How to Build a Lean Small Business Using the One Metric That Matters
“It’s not the daily increase but daily decrease. Hack away at the unessential.” -Bruce Lee
“The more you leave out, the more you highlight what you leave in.” -Henry Green
A Lean SMB = a Data-Driven SMB
You’ve probably heard of the Lean Startup, the management framework by Eric Ries that’s revolutionized the world of entrepreneurship. The key idea of Lean Startup, as outlined in Ries’ seminal book, is this: build and iterate quickly on a product, continuously solicit customer feedback, and continuously adjust your product and strategy accordingly.
When we talk to seasoned small business leaders about lean startup, they’ll often say something like:
“That’s not for me. That’s for young entrepreneurs in early-stage tech startups. I’ve been running my small business for a long time and I don’t need a new Silicon Valley fad to tell me how to run my business.”
We understand why many SMB owners feel this way. After all, nobody knows their business better than they do. But they’re missing the point of the Lean Startup, which is this: the tools it offers can help any kind of organization — a tech startup, a multinational corporation, a nonprofit, a local government, and yes, even a small business.
Furthermore, as the rate of innovation continues to accelerate, using analytics to measure what’s working is has ceased being optional — and neither are the management tools for leading a culture of innovation.
As Eric Ries points out in the The Lean Startup, the principles of effective entrepreneurship apply to any “startup.” What counts as a startup? Any “human institution designed to create new products and services under conditions of extreme uncertainty… in any size company… in any sector or industry.”
That means The Lean Startup principles can help small and medium-sized businesses (SMBs) in any stage of their lifecycle, whether they’re 3 months old or 30 years old. From the book, here are the 3 Lean Startup principles that are most critical to SMBs:
1) Validated learning.
All validated learning means is continuously testing your hypotheses, market, and strategy with frequent experiments.
We met many SMB owners who base their business strategy and decisions off of an intuition, hunch, or “gut feeling.” Of course, we need to make educated assumptions based on our intuitions every day to be effective business leaders. However, we also need to keep in mind that our intuitions often fail us.
We may be willing to bet our life that this new idea is going to disrupt a whole industry. But, unfortunately, it matters very little what we think or believe. Rather, what really matters is what your prospective customers think and believe — both about the problem you’re trying to solve, and your solution for it. The only way to know that your customers really want, is through empirical experiments.
Many entrepreneurs have a vision for a product or service and think that by sheer force of will they can impose that vision on the market. These founders think, “If we build it, they will come.”
But the core idea of the Lean Startup ideology is that you’re not building what you want, you’re building what your customers want. In fact, you even build a tool to constantly measure and learn what your customers like and dislike.
Using this, you can continually adjust the tool based on your customer feedback. Eric Ries calls this critical feedback loop the “Build-Measure-Learn” cycle:
“The fundamental activity of a startup is to turn ideas into products, measure how customers respond, and then learn whether to pivot or persevere. All successful startup processes should be geared to accelerate that feedback loop.”
Don’t think of your product as a static widget that you need to figure out how to sell. Think of your product as an ever-changing hypothesis that you test empirically through user feedback.
3) Innovation accounting.
Your SMB needs a radically new accounting system to hold your team accountable. This may sound old-school or boring, but it’s mission-critical to your SMB’s success. From a management level, you need to define:
- how to measure progress
- how to set up “milestones”
- how to prioritize tasks
All 3 of these lean principles are data analytics problems. Here is how each of them is, at its core, a data analytics process:
1) Validated learning: The way a SMB scientifically validates what it learns about its customers is through data from experiments.
2) Build-Measure-Learn: a SMB measures how customers respond to their products primarily by using quantitative data. This can be done with qualitative data such as customer interviews and feedback from your sales team but your customer response should be measured to some extent by quantitative data.
3) Innovation accounting: measuring progress is capturing data while setting up milestones and priorities is project management based on actionable insights from that data. Should you make changes to your product? Ask your data. Should you pivot your marketing strategy? Ask your data. Should you adjust your ideal customer profile? Once again, ask your data.
Don’t Launch a Rocket Ship — Drive a Car
I think the whole essence of lean startup is captured by one simple illustration: the difference between driving a car and launching a rocket ship.
“The second important feedback loop in an automobile is between the driver and the steering wheel. This feedback is so immediate and automatic that we often don’t think about it, but it is steering that differentiates driving from most other forms of transportation… If I asked you to close your eyes and write down exactly how to get to your office — not the street directions but every action you need to take, every push of hand on wheel and feet on pedals — you’d find it impossible…
By contrast, a rocket ship requires just this kind of in-advance calibration. It must be launched with the most precise instructions on what to do: every thrust, every firing of a booster, and every change in direction. The tiniest error at the point of launch could yield catastrophic results thousands of miles later.
Unfortunately, too many startup business plans look more like they are planning to launch a rocket ship than drive a car. They prescribe the steps to take and the results to expect in excruciating detail and, as in planning to launch a rocket, they are set up in such a way that even tiny errors in assumptions can lead to catastrophic outcomes.”
To make a long story short, running a data-driven SMB should be like driving a car, not planning a rocket ship launch. If a company is a car, then data is the windshield, the rear view mirror, and the GPS. Data analytics tells you where your company is, where it has been, and where it’s headed with the current trajectory.
The idea of the lean startup can be boiled down to this simple core idea: build the car engine, use data to know where the car is, and steer the car accordingly.
However,what if your GPS took hours to tell you where your car is and where it’s going? Obviously, you’d have a problem. By the time you figured out where you were, you’ already be heading down the wrong road, or worse, in a ditch.
In the past, data analysts in many sectors spent weeks or even months running models and creating retrospective reports on business data. SMBs often don’t have that luxury as they typically can’t afford the time to learn analytics or the money to hire a full-time data science team. That’s where lean analytics comes in.
Drive with a Windshield, not a Rearview Mirror
Lean Analytics is a framework that came out of the Lean Startup movement. Whereas the lean startup is about managing a constant cycle of building, measuring, and learning very quickly, lean analytics is the way you measure and learn.
As Kroll and Yoskvitz put it in their book Lean Analytics,
“Lean Startup helps you structure your progress and identify the riskiest parts of your business, then learn about them quickly so you can adapt. Lean Analytics is used to measure that progress, helping you to ask the most important questions and get clear answers quickly.”
One of the book’s most important takeaways for SMBs is learning how to find the One Metric That Matters (OMTM) to you right now. The OMTM is the one and only number you’re using to define success for your current stage, the number you care about more than anything else.
This “One Metric,” can help you draw a threshold that tells you “when to step on the gas and when to slam on the brakes.”
Lean Analytics outlines 4 main reasons to use an OMTM:
- It answers the most important question you have.
- It forces you to draw a line in the sand and have clear goals.
- It focuses the entire company.
- It inspires a culture of experimentation.
A great example of effectively using of an OMTM is Solare Ristorante, an Italian restaurant in San Diego owned by a serial entrepreneur named Randy Smerik who came from the tech world. Every night, his son Tommy yells out a number (e.g. 24). This number is a percentage representing the ratio of staff costs to gross revenues for the previous day: an important ratio in the restaurant industry. It’s a rich metric because it captures two factors a restaurant owner can control to some extent: (1) per-diner revenues and (2) staffing costs.
As Randy points out, staffing costs above 30% of gross revenues is bad because the restaurant owner is either overspending on staff or underselling per customer. A fancy high-end restaurant pays more for their staff but they also have a much higher revenue per customer due to their higher prices. A low-margin diner, on the other hand, has to focus on minimizing the costs of staffing.
According to Lean Analytics, there are 5 reasons why this OMTM is a great one:
- Simple — It’s a single number.
- Immediate — You can generate it every night.
- Actionable — You can change staffing or encourage upselling the very next day, whereas ingredient costs, menus, or lease agreements take longer to modify.
- Comparable — You can track it over time and compare it to other restaurants in your category.
- Fundamental — It reflects two basic facets of the restaurant business model.
When identifying your OMTM, make sure it meets all 5 of these criteria.
How to Identify your OMTM
To figure out your current OMTM, go through the following exercise by Kroll and Yoskovitz.
Write down the top 3–5 metrics that you currently track daily or would like to track. Now go through these questions for each metric.
- Do you (or would you) use it to make business decisions? (or is it just a vanity metric?)
- Is it adding value to your business?
- Are there other metrics that may be more actionable?
Based on these questions, eliminate the bad metrics. Now you have a short list of good metrics you can track or are tracking. Finally pick the one you couldn’t live without. This is your current OMTM.
Let’s go through an example from Lean Analytics. For a SaaS SMB that’s found its product/market fit and is focused on growing, one good OMTM to start with is “Net Adds.” This metric is the “total (number?) of new paid subscribers (either conversions from free trials or direct paid signups) minus the total who cancelled.”
Net Adds per day can help SMBs quickly see:
- What days have the highest number of cancels (so that you can address the problem)
- Your free trial conversion rate
This one metric captures a lot of actionable information about a business. Related customer metrics such as “Total Paying” and “New Free Trials Yesterday” feed into Net Adds per day so you know this OMTM is a good high-level overview of how your business is doing.
Want to Learn More?
This article is not designed to be a comprehensive how-to guide on lean analytics, but simply to introduce the concept of lean analytics and the lean startup in the context of SMBs.
As you can see, using data to quickly and frequently go through build-measure-learn feedback loops is both an art and a science.
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