from GA about your website or application, including metrics like number of visits, time on site, bounce rates, conversion rates, advertising performance, social media presence and much more.
Other popular services that Compass taps into are payment APIs such as Adwords, Paypal, Stripe, Amazon, and Shopify. Compass can use data from these services to calculate benchmarks for revenue, lifetime value and churn.
It’s important to note that Compass doesn’t share your company’s data with anyone, and never will.
2. Reading Your Dashboard Report
The first thing you’ll notice once you’ve activated one or more data sources, is that your dashboard will be filled with rich, color-coded data about your business.
a) How To Read The Color Codes
The color coding of your data points in Compass is very simple:
Green means you are above the median of your peers, which means that, compared to the market, this is a strength of your product.
Yellow: Means you are below the median, though not by much. It demonstrates that this is an area you should be paying attention to.
Red: Means this is a weakness of your product and an area that you should focus your efforts to improve.
b) How To Read Your Dashboard
The foundation of our assessment of your startup is based on classifying your company into one of 4 stages in the Startup Lifecycle. Our model of the startup lifecycle has been tested, validated and written about extensively in our research reports under our Startup Genome initiative. You can find those reports here.
According to our model, the Startup Lifecycle is made of 4 stages of development: Discovery, Validation, Efficiency & Scale.
It is very important that you conceptually understand these stages and move through them in order. We have plenty of qualitative and quantitative analysis showing that companies who move through these stages sequentially perform massively better than companies who don’t.
Moving through these stages out of order leads a company to incorrectly set goals and priorities, improperly allocate resources, and focus on the wrong metrics for improvement.
Now we’ll walk you through a basic description of each stage.
In this stage you are searching for Problem / Solution Fit. More specifically, this means you’re trying to investigate whether your hypothesized product is solving a problem that your target market have a strong need/desire to have solved.
Many startups either don’t do this stage properly or skip straight to validation. They end up spending a lot of technical effort designing and coding a product that, as it turns out, nobody is interested in using.
In this stage you are searching for Product / Market Fit. More specifically, this means you’re looking to build minimum viable products (MVPs) in increasing levels of resolution and completeness.
MVPs help you validate that your identified customer segment is interested in your product. Not just based on what they said in the discovery stage, but now based on how they actually behave and in engage with your prototype.
To successfully complete the validation stage, you’re searching to create a repeatable ‘must-have’ experience for a significant customer segment. This segment needs to be significant, so that you can scale your company around it.
A variety of qualitative and quantitative metrics are used to indicate whether you have reached Product / Market Fit. These are such as Net Promoter Score, User Satisfaction Score, Very Disappointed Score, Retention, Engagement, and Monthly Recurring Revenue.
Many startups move on to the efficiency and scale stages before they’ve reached Product / Market Fit. They waste a lot of time and money optimizing and marketing a product that users aren’t very compelled by yet.
In this stage your startup has found Product / Market Fit. You are now preparing your company to be able to handle massive growth in the proceeding scale stage.
This is the stage where you refine your business model, optimize your landing pages and conversion funnels. It’s also when you solidify your technical infrastructure as well identity the values of your company culture.
Startups that skip this stage and scale too quickly after Product / Market Fit are metaphorically similar to an unprepared rocket launch. Their startups inevitably blow up and disintegrate rather than reach the stratosphere.
Scaling before finishing the efficiency stage can destroy startups in many ways. One of the most common way in which Compass can help with is making sure your unit economics are solid. That means you want to make sure for every new customer your startup acquires, the lifetime value is higher than the acquisition cost, and the time to acquire and speed of marketing recovery cost are sufficiently fast.
In this stage, startups are ready to step on the gas pedal and drive growth very aggressively.
Once startups have validated their unit economics, identified a variety of profitable customer acquisition channels, and know that their product can technically handle the increased usage, they are ready to start aggressively pumping financial and human resources to profitably saturating these growth channels.
3. The 4 development stages in Compass
Reading your dashboard from the bottom up, you can identify what stage in the Startup Lifecycle your company is at. Here’s how you can do that:
1. Product / Market Fit
A startup still looking for Product / Market Fit is not yet in a position to grow.
The performance indicators in this section will evaluate the importance of your product in the lives of your target market and corresponding key customer segments.
So if your data looks red or yellow in this section, that is a sign that your product isn’t sufficiently compelling to users and you haven’t yet reached Product / Market Fit.
Here is a more detailed description of each of the metrics in this section:
LTV: Lifetime value is the mathematically calculated monetary value the average user will spend on your company’s products and services during the entire timeframe they remain a customer of your company. The key variables of the LTV equation are the average time length an individual remains a customer of your company, retention rate and profit margin per customer.
Returning visitor: This is the percentage of users who return to your site or application after their first visit.
Time on site: This is the average amount of time users spend on your site or application per session.
Pages per visit: This is the average number of pages on a user views on your site per session. The precise pathway of what pages they visited, in what particular order may also be provided.
Bounce rate: This is the percentage of users who visit a single page on your website or application and then leave before taking additional actions.
2. Product Efficiency
Once Product / Market Fit is successfully achieved, a startup should then focus on optimizing product performance.
That means making sure that users have the best possible experience with your product. For that, the key metric we measure is Page Load Time:
Page Load Time: Increasing speed has become a fundamental product requirement. People need things faster and more readily. Every second counts when it comes to the time it takes for a page to load, and that has a direct effect on business results.
3. Customer Acquisition Efficiency
If your product is a great fit with your target market and it is performing well, then congratulations! You are ready to start ramping up customer acquisition.
The two main metrics you should be looking at are below. Pay close attention to them and be sure that each of your customer acquisition channels are performing well:
CAC: Cost per acquisition is the most important metric to measure and monitor if you’re doing paid advertising. Benchmarking your CAC against companies similar to yours will help understand how effective your marketing is and how much room for improvement you may still have.
Conversion Rate: The percentage of people that came through a particular marketing channel and signed up or made a purchase.
Bounce Rate: These refer to each acquisition channel. If a particular channel has a high bounce rate, it means that it could not be the right channel for your product. Or it might need optimisation work.
4. Topline Performance
If your Product / Market Fit, Product Efficiency and Customer Acquisition metrics are performing well, you are ready to scale.
So it’s time to step on the gas pedal and watch out for the top-line metrics of your business, which are:
Revenue: Make sure that your monthly revenue numbers are pointing up.
Avg. Transaction Value: Selling more of higher priced products will help you improve your overall business performance.
Transactions: Make sure growth is steady by improving the number of transactions weekly or even daily.
Unique visitors: If all your other metrics are trending up, then watch for your unique number of visitors as well. Just be careful not to pay too much attention to this metric before other core areas of your product are optimized.
4. How to incorporate Compass in your company’s routine
Compass’ value surfaces when you incorporate our data into the managerial processes of your company.
We recommend using Compass’ dashboard in your next meetings, in the following way:
Successful companies focus on solving their biggest bottlenecks first. With Compass, your sprint meetings will start with a clear view of your priorities.
By understanding, for example, that Page Load Time is high in comparison to your peers, and that page load time directly impacts conversions, you’ll know to prioritize tasks to reduce Page Load Time.
We recommend you open the meeting by showing Compass’ dashboard to the entire team. Set it for Report mode and select Weekly Report to see your improvement from last week. Then use our colour coding system to identify what are the main metrics you should be focusing on.
Now go to your backlog of tasks and pick the ones that can positively impact red metrics in your dashboard (or brainstorm ideas that can). Then assign these tasks accordingly.
Repeat this process in every sprint meeting until all your metrics are green.
Weekly Team Meetings:
If your company starts each week with a team meeting, then use data from Compass to enrich it and ground this week’s focus.
Show your Compass dashboard to the entire team and highlight green and red metrics. Set it for Report mode and select Weekly Report to see your improvement from last week. This exercise will help get your entire team focused on the most important data.
Congratulate the team on the metrics that are looking positive and bring their attention to the metrics that need improvement.
Use that data to focus your company’s weekly efforts in the direction that will have the biggest impact on the business. Then assign tasks and responsibilities accordingly.
Investors come to the board meeting to learn about your company’s performance. Compass’ dashboard will give them a clear indicator of the areas you are performing well and where you need improvement.
Knowing how your metrics stack up against the market will allow them to focus the time of the meeting on what matters most. Once they understand what the most important issues are, they can help you with clear cut advice on how to improve.
Moreover, they will know that the entrepreneur has a deep knowledge of what’s going on in the company. That will reassure them that actions are being taken to drive the business towards success.