Metrics — Introduction

Metrics are essential to running a good business. Here's a primer

Readers of this site have noticed a recent focus on trying to get some rough numbers and some types of metrics around the blogopshere. Those are part of my trying to figure out whether Web 2.0 is a bubble or whether it is really different from web 1.0. To that extent, I’ve been working on a series of entries relating to metrics in the blogosphere and web 2.0 world. I’m sure that many of the statements I will be making over the course of the next week will be controversial but I expect to stir up discussion of what Web 2.0 means in terms of real numbers.

The series is going to be broken down into five main chapters. Today, I’m going to go over the basics of measurement and who needs them. Day 2 will be about hard metrics (aka. the measurable ones.) Day 3 will delve into soft metrics (ie. the ones that are harder to measure.) On day 4, I will try to weight all those values out in order to get some types of basic formulas for measuring web 2.0 performance. An finally, on day 5, I will review what I expect to be a fair amount of commentary being made in the blogosphere about the previous four entries.

So let’s dive in.

Why Metrics?

The first question people would probably ask is why bother? After all, things are different now and trying to assign any types of metrics is a fool’s errand, isn’t it?

Well, not quite. In my experience, the talk about things being different now is no different than the initial talk that existed in the early 90s when discussing the fundamentals of e-business. At the times, screams that the rules were different were used to gloss over some structural issues with certain business. at the end of the day (or the end of the bubble), many realized that the rules were not so different after all and that traditional business models could be adapted to the web space.

It is my contention that the rules of Web 2.0 are fundamentally the same as the rules of business in general. Models relating to valuation of business have been relying on some objective measurement as well as a few subjective ones for years and I would venture to say that most of the data we need is in front of us.

There are objective numbers (things like traffic and revenue) and some more subjective ones (things like reputation and integration value) but all and all, there may be a way to measure web 2.0 business and assess them in a somewhat dispassionate light. Web 2.0 models are inherently based on some level of integration (mash-ups, remix, or whatever you want to call it) and the value that can be derived from that so I will also try to figure out what those levels are.

But one also has to be careful, as metrics are not everything, and to consider them as the only tool in an investment strategy would be foolish. What I am attempting here is largely to figure out what kind of goalposts we are looking at.

Who needs Metrics?

In my mind, metrics are a fundamental of any business, no matter where in the business one lines. Just thinking about the role of metrics within a traditional start-up, one can think of the metrics that apply.

For example, management needs to have some metrics in order to impact strategic planning and development. Some of the areas in which metrics would play a role for the management team would we comparative analysis to competitors in one’s space (is our business losing or gaining speed against competitors?), management of investments (whether to take external investments, reporting to one’s investors), exit strategy (is the market at peak? is the offer we’re getting valuing our business at a much higher value than we think?)

The finance office, of course, will be very involved with any types of metrics relating to the financial performance of the business but also to its burn rate and its ability to attract or retain external investors. The business development team uses a number of metrics to attract and retain partners by demonstrating the value of the business to those partners, showing them that they will gain certain measurable advantages. Sales team also use metrics to demonstrate how buying one’s product (or advertising against that product) is good for the client’s business.

On the more geeky end, development teams can put metrics to their code, using some data points to assess whether one’s design is solid enough to scale. Metrics can also be used by the development community to ensure that bugs and/or features are prioritized properly to maximize value to the business. And in the operations room, metrics are being used to assess capacity against certain system and figure out when/where to buy new hardware to ensure that the business can continue to grow without seeing major capacity issues. Proper metrics can also be used to assess whether certain bugs are causing more problems than others and should therefore be fixed by developers first.

Meanwhile, outside a company, investors are using metrics to assess the performance (growth or decline) of the company and judge return on investment. This can have a huge impact on whether one’s investors decide to invest in future rounds or pressure management to make some changes (and sometimes those changes could include changing the management itself). Partners use numbers to assess the advantages of partnering and judge how much they can negotiate in a deal. I have, in the past, seen situation where solid ownership of a particular customer segment, for example, have managed to get very large companies to agree to very favorable terms for a small start-up. Had those metrics not existed, the start-up could have found itself at a disadvantage.

Advertisers also use numbers to assess alignments with the target publics they are trying to reach and to assess whether a certain advertising campaign has met the goals it was supposed to.

So numbers are sitting at the core of every segment of a business and it is important to understand their value in order to assess whether they can help or not. Tomorrow, we will start delving into those numbers and work on figuring out some specific ones that can be used to measure the value of a business.

About the Author

Tristan Louis

Writing and working on the internet since 1993, I've launched six companies, of which two went public and three were sold. This is my personal site and all opinions here are mine.