Every day you see startups reporting

  • 10 million people trying a wallet
  • 10 million App installs
  • 10000 transactions on their App
  • Growth of 100% in GMV

I consider all of these vanity metrics. Vanity metrics are numbers that make you feel and look good — but do not validate your original business hypothesis/actual growth.

Imagine a hyper local start up which just raised a huge round of funding. The first impulse would be to increase their spends on Hiring and Customer Acquisition. Instead of spending 15–30 Rs. CPI on Facebook campaigns (like you did earlier when money was tight and optimizing your marketing efforts were a priority) you now scale up and spend much much more. Your total App installs increase and due to the increase in the number of new users(each day), your DAUs go up too. You start giving massive discounts and your transactions as well as GMV becomes 3/4 fold. Your VCs are happy. So are your users who can now gorge on delicious Chicken Biryaani for <100 INR (including delivery costs).

But the hard part will follow a few months later when you will realize that your burn rate is not sustainable. Unable to raise another round (due to panicking investors) you will curb our spendings. Then you will start seeing all your KPIs go down. The only option would be to shut shop or get acqui hired.

Because unit economics never made sense for you in the first place. You were losing money on each transaction. You hoped that people would one day get used to your App and start transacting even without the massive discounts on offer.

The alternative:

Study real engagement instead.

A food tech start up knows that sooner or later it has to make money on each customer. Or each transaction. Unless you are going to end up being the market leader and can afford to crush your competitors by giving discounts for years (and growing with negative gross margins) you will have to stumble on a profitable model soon.

So if your original business hypothesis was that users once they get used to the service will order food from your App at least once a week without getting any discount, you need to reach there fast.

So real metrics to track would be:

  1. What % of your users are actually using your service ever week.
  2. How many of your users are ordering food without any discount.
  3. How many transactions would it take for a user to get hooked on your service and for him/her to become a loyal user.

Facebook found that when you add 7 friends in 10 days, you’re far more likely to become a lasting user and all their activation/on boarding efforts focus on getting you reach there.

Maybe for you it is the first 3 transactions for an user which will be subsidized by discounts (part of your CAC). But from the 4th transaction on wards you should start making money on that user.

So your magic number is 3 transactions.

If the only reason anyone comes to your App is because they can grab a lunch with you(the start up) bearing the majority of the cost you are doomed.

Snapdeal’s Chief Product Officer Anand Chandrasekaran said the same thingduring an interview NDTV Gadgets earlier.

“I hope a year from now, we’re not looking at who’s more successful based on the number of wallets,” said Chandrasekaran. “I think as an industry we should set ourselves to accomplish goals that are great for customers. 50 million people trying a wallet means nothing to me.” Freecharge could quickly scale to 87 million users by on-boarding all Snapdeal account holders, but the point was not to create users, but to “create habits so that more people use it everyday, creating room for many wins,” said Chandrasekaran. Snapdeal believes in activity over vanity, he said, criticizing the industry for chasing vanity metrics, and added that this is common in an industry in its infancy.

Additional Read:

http://blog.samaltman.com/unit-economics

http://avc.com/2015/10/negative-gross-margins/

http://www.forbes.com/sites/ellenhuet/2015/07/23/what-really-killed-homejoy-it-couldnt-hold-onto-its-customers/

http://techcrunch.com/2015/07/31/why-homejoy-failed-and-the-future-of-the-on-demand-economy/ allensblog The “On Demand” economy (elsewhere, I’ve called it the crowd-scaled economy and it sure isn’t accurate to call it the…allensblog.typepad.com

Cross posted from : https://www.linkedin.com/pulse/dont-chase-vanity-metrices-manas-j-saloi

P.S I tweet interesting stuff here: @manas_saloi