Metrics — Introduction

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.

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