Innovation Accounting

According to traditional bottom line accounting, Facebook looked like a horrible investment in the first 5 years of operation as expenses far exceeded revenues. However, user behavior metrics painted a completely different picture of the business. In fact, daily active users grew from 1 million in 2004 to 100 million by 2008. Today, Facebook is worth roughly $340 billion, making it one of the world’s largest tech companies.

In short, this case exemplifies why traditional methods, applied by established businesses, to measure investments is not always ideal with new concepts — at least not in the short term. For VP’s this is a critical point to understand. Otherwise, you might, in the worst case, decide to shut down a developing unicorn, just as user behaviour is showing a concept on the verge of breakout success.

So if you’re not going to use traditional profit-loss metrics, which user-behavior metrics should you focus on? As a rule of thumb, you’re looking for signals that indicates a sustainable business model. For example, if you’re testing an in-app advertisement business model, you want to measure metrics that allow you to forecast your future business revenue. In this scenario weekly daily users, average session duration, and cost per impression, are metrics that together can be used to forecast both revenue and durability.

“Why not measure more?” you might ask. With free tools such as Google Analytics, it has become extremely easy to measure all kinds of user behavior metrics. However, in doing so you might risk ‘drowning’ in data, paralyzing your decision-making. Or even worse you might optimize for what Eric Reis calls ‘vanity metrics’. These metrics are characterized as not revealing insights about the underlying business case. For example, 200,000 total visitors for a news site might sound impressive, but without understanding the percentage of returning visitors or the time-line in which the data was collected, the metric is worthless.

Instead, Eric Reis advocates for actionable metrics, which he defines as metrics correlating with growth drivers for the business. Often it’s not about picking between ‘right’ or ‘wrong’ metrics, it’s about the context in which the metric is presented. A news site with 5,000 new monthly visitors of which 75% return is a stronger indicator of the direction of the business than total visitors by itself. In the illustrations above, you’re able to view some examples of different business models and examples of actionable metrics.

Three key takeaways:

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