Vanity Metrics vs. Actionable Metrics – Guest Post by Eric Ries

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Vanity metrics: good for feeling awesome, bad for action. (photo source: UK Guardian)

This is a guest post by serial entrepreneur Eric Ries. He was most recently co-founder and CTO of IMVU, which has more than 20 million registered users and generates $1,000,000+ in revenue per month. Eric is also a venture advisor to Kleiner Perkins.

How do you get to $1,000,000 per month in sales? By testing the right things. Eric is a metrics man.

Here is just one business-changing example, taken from the outstanding “How IMVU Learned its way to $10M a year” on Venture Hacks

IMVU learned its way to product/market fit. They threw away their first product (40,000 lines of code that implemented an IM add-on) as they learned customers didn’t want it. They used customer development and agile software development to eventually discover customers who would pay for 3D animated chat software ($10M in revenue in 2007). IMVU learned to test their assumptions instead of executing them as if they were passed down from God.

Enter Eric Ries…

Vanity Metrics vs. Actionable Metrics

The only metrics that entrepreneurs should invest energy in collecting are those that help them make decisions. Unfortunately, the majority of data available in off-the-shelf analytics packages are what I call Vanity Metrics. They might make you feel good, but they don’t offer clear guidance for what to do.

When you hear companies doing PR about the billions of messages sent using their product, or the total GDP of their economy, think vanity metrics. But there are examples closer to home. Consider the most basic of all reports: the total number of “hits” to your website. Let’s say you have 10,000. Now what? Do you really know what actions you took in the past that drove those visitors to you, and do you really know which actions to take next? In most cases, I don’t think it’s very helpful.

Now consider the case of an Actionable Metric. Imagine you add a new feature to your website, and you do it using an A/B split-test in which 50% of customers see the new feature and the other 50% don’t. A few days later, you take a look at the revenue you’ve earned from each set of customers, noticing that group B has 20% higher revenue per-customer. Think of all the decisions you can make: obviously, roll out the feature to 100% of your customers; continue to experiment with more features like this one; and realize that you’ve probably learned something that’s particular valuable to your customers.

Unfortunately, most analytics packages are configured by default to provide mostly reports on vanity metrics. That makes sense, since they are the easiest to measure and they tend to make you feel good about yourself.

For example, here’s a pattern I’ve witnessed in companies large and small. The company launches a new feature or new product, and a few days later, traffic (or revenue, or customers) starts going up. Everyone involved with that product celebrates. In fact, I’ve noticed that people tend to believe that whatever they were working on that preceded the metrics improvement probably caused the improvement itself. So the product guys think it’s the new feature, the sales guys think it’s that new promotion — I’ve even seen customer service reps be convinced it’s due to a new customer-friendly policy. In many cases the fluctuations are random or caused by unrelated external events. Unfortunately, the same mental trickery doesn’t apply when the numbers come back down. Human beings have an unfortunate bias to take credit for positive results and pass the blame for negative results.

Take the example of a product that has a weekly seasonality pattern. For products “on the Disneyland calendar” they will see higher usage on weekends and holidays. As a result, new initiatives that are launched on Thursday or Friday are likely to be judged a success when people come to work on Monday. Yet products unfortunate enough to be launched on Sunday may be judged a failure by Tuesday or Wednesday — unless the company is focused on Actionable Metrics.

There are some tips to getting to more actionable metrics:

1. Split-tests.

A/B experiments produce the most actionable of all metrics, because they explicitly refute or confirm a specific hypothesis. Either way, you can use split-tests to take action on anything from minor copy tweaks to major changes in the product or its positioning. However, not all split-tests are created equal. There is some value in the linear-optimization type tests that are a useful tactic in growing conversions. But the real value of split-tests comes when you integrate them into your decision loop: the process of putting your ideas in practice, seeing what happens, and learning for your next set of ideas. The tests that drive the most learning are the ones to focus on. A good rule of thumb is to ask yourself, “if this test turns out differently from how I expect, will that cast serious doubts on what I think I know about my customers?” If not, try something bigger.

Good third-party tools for A/B testing are hard to come by — most are too complex for most situations. If you don’t have an A/B system, you can use Google Website Optimizer or — if you have a software development team — build your own (for more implementation details, see “The one-line split-test, or how to A/B all the time” and “Getting started with split-testing“).

2. Per-customer metrics.

It’s important to remember, “Metrics are people, too.” Vanity metrics tend to take our attention away from this reality by focusing our attention on abstract groups and concepts. Instead, take a look at data that is happening on a per-customer or per-segment basis. For example, instead of looking at the total number of pageviews in a given month, consider looking at the number of pageviews per new and returning customer. Those metrics should be relatively constant — unless something interesting is happening with your product. So even a big rush of new customers shouldn’t change how many pages they each view on average, unless you’re getting a new kind of customer.

Similarly, if you’re increasing the engagement of customers with your product, that will tend to show up in the data for the returning customers. But if you just look at their aggregate data, you can miss important trends. I’ve often observed the following pattern: a big spike of customers joins thanks to a Digg or Slashdot mention. If a product has an average customer lifetime of two months, then after that period elapses, a huge number of customers can be expected to churn out all around the same time. But these effects are hard to keep track of, since customers are coming and going all the time. If you focus only on the number of pageviews, even if you limit it to returning customers, you might mistake a positive product change for something negative, because you launched it during a churn-dominated period.

Many analytics packages, including the much-maligned Google Analytics, have the ability to break down aggregates into per-customer or per-segment analyses. These can help make reports more actionable if you combine them with the Goal Tracking feature. For example, if you can tell which web referrers are driving the most traffic, that’s moderately useful. But if you can tell which are driving the most conversions, then you can start to make ROI-based decisions on where to invest your time in getting more traffic.

3. Funnel metrics and cohort analysis.

The best kind of per-customer metrics to use for ongoing decision making are cohort metrics. For example, consider an ecommerce product that has a couple of key customer lifecycle events: registering for the product, signing up for the free trial, using the product, and becoming a paying customer. We can create a simple report that shows these metrics for subsequent cohorts (groups) over time. Let’s say we create a weekly report. For each week, we then report on what percentage of customers who registered in that week subsequently went on to take each lifecycle action. If these numbers are holding steady from cohort to cohort, then we get clear feedback that nothing significant is changing. If one suddenly shifts up or down, we get a rapid signal to investigate.

The best thing about funnel metrics is that they allow you to boil down a large amount of information into a handful of numbers. If you don’t have the software to build these reports automatically, consider doing it by hand.

This is easy to do if the number of conversion events in relatively small — even if the number of customers is very large. For example, a typical website will have a 1% registration-to-purchase conversion rate. So even if you are registering 1000 new customers every day, those customers are going to result in something like 10 new purchases over their lifetime. So instead of getting fancy, use the good old index cards. At the end of each day, create an index card with that day’s date on it and the number of people who registered that day. Then, for each conversion that comes in, make a tally mark on the index card of the date that the person registered, not the date they purchased. For most products, this only requires you to maintain a week or two’s worth of index cards, since most products have customers that make purchase decisions relatively quickly. Then, on a weekly or monthly basis, gather up all the cards for a given cohort, and compute the conversion rate of the customers who registered in that period. That’s the number you want to focus on driving up.

4. Keyword (SEM/SEO) metrics.

SEM (Search Engine Marketing) and SEO (Search Engine Optimization) are great customer acquisition tactics, but they also can reveal important and actionable insights about customers, if we treat customers who were acquired with a given keyword as a segment and then track their metrics over time. For example, early on at IMVU we tried advertising for AdWords phrases that contained the name of a competitor’s product plus “chat.” We’d then take a look at key statistics for the cohort of customers that registered from each separate campaign. What we found were striking differences in signup and conversion rates depending on what competitor we brought the customer in from. That information is moderately useful in directing a marketing campaign. But it’s far more useful as an indicator of who the customer behind the numbers are. We eventually found that the highest conversion rates came from products that are primarily used by teenagers and young adults — a very different demographic than we thought we were serving. As a result, we started to adjust the mix of customers we were bringing in for usability tests, with dramatic results. For concrete examples of user feedback and testing, see the below video from an interview with Mixergy:

Here is a small sample transcript from the above video:

And so out of complete desperation, we were like, “Okay, fine, we’ll introduce a simple chat now feature.” It was a matching thing where you could push a button and you would be randomly matched with somebody else from around the world – the only thing you have in common is you both pushed that button at the same time.

And we did that, and all of a sudden people were like, “Oh, this is fun.” And then – then here’s what happened. So we bring them in and they do the Chat Now, maybe they meet somebody new who they thought was kind of cool. They’d be like, “Hey, that guy was neat, I want to add him to my Buddy List. Where’s my Buddy List?”

And we say, “Oh, no, no. You don’t want your own Buddy List. You want to use your regular AOL Buddy List” because that’s interoperability, network effects, all this nonsense.

And the customer’s looking at us like, “Well, that doesn’t make sense. What do you want me to do exactly?”

And we said, “Well, just give that stranger you just met your AIM Screen Name so you can put them on your Buddy List.”

And you can see the eyes go wide – they’re like “Are you kidding me?! A stranger on my AIM Buddy List?”

And we said, “But – but otherwise you’d have to download a whole new instant messaging client! And then you’d have to have your separate Buddy Lists.”

They’re looking at us like, “Do you have any idea how many instant messaging clients I already run?”

We said, “No, what, like two or three?”

And the teenager responds, “Duh! I run eight!”

They were already running, like, fifty clients! I mean, I had no idea how many instant messaging clients there were in the world. And we had this preconception like, “Oh, it’s a challenge to learn new software, and it’s tricky to move your friends over to the new Buddy List,” and all this other nonsense sitting in our heads that just, for our customers, looked at us like we were crazy.

Conclusion and Challenge

A common theme across all of these actionable metrics is the lack of really good action-oriented third party tools.

So I’d like to issue this challenge to all of you reading this post today: share your stories of actionable metrics and how you track them. If there are good tools that you have used, let us know. Most importantly, let us know how you customized off-the-shelf tools like Google Analytics to get more action-oriented. We’ll share the results in a future post. We’re looking for stories that embody these three principles:

1. Measure what matters. It’s tempting to think that, because some metrics is good, more metrics is better. That’s why vendors routinely list the thousands of reports they are capable of generating as a feature. The truth is, the key to actionable metrics is having as few as possible. Detailed reports are useful when we’ve diagnosed a problem and are looking for clues as to what’s gone wrong. But where does that diagnosis come from in the first place? Actionable metrics help us realize we have a problem and point us in the right direction to start solving it.

2. Metrics are people, too. Great metrics tools allow us to audit their accuracy by tracing reports back to the individual people who generated their data. This improves accuracy, but its more important effect is that it lets us use the same customers for in-depth qualitative research. Not sure what the numbers mean? Get the customers on the phone and ask them.

3. Measure the Macro. Lastly, even when we’re split testing the impact of a minor change, like a wording or a new button, it’s important not to get distracted by intermediate metrics like the click-through rate of the button itself. We don’t care about click-through rates, we only care about the customer behaviors that lead to something useful, whether purchase, retention for advertising CPM, or some other measurable “success” particular to your business model.

[From Tim: Here are a few options to get the juices flowing: The Better Google Analytics Firefox plug-in and six other tools for specific Google Analytics feature enhancement.]

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Metrics are just one component of a new vision for entrepreneurship that I call the “lean startup”. You can learn more on the Startup Lessons Learned blog. For those that want to explore these concepts in comprehensive depth, including more real-world examples, there will be two all-day Lean Startup seminars sponsored by O’Reilly on May 29 and June 18 in San Francisco.

Posted on: May 19, 2009.

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100 comments on “Vanity Metrics vs. Actionable Metrics – Guest Post by Eric Ries

  1. Thanks for this great comparison of actionable metrics vs. vanity metrics. As I push farther into the internet marketing world these things are of exceptional importance.

    I particularly like the A/B split testing for finding actionable changes.

    Like

  2. “Test their assumptions instead of executing them as if they were passed down from God”

    Good advice. I find even ideas that ARE passed down from God need a little tweaking.

    The reception from heaven isn’t always perfect…

    Like

  3. Wow, Eric, thanks for some seriously thorough advice on a topic that’s very close to home for my product. As with all your articles, you’ve given the details to take action here…and really I have no excuse but to beef up the dashboard for my product now.

    I particularly like your thoughts on “measure the macro”–because it is very tempting to measure the click, when that’s not necessarily the sale or the other conversion we’re most interested in. Wish I could attend your upcoming seminar!

    Like

  4. Wow, this and a few other pieces I’ve read really get me motivated to delve into meaningful analytics. But then reality hits. When you actually try to start “doing” some of this stuff, it just seems like a 1000 piece puzzle.

    I often ask myself if I’m better, at this stage in the game, to pump out tons of useful and interesting content instead of spending my time looking at numbers. I know it’s a bit of a catch 22, but that’s reality.

    I guess I better get back and take another look at what I’m doing with analytics.

    Cheers,
    Adam

    Like

  5. Interestingly, a lot of the vanity metrics are the focus of internet advertisers, and less so for ventures and entrepreneurs. For example, click-through rates are crucial to Adwords advertisers because it directly influence the cost and profitability of an ad campaign, and advertisers will relentlessly tweak something as simple as the Ad title to boost this click through number.

    Eric Ries posts: “We don’t care about click-through rates, we only care about the customer behaviors that lead to something useful, whether purchase, retention for advertising CPM, or some other measurable “success” particular to your business model.”

    Ad campaigns aside, this discussion touches on the core of what makes time spent on internet metrics worthwhile: the closer you are to direct customer feedback, in every way, the better the numbers that matter to YOU will look. Are your customers happy? Are they happy to hang out here with you on your site, in your business, doing what you want them to do?

    Like

  6. I am really interested in what companies like http://www.kontagent.com are doing with measuring user engagement loops and virality. Especially as more companies adopt FB Connect and other social platforms as their viral distribution channels.

    Digg’s first installment of Facebook Connect must be returning some very interesting data as every story published into the stream is tagged with several campaign tags according to link location within the story (I think they use Omniture)

    The A/B test is incredibly valuable here and will give 3rd parties the data they need to fully leverage the power of Connect and measure the top responses from organic stream traffic.

    Love the Zoolander shot!

    Like

  7. Great post! I’m getting to be pretty maniacal about split testing on my landing pages these days — it seems to give the best return on effort… Its amazing to me how resistant people are to testing and tracking things that really matter — I guess people feel better when they can tell others that they had 100,000 hits on their website today and just ignore the fact that none of them made a purchase.

    Like

  8. That was the most entertaining video chat transcript I’ve ever watched. Eric Ries covers a lot of ground, stays organized, and sounds truly passionate. And not a single “uh” or “um” to be heard.

    The entire hour of the talk on mixergy doesn’t disappoint–check it out if you want more.

    (P.S. Tim, you might want to study what it is he does so well for your “Random” chat with Kevin Rose.)

    Like

  9. This is a great article and totally in line with my company’s (RJMetrics) way of looking at the world. We develop a tool that connects to our clients’ databases to perform cohort analysis, segmented customer lifetime value, etc. The most common question I get from potential customers is why would I use a tool like yours when I already monitor my page views and visitors in Google Analytics (or some other tool). I’ll probably just point them to this article in the future.

    And Eric, if you’re looking at third party tools as you continue to do this kind of analysis, I’d love to talk.

    Like

  10. I’ve been using Google Analytics on my websites and I’ve found it to be quite useful. I’m tracking what keywords are bringing in customers/potential customers and where they are going on my websites.

    However, I still have a long way to go and this post has given me some important ideas.

    Like

  11. As a huge fan of this blog, I was very excited when I saw this post today!

    Analytics, Multivariate testing, and A/B split testing is what a huge chunk of my responsibilities are where I work.

    Every day I am amazed at comparing what you think you know about your web visitors, and then what you learn from their actual actions and the inferred intent learned from analytics data, this combined with the outcomes of testing is usually very eye opening.

    Use your analytics data to find opportunities where you can improve. Then use a/b testing or multivariate testing to improve those pages where those opportunties live (unless it’s simple enough to fix without having to test)

    The best part is, it costs nothing (so no excuses!) to start learning and using:
    Google Analytics – FREE
    Google Website Optimizer – FREE
    Your Ideas – FREE
    Web Research if needed – FREE

    Again – Great Post!

    Like

  12. Wonderful write up on the perception of “what really works” as opposed to “what really looks good”. My hat goes off to Eric on this one.

    Like

  13. Nice post, I have just started to use http://www.woopra.com as an analytics tool. It seems a bit easier to use against google analytics but I would opt to stay with the latter option for now. Also, SEO for firefox has interesting data that gives you an idea of how sites are ranking.
    Thanks Tim & Eric.

    Cheers

    Jose

    Like

  14. Great post Eric,

    I am following your blog and as an entrepreneur it is constantly interesting to review what others have learned on the subject.

    Peter Drucker stated “That which gets measured gets managed”. I mentioned this to family and friends regularly and show the point of following the right metrics using an example similar to below…

    Say you want to improve your physical appearance, as you are looking a little overweight in your own opinion. You get on the scales and weigh yourself and then work for two weeks straight in the gym, running and eating well. When you jump back on the scales you notice not much has changed and become disappointed.

    In reality there has been a change to your body. You are likely to have increased muscle and reduced fat, but will probably weigh the same. You will probably have more energy but lastly, you would have noticed visual results if you were measuring a different way. Essentially by measuring the size of your waist, arms, legs, etc. then you may have noticed more of a change.

    The key is to measure what matters, not what is easy.

    Like

  15. Great post. Me and my partner were talking about this same topic 2 days ago. Thanks for the informative post Tim and Eric.

    @Rosa and @Blair: i agree with what you said. Well put.
    @jose: I’m trying Woopra out too. I really dont like using GA that much.

    Like