BusinessTechnology

Metrics — Hard Metrics

Yesterday, I looked at which parts of a company can use metrics. Today, I start delving into the types of metrics those different groups can use. For the purpose of this on-going discussion, I’ve divided metrics into two categories: Hard Metrics and Soft Metrics. The main difference betwen the two is that hard metrics can easily be measured while soft metrics are more amorphous. One could also say that hard metrics are more traditional, by nature, than soft metrics. Let’s go into more details…

Revenue

One of the easiest metrics to measure, in terms of assessing the value of a business, is the revenue lines and other items, such as profit and loss (also known as P and L), which one can cull from balance sheets. While the raw numbers, in and off themselves have some value, it is important to look at distribution. On the revenue side, distribution could be spread across a number of areas: for example, a site could receive some advertising revenue (both through an internal sales force or via an advertising network like Google Adsense or Yahoo! Publishing Network), derive revenue from paid subscriptions, receive dollars for syndicating content to another source, or manke money from a number of other areas. Some Web 2.0 companies are deriving revenues from the sale of product or services related to their free (advertising supported) offerings. Others might be looking at the sale of data they gather from the interaction people have with their services. For example, I remember seeing a company, a while back (and the name escapes me), which sold corporation some tracking mechanism based on what people in the blogosphere were writing about the corporate client. This type of data mining will probably become increasingly relevant and pernicious in Web 2.x and I believe that it will become a major source of revenue for quite a few companies. However, those companies will have to be careful in their offering so they do not ostracize their audience because another hard metric is…

Traffic

Since the onset of the commercial internet, traffic has been one of the hard metrics relating to internet businesses. The reason such metric is of import is that, when looking at the web as a medium, the parallel to other media make it easier to grasp for marketers. As a result, discussions of page views, eyeballs, visitors, and sites generally exist around the time advertisers decide whether to make a purchase on a web site.

While the boom and bust of Web 1.0 has shown that pure page counts does not a business make, there is still some value to be derived from such numbers. In Web 2.x, audience participation is a mjaor factor of success and it is the lock-in of certain audiences that lends certain Web 2.0 companies some credence. As a result, one should carefully consider visitor counts and site numbers when evaluating the market potentials of a web business.

The visitor count (and its other metric the visitor growth data) can provide some insight into the value of a particular community. For example, when News Corp. bought MySpace, it not only bought a tool but also a community (and one that is growing at a pretty quick pace). Or when Ebay bought Skype, it bought a substantial number of users along with some tools for VoIP. Whether those can be monetized remains to be seen but a concept of integration value will be attachable to those metrics.

Also of import is the unique site count. The reason for this is that it gives more data as to visitor concentration. If a community comes primarily from sites in a particular country, one has to ask whether the value of that business exists only in that country or whether it can be internationalized. Alternately, a wide distribution and a slower growth in site count could mean that a web business has matured to the point of not being able to extend its reach any further (it could be that the business has reached all its potential audience already and therefore will not grow much beyond its existing position) As a result, an analysis of site distribution can provide some important value when trying to evaluate a business.

Another important traffic metric, in the current world, is RSS subscribers. One could argue that subscribers are generally more motivated customers in that they have taken a step towards getting to know a site a lot more. An RSS subscriber is someone who is developing a relationship with a site, as opposed to more casual visitors of a site. There may be some added value in the level of engagement such a user would have. Some of the way one could potentially derive some value out of this type of user is in defining focus group to get an idea as to what attracts certain types of users to the site. Another reason to track RSS subscribers is that, according to several studies (Pew, Yahoo), RSS subscribers tend to be in the early adopter camp and reaching such individual could be the key to the initial launch of a successful product.

Output

Another useful metric to track is the output of a site. In terms of a blog, the output can be seen as number of entries per day. In terms of Web 2.x business, the output could be seen as number of page or remixes created through user interaction. In a recent post on his blog, Fred Wilson mentioned the following metrics tracking he and his partner are doing on their investments:

In the case of Indeed, we like to watch the number of searches per month.In the case of Delicious, we like to watch the number of postings per month.

In the case of Tacoda, we like to watch the amount of behavioral data being captured in the TAN network.

These can all be seen as a measure of output for the different companies. Of course, the output is different based on each companies approach but it does provide some info.

Trends

While Fred chides me for trying to assess some values based on links, he mentions how he and his partners are approaching the metric:What we do is use these numbers to monitor our investment thesis and make sure the opportunity is playing out the way we think it will. And we use them to find places where we need to work harder on the service to make it better. And we use them to show new hires, new partners, and new investors that the business is on a solid trajectory.These are actually values relating to trends, which is the most important thing when tracking hard metrics.

Growth patterns are really what most of this data should allow one to divine. One’s ability to judge such patterns (and assess whether they are headed in the right or wrong direction) is the difference that will make or break many a business. When looking at all this data, looking at it in a closed fashion (ie. a slice of data in time) does only do it justice when trying to assert a baseline. However, baselines in and of themselves are not that interesting. The real interest really lies in the trends to evolves over time against those baselines.

Engagement trends

I would assert (and will probably receive many a flame for it) that the value of web 2.x business is going to lie partly in what I would call the “engagement trend line”, which I see as a value derived in part from several engagement metrics. On a weblog, those metrics could be broken out as follows: RSS subscribers, click through from those subscribers to the blog, comments posted to that blog, and links towards that blog. Yet to be defined, however, is whether Metcalfe’s law of network effect actually does have an impact on all of those.

Tomorrow, I will look into the soft metrics, which are harder to measure but, for now, I’d like to ensure that the discussion goes on so please either post your comments in the discussion area or comment on this on your own blog.

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