We’re used to financial KPIs to monitor the progress of core innovation businesses but in case you’re a (corporate) startup that may not generate revenue until you found product market fit, this is less useful.
A startup as well as a transformational innovation team is essentially an organization built to search for a repeatable and scalable business model. What’s most important in these early stages is validated learning.
So relying on revenue as primary measure of success can be at best counterproductive. Traditional accounting methodologies can stall innovation since they are more suited to core innovation and existing business with products or services. Standard accounting practices like cash flow analysis or financial ratios can put early stage products or businesses in an unnecessarily awkward situation.
Innovation Accounting uses metrics that measure the true progress of innovation, such as customer acquisition, retention, user activity and so on.
One of my favourite models for doing this is Dave McClure’s Pirate Metrics. It defines macro metrics that can be used to model the customer lifecycle. Whilst revenue may be one of them, it’s not the only one.
Get ready to board …. A-A-R-R-R
Pirate Metrics is a 5 metric-model (A-A-R-R-R) designed to represent all of the key behaviors of customers.
- How many users you are acquiring
- How many users are active
- Whether the customer comes back and uses the product again
- Whether your customers tell others about their experience and your product
- How much money you are able to capture
|Acquisition||How do your users become aware of you?||SEO, SEM, widgets, email, PR, campaigns, blogs…|
|Activation||Do drive-by visitors subscribe ,use, etc?||Features, design, tone, compensation, affirmation|
|Retention||Do one-time users become engaged?||Notifications, alerts, reminders, emails, updates, …|
|Revenue||Do you make money from user activity?||Transactions, clicks, subscriptions, DLC, analytics, …|
|Referral||Do users promote your product?||Email, widgets, campaigns, likes, affiliates,…|
Without measuring progress, developing your product is really just relying on good luck. Analysing and monitoring these 5 metrics can give you a pretty good idea of potential issues. It gives you indications where you need to improve, or where the opportunities for optimisation lie.
Revenue is very important for measuring success of core innovation and existing business, but it’s distracting for transformational innovation and (corporate) startups.
Pirate metrics help to define and measure success when all numbers are (close to) zero and before you actually start capturing some of that value back.
They are leading indicators to revenue before actual revenues are realised.
They can also be used to hold entrepreneurs and intrapreneurs accountable.