How to design a winning metrics framework

What metrics should your business measure? Here’s how to find out.

How to design a winning metrics framework

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Deciding what to measure, and then what to focus on moving, is a life or death decision for your business. Measure the wrong things, you’re toast. Measure the right things, but focus on moving them in the wrong proportion, you’re toast. 

For your business to thrive you must prioritize the metrics that matter most. Then, crucially, your team needs to spend their time making the numbers move... instead of worrying about whether the numbers are even right in the first place.

That’s a tall order, and I’ll tell you exactly how to build your metrics framework and how to focus your time on moving numbers (not worrying about whether they’re right or wrong) in future posts. 

Before we dive into the “how-to,” though, let's start from the beginning: In today’s post, I’m going to share a simple blueprint you can use to identify the metrics that matter most to your business. I’m going to show you how to design a winning metrics framework.

Who this is for:

Though this piece will focus on for-profit businesses, the frameworks we’re about to explore can be applied to any type of organization, with a few important caveats: 

First, you should have achieved some modicum of product<>market fit – meaning your product or service should satisfy a valid customer need in the market. Generally, companies who are still in their infancy (e.g., Pre-Seed/Seed) should focus on experimentation and innovation, not necessarily optimization. 

Optimizing between growth, quality, and efficiency (which we will come back to) is the ultimate goal of a great metrics framework and a prerequisite for efficient scaling. Andrew Chen at A16Z has a great explainer on why you shouldn’t attempt to scale without product market fit.  

Second, the concepts we discuss will broadly assume that your organization’s overarching goal (whether near-term or long-term) is to be a consistently growing, consistently profitable business. There may be businesses where growth is not a core focus, for example small family-owned enterprises or lifestyle businesses. 

But, most companies – and certainly any venture-backed startup – must grow and have a path toward profitability.

To illustrate our blueprint for designing a winning metrics framework, I’ll use the example of a lemonade stand called LemonDrops, which both has product market fit and is looking to grow profitability. 

Choosing your North Star objectives: LemonDrops

LemonDrops operates a chain of lemonade stands. They sell one product, lemonade, which consists of water, sugar, and lemon juice, served in plastic glasses full of ice. They have been growing revenue 2x annually and have a net profit margin of 10%. Their “ridiculous minus one” North Star goal for the year is to increase their revenue growth rate to 3x annually while improving their net profit margin to 15%.

LemonDrops has a clear, measurable North Star objective for the business. They’ve selected two primary outcome measures, revenue growth and net profit margin, that they want to meaningfully move this year. (I’ll explain more about outcome metrics later.)

Before building out your metrics framework, you should first align organizationally on your North Star objectives. These can be tied to important milestones like an upcoming fundraise or an annual or semi-annual planning process. Once decided, everything you do as a business, including and especially what you decide to measure, should directly or indirectly tie back to these North Star objectives.

Quality, Growth, Efficiency: The “Goldilocks Triangle” of Business

LemonDrops, much like any other for-profit business, is subject to what I call the “Goldilocks Triangle.” 

This “Goldilocks Triangle” represents the everpresent tradeoffs between Quality, Growth, and Efficiency that constrain every business.

If you push too hard in the direction of one or two of these outcomes, at least one or two of the others will inevitably suffer. You cannot have a consistently growing, consistently profitable business without balancing and periodically rebalancing your focus on Quality, Growth, and Efficiency.

Growth, quality, and efficiency - the "Goldilocks Triangle" for business success.

Using LemonDrops as an example, what do each of these mean and how does the Goldilocks Triangle apply?

  • Quality: How great, and how consistently great, is the experience of your lemonade?
  • Growth: How much lemonade did you sell today relative to what you sold yesterday?
  • Efficiency: How profitable is your lemonade business (or each lemonade stand, or each glass of lemonade)?

Now, let’s look at how LemonDrops might experience tradeoffs between each one:

Quality

LemonDrops wants to improve the quality of its customer experience after receiving customer complaints that their lemonade gets warm too quickly on hot days. They decide to provide a battery-powered refrigerated cup to every customer that purchases a lemonade. In theory, this would address their customer complaints and improve quality, but at the expense of reducing efficiency (cost per unit of lemonade would skyrocket).

Alternatively, let’s say LemonDrops decides to focus on efficiency. To that end they increase the water to sugar ratio in their lemonade to improve their gross margin. While this might have the intended effect on unit-profitability, it would likely lead to reduced quality and ultimately slower growth (who wants to drink watered down lemonade?).

Growth

The same tradeoffs apply to growth. Let’s say that in order to juice revenue growth (tee hee 🍋) LemonDrops decides to offer an all-you-can-drink lemonade subscription product. A rush of customers both new and existing sign up for the product, driving revenue growth, great!

Unfortunately, LemonDrops’ existing power-customers, aka “LemonHeads,” drink too much lemonade, driving costs up and profitability down, womp! Efficiency suffers.

Efficiency

If LemonDrops decides to reduce staff hours to reduce labor costs, they could end up hurting both growth (if lines at the lemonade stands get too long and customers balk at waiting) and quality (if higher workloads lower staff morale, leading to less pleasant customer service). 

Bottom line - even if your North Star objectives only focus on growth and efficiency, you still need to balance quality, efficiency, and growth. As such, you must design your metrics framework to make that happen.

Types of Metrics: Inputs, Outputs, and Outcomes

The three types of metrics you can measure: Inputs, outputs, and outcomes.

Before we can design LemonDrops’ winning metrics framework, we need to understand the difference between each type of metric: inputs, outputs, and outcomes.

Outcomes

Let’s work backwards from our goal and start with Outcomes. Outcome metrics are, by their nature, lagging indicators. You generally won’t see changes you make to your business flow through into these metrics for weeks, months, or even quarters.

In a for-profit business, every outcome metric should tie directly to financial performance. Moving an outcome metric also typically requires the cross-functional effort of multiple teams working in unison. For example, revenue growth hinges on Marketing, Sales, and Product working well together. 

Some examples of outcome metrics include:

  • Revenue
  • Profit
  • Net Revenue Retention (NRR)
  • Payback Period on Customer Acquisition Cost (CAC)

Your North Star objectives, generally speaking, should always be tied to outcome metrics.

Outputs

Output metrics refer to the component parts that lead to your desired outcome.

They typically have a faster response to changes in the inputs, versus an outcome that may not materialize for months or longer. 

Let’s use lead to paid customer conversion rate as an example – that is the percentage of leads that ultimately convert to paid customers over a given time period or cohort. Imagine your organization doubled its conversion rate year over year. Sounds pretty awesome, right? 

Well, maybe. 🤔

For starters, there’s no direct link to financial performance. Conversion rates don’t pay the bills. Doubling your conversion rates is less exciting if, for example, you were to experience a fourfold drop in lead volume over the same period, and thus end with half the number of customers acquired. Even though conversion rates doubled, you’d have been better off if neither of those outputs had changed.

Inputs

As Keith Rabois would say - the most successful organizations always focus on inputs.

Input metrics are the most controllable: You can scale inputs up or down based on the resources that you control. As a general rule, an input metric should be no more than one degree of separation away from a resource that you control, otherwise you should consider it an output metric. 

Here’s an example: A SaaS business isn’t growing as quickly as its leaders would like. Yet, the company also has a lot of qualified leads who either aren’t being contacted or who aren’t being contacted the same day they fill out a lead form. 

Given this, the company decides to focus on improving an input metric – same day lead contact rate – that measures the percentage of leads that are contacted the same calendar day that they enter the system. This is an input metric, because the company has direct control over the resources or levers needed to move it. In this case the company could either hire more sales reps, increase individual sales rep quotas, deploy an auto-dialer software, or some combination of those activities to drive the input metric.

The upshot here is that because you’re focused on driving and moving the inputs, you aren’t capping the amount of output (and ultimately outcome) growth you might achieve. For example, if you were to try and improve monthly sales by 20%, that’s probably where your growth will plateau. Increasing the same day lead contact rate to 100%, on the other hand, could result in a much higher sales improvement rate.

This is a subject for another post, but you should generally prioritize moving the input metrics for which the associated output metrics are the most sensitive. 

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The LemonDrops Metrics Framework

Let’s pull this all together for LemonDrops. There is virtually no limit on the number of metrics LemonDrops could choose to analyze their business performance.

For now let’s look at an example of how LemonDrops can prioritize a metrics framework that builds toward a balance between growth, quality, and efficiency.

Let’s assume that LemonDrops can’t keep up with the demand it has for lemonade. It’s the main thing standing in the way of them crushing their North Star objectives of 3x growth and 15% net profit margins. It’s a good problem to have, but keeping it in mind also helps constrain the focus of their metrics framework. 

Here’s what a starting point metrics framework would look like to tackle this problem:

Key Points:

  • Making sure the lemonade stand is both fully staffed, and staffed with increasing efficiency to not lose customers and improve conversion is the name of the game here.
  • Prioritizing the right input metrics can cut across quality, growth, and efficiency.
  • The flip side of the Goldilocks Triangle is that if you focus on the right inputs and outcomes, you get a mutually reinforcing virtuous cycle between quality, growth, and efficiency.
  • Even if quality isn’t specifically a named North Star outcome metric, it’s the most important output metric as it ties both to growth and efficiency.

What specific metrics should your framework include?

Now that you understand the theory behind designing a metrics framework, it’s time to make some tough decisions about what to measure (and which metrics you hope to move).

There’s a big difference between “We can measure this,” and “We should measure this,” and you’ll learn how to make the distinction in this resource: Building Your Metrics Framework: A 7-Step Guide

In the guide, you'll learn exactly how to build an effective metrics framework for your organization. That way, you and your team can be confident that you’re moving the exact metrics that will increase growth and profitability.

Published on Sep 14, 2022 by Matt Hammel

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