Beyond Revenue: Startup Metrics Measuring Progress Toward Differentiation & Value Delivery

I believe early stage founders’ obsession with growth — as measured by revenue and user acquisition metrics — provides a very partial view of product value creation and long-term revenue upside.

According to Paul Graham, founder of Y Combinator, product-market fit is vaguely defined as ‘mak[ing] something that people want’. Most accelerators frame product-market fit — generally single product adoption by a single customer profile — as the big milestone sitting between founders and scale; products flying off the shelf and you’re on the verge of an acquisition or IPO.

In reality, it’s barely the first step.

Once your product — a combination of features — are shown to deliver unique value to a set of users — competitors with substitute solutions will quickly enter your market space, seeking to capture the available opportunity. Alternatives will continue to enter the market until marginal revenue equal marginal costs, meaning zero economic profit for participating solution providers.

This commoditized race-to-the-bottom is a daily reality for formerly high-growth firms who haven’t demonstrated consistent business model innovation. Long-term growth is actually predicated on calculated pivots that seeks differentiation through constant, iterative product innovation.

Long-term growth is actually predicated on calculated pivots that seeks differentiation through constant, iterative product innovation.

So how do executives know whether their business and product model pivots are moving into higher value spaces where they are generating differentiated value for users.

The below metrics provide executives’ guidance whether specific interventions are succeeding. As a note, these high-level first order metrics cascade down to a broader set of indicators that measure the performance of internal teams, processes and acquisition programs that operationalize these pivots.

DAU/MAU Ratio: Daily Average Users (DAU) and Monthly Average Users (MAU) are important metrics investors, executive and product leads use to measure product adoption. When you combine the two into a ratio, the metric provides a more valuable insight — as a percentage of your install base, how many customers are using your product daily. This ratio indicates how pivotal your solution is to completing a recurring consumer or business process.

This ratio indicates how pivotal your solution is to completing a recurring consumer or business process.

Net Promoter Score (NPS): NPS is a “likelihood-to-recommend” question that allows executives to sort customers into one of three groups: promoters, passives, and detractors. When deployed correctly, NPS is a powerful indicator of whether your product is creating value for your customers. High scores on this question is correlated strongly with repurchases, referrals and other actions that contribute to a company’s growth. The average NPS varies across industries, so it’s important to consider industry context when evaluating your own company’s NPS. Leaders whose products are in the top NPS quartile are developing solutions that are providing significant business value for their customers. It is no surprise that research from Bain & Co. indicates that NPS leaders experienced 200% higher compound average growth rates (CAGR) than competitors performing at the mean.

Price Elasticity of Demand: This esoteric economic principle is a great indicator of how valuable a product actually is to its consumer. Price testing and optimization is not only a tool to identify maximum willingness to pay (WTP), it also demonstrates whether there it provides relative value compared to solution alternatives. Elasticity of demand is measured as follows:

ED = %🜂Qd / %🜂P

where Qd refers to quantity demanded, p to price and Δ to change. If ED>1, demand is elastic. If ED< 1, demand is inelastic, and ED= 1, demand is unitary elastic. A range of software tools let product owners cohort test changes in price changes and measure their impact on demand. If demand is found to be inelastic — meaning the percentage change in the quantity of a product demanded resulting from a given percentage change in its price is less than 1, your product delivers unique, non-commoditized value to customers — and you have more untapped revenue upside to capture.

If your product demonstrated inelastic demand, it delivers unique, non-commoditized value to customers — and you have more untapped revenue upside to capture.

As a rule of thumb, if you demonstrate a DAU/MAU ratio at or above 50%, prove inelastic demand for your product and perform in the top NPS quartile for your industry — you’ve got a potential rocketship on your hands. Your solution delivers significant and recurring value to customers, there is no solution alternative of equivalent value and your consumers are prone to consume more, buy adjacent solutions and refer your product.

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